Unlocking the Power of Monetization: A Guide to SaaS Pricing
This is the first in a four-part series on how to develop your SaaS pricing strategy.
Part 1:
Customer Segmentation
In 2018, I hired Price Intelligently to help Proposify figure out our pricing.
We were healthy and growing, had just raised $3M in venture capital, we were moving upmarket, and now was the time to nail our pricing strategy.
It was an investment of over $200,000, and it took us nearly a year to complete, but the results were staggering. After implementing their research-backed pricing, we went from barely being able to close a $3,000 deal to now having customers pay us $50K, $80K, and even $180K every year.
This was a massive factor in helping us reach over $10M in revenue.
Over the next few weeks, I'm going to share everything I've learned about pricing with you.
Why is pricing important?
There are three ways to grow any business:
get more customers (acquisition),
keep them longer (retention), and
charge them more (monetization).
It really is that simple.
Most business owners put all their effort into acquisition, but neglect monetization even though it’s the most efficient lever to scale revenue.
Why? Because most businesses don't have a process to learn how to price their products - they just copy their competition or throw spaghetti at the wall to see what sticks.
That's not the way to go about pricing. You have to find your pricing by surveying your market, not by trying out new pricing ideas with your existing leads and customers.
The pricing process
This is the process that Price Intelligently used to help Proposify nail our pricing:
1. Segment
Segment your market into distinct tiers, and identify the ones with the highest willingness to pay and likelihood to buy. You start here because it’s the foundation of your pricing strategy.
2. Structure
This usually involves a value metric. A value metric is what ties the price of your product to the value your customers receive from it. This metric is what determines the pricing structure of your product. It is typically one of three types:
Usage-based pricing is based on how much a customer uses your product. This could be the number of emails sent, the number of proposals created, or the amount of data consumed.
Seat-based pricing is based on the number of users who have access to your product. This pricing model works well for products that are used by teams or organizations.
Outcome-based pricing is based on the results or outcomes your product delivers to customers. Typically, this is the amount of revenue generated, where the SaaS company captures a percentage of each transaction.
3. Packaging
Once you've chosen the value metric that works best for your product, it's time to package your features into tiers based on what each customer segment values.
This makes sure you are not giving away too much on your lowest-tier plans. It's important to strike a balance between offering enough value in your lowest-tier plans to attract customers and providing more value in your higher-tier plans to encourage customers to upgrade.
4. Price Points
Only after you've packaged your features into tiers do you identify exact price points. With enough data, you can find a price that isn't so high that you're turning away great customers, but at the same time, you're not leaving money on the table.
Methodologies used:
There are two main methodologies for surveying your market:
Relative Preference Analysis
This is how you find out what matters most to each buyer; preferences, pain points, features, etc. Forcing respondents to make a decision provides you with both rank order and magnitude of preference.
We cut this data into segments to gain better insight into trends within the data.
Price Sensitivity Analysis
This is a proven model for gauging customers' willingness to pay and price elasticity. We use this to learn what drives the most value from particular segments, what is the deviation from the median willingness to pay, and what is their likelihood to buy.
With this data you can learn price what price will maximize acquisition and what price point will maximize profitability.
With all of this data, you can build quantified buyer personas. Here’s an example:
What we learned from the first research sprint
During our research sprint, we learned several valuable insights. Based on trends within the data, we're seeing one primary method of identifying Proposify's target and non-target buyer personas: sales team size.
We found the sweet spot for customers: sales teams of 6-25 had the highest willingness to pay, and 25-100 had the highest likelihood to buy.
We called these two personas “Mid-Size Mike” and “Large Leo”. We would later learn that there wasn’t a significant difference between these two groups, so we rolled them up into one buyer persona.
"Small Time Sarah" had fewer than 5 sales reps and was considered an "anti-persona." At the time, the majority of our customers were actually Small Time Sarahs, so this reinforced our decision to move up-market.
On the other extreme, we had “Established Erin” who we considered more of a future customer because they had different pain points and with a lower likelihood to buy, they would need a more robust sales and marketing strategy.
Other things we learned
Different pain points and value propositions resonated with each group. For example, “limited ability to see what’s happening with proposals we send” resonated a lot all groups except Established Erin.
We got to see the industries represented in the survey.
along with more information about how they solve the problem today, how many proposals they send, the value of the proposals, and the number of locations.
How to apply this to your business
Learn what the market is willing to pay by surveying non-customers within your market. I’ve used UserInterviews before, but there are a number of paid services for this.
By using relative preference and price sensitivity surveys, you can learn the market’s willingness to pay and likelihood to buy.
As you slice the data you’ll identify trends you can use to segment your buyers. For Proposify it was sales team size, but for you, it could be industry, geography, or something else.
Your survey can test different pain points, value propositions, and features to identify what each segment cares the most about.
Once you know then which segments of customers you should be focusing on the most, the next phase is figuring out the right pricing structure.