Finding The Right Value Metric In Your Pricing Strategy

In the first part of this series, we talked about how important it is to segment your buyers to uncover the group with the highest willingness to pay and likelihood to buy. This week, we're going to dive into the second phase, which is figuring out your value metric.

One of the biggest mistakes B2B SaaS founders make is having a one-size-fits-all plan for pricing. This means that the price is capped, and there's no room for expansion of accounts over time. If you've ever seen a SaaS pricing page that has one plan with unlimited everything, this is what I’m talking about.

People do it because they think it’s simplifying the pricing, but it’s actually causing more confusion since buyers can’t figure out if it’s right for their needs.

It also caps your business at the knees since you are giving away everything for one price, and aren’t able to charge more over time as customers get more value from your product.

As the name implies, a value metric is how you capture some of that value.

For example, if you're selling email marketing software, your value metric could be the number of emails sent per month, or it could be the number of contacts in your database, or it could be the number of templates you have.

And that’s the point: getting the value metric right isn't always straightforward. If you use the wrong one, it can punish customers for using your product and frustrate them, making them feel nickel-and-dimed.

But if you get the right one, customers think “Hey, this is reasonable. I’m getting more, so I’ll pay more.”

There are three main types of value metrics: usage-based, seat-based, and outcome-based.

Usage-based

Usage-based or consumption-based is pricing on how many units of the product you consume. For example, if you're selling a project management tool, your value metric could be the number of active projects on the go.

This tends to work well with data products, where the more data flows through the product, the more you pay. Amazon Web Services is a good example of this, where you get billed for the amount of servers and memory you consume.

Seat-based

Seat-based value metrics are based on the number of users in your product. For example, if you're selling a team communication tool like Slack or a CRM like Salesforce.

Seat-based is probably the most old-school pricing model in software and harkens back to the days of selling individual software licenses on hard disks.

It doesn’t work well on analytics products since most people just care about logging in and seeing the data, so they’ll share passwords with their team if you try and charge them for seats.

Outcome-based

Outcome-based value metrics are based on the outcome that your product delivers to customers. For example, billing tools are typically a percentage of each transaction, and so the more volume you run through their product the more you pay.

So how do you find the right value metric for your product? It's not easy, but there are a few questions you can ask the market to help you make the right decision.

What are the benefits that your customers get from using your product? This will help you understand what your customers value the most.
What are the actions that your customers take when using your product? This will help you understand what your customers are doing with your product and what they find the most valuable.
What are the industry standards for value metrics in your space? This will help you understand what your competitors are doing and what customers are used to seeing in terms of pricing.
Finally, what are the economic drivers of your business? This will help you understand how your business model works and what types of value metrics are most likely to work for your product.

Here’s how we uncovered our value metric when we engaged Price Intelligently.

Previous to the research, this is what our pricing looked like:

As you’ll see, we limited the smallest plan to one user and used “active proposals” as our value metric.

Our biggest plan was capped, because we offered unlimited everything for $250/month. 🤦‍♂️

After the research work, we changed our pricing to look like this:

Here we limited proposals on the smallest plan but switched primarily to a per-seat model after that point. Because of this one change, we now have many customers paying us $10,000 and up to use our product. One customer even pays us $180,000 USD per year!

So how did we arrive at this conclusion?

If you recall from last week, we used relative preference surveys.

Instead of asking people what they want, we ask them what is MOST important and what is LEAST important. Forcing respondents to make a decision provides you with both rank order and magnitude of preference.

So we first asked respondents what their preference was:

Which of the following would make you feel MOST and LEAST inclined to pay more for Proposify?

Pay more for additional features
Pay more based on revenue won through the product
Pay more for increased usage
Pay more for additional users

It was clear that features were the big driver here. Smaller businesses tended to prefer an outcome-based pricing model (like the percentage of revenue won).

For other customers, paying based on revenue (outcome) was preferred. This was surprising since we don’t actually manage the transaction, just the quote. If you sold a $1M deal through Proposify would you want to pay a percentage to us?

Usage and seat-based were less preferred by the respondents, interestingly enough.

Next, we asked which unit aligns with the value they derive from the product.

Which unit aligns LEAST and MOST with the value you would derive from this proposal solution? In other words, which resonates LEAST and MOST with how you would imagine price scaling for a proposal solution?

Pricing by Number of Users
Pricing by Number of Proposals
Pricing by Number of Workspaces

We segmented the data by the amount of sales teams since we offered a team/workspace feature and wanted to find out if that was a value metric worth exploring.

As you can see, the data was a bit all over the place. Certain team sizes seemed to prefer users over proposals, but there wasn’t a clear answer.

Next, since we were currently using a usage-based pricing mode, we wanted to understand how people thought about usage, and which part of proposals as a value metric worked best.

When paying for a proposal solution, which of the following do you feel makes the MOST and LEAST sense?
- Thinking about what makes the MOST sense – what would you be willing to pay for on an ongoing basis?
- Thinking about what makes the LEAST sense – what would discourage you from purchasing this solution?

Paying for Won Proposals
Paying for Active Proposals
Paying for Sent Proposals
Paying for Number of Proposals Created

At the time we were using “active” as the metric, which was not well understood by many customers. (“Active” is when you created or sent a proposal. After it was won, lost or archived it was no longer viewable and became “inactive”, not counting towards the total).

We found that there was a higher likelihood to buy when a proposal is sent versus when it’s created or sent.

We also found that there would be less price sensitivity if we switched to ‘sent’ instead of ‘active’ proposals.

So what did we do with all this data?

In the end, it was fairly inconclusive. Many customers say they don’t like paying for more users, but in larger businesses, it seems to be the norm and what buyers are used to.

We could have tried billing a percentage of each deal or calculating the total amount won through the platform and moving them into tiered buckets based on their revenue.

We also could have tried using “sent proposals” as a value metric, but we often found with current customers there wasn’t always a correlation between the volume of proposals and the size of customers.

Some small customers send a lot of proposals, some larger customers send fewer.

In the end, we were moving upmarket to serve larger businesses and moving away from small self-serve customers, so we decided to land on the per-seat model and capped the proposal limit on the smallest plan.

How to apply this to your business

Finding the right value metric for your product is key to unlocking expansion revenue and attracting the right buyer.

It's important to understand how your customer perceives the value your product offers, but at the end of the day, you do need to make an informed guess and start experimenting with different value metrics and see what works best for you.

In next week's article, we'll dive into the third phase of pricing and talk about packaging and how to figure out which features go on which pricing tiers. Stay tuned!

Please hit “reply” and let me know what you valued most and what you want to learn next.