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BSMS 24 - Pricing and packaging your SaaS offering (Part 1)
SaaS pricing and packaging is one of the most important aspects of a SaaS business. Without calculated prices and packages that align with your customers, you will lose out on ROI and sour against the competition. Not only do you need to provide the right value, but also you need to effectively monetize it. Value based pricing is key here - give the buyer attractive choices on your terms, instead of following market trends.
Today we take a deep dive into the many factors that go into pricing and packaging, with discussions centered around ARPU, pricing units, value based pricing. We answer the fundamental question: How do you price and package your SaaS offering?
Next episode is part 2. If you enjoy the episode, check out Stijn's new book. Coming soon.
Hello and welcome to episode 24 of B2B SaaS Marketing Snacks. Today, I will be your host/introduction giver. My name is Richard. I work on the product team here, along with Mike. The rest of the episode will be Mike and Stijn as usual. And today we're doing a great topic. We're talking about pricing and packaging, and what goes into it. I'm really excited for this topic, because it's just so essential and so important for all SaaS business. So we're going to be giving you a high level overview and then get down into the nitty-gritty, as usual. We'll be talking about units for pricing, we will be talking about ARPU, value based pricing, and really answering the question, how do you actually price and package your SaaS products or services?
Without the right prices and packages that align with your customer wants, you will tend to lose out on ROI and lose wins to the competition, which obviously we don't want. But, with the right packaging and pricing, you can capitalize on not only the market and what people want, meaning more customers, better customers, but also you make more money and create more value. It's really a win-win for everyone. And it really is a science. There's a lot to it. You have to make sure, for example, you aren't giving out things for free that shouldn't be free. You have to organize things in the right way, put a lot of pieces together, but once you do it, it is definitely worth it. You see value, your customers see value and they appreciate it, and it's just on the right track.
So, I will leave it at that. There's a lot to talk about. There's so many more great examples of this, but we cover it all in the episode so I'll just leave it to the experts. I'll leave it to Mike and Stijn. So, enjoy.
All right. If I'm a company and we're just getting going, what are the things I need to think about when I'm pricing my product? How do I go about actually pricing my SaaS product? What are the things I need to think about?
Pricing is a profession in itself. And there are pricing consultants who will charge you an arm and a leg to come and tell you, "Hey, raise all your prices by 10%." And they actually would make you good money if you follow their advice, so they're worth their fee. But of course you can spend many, many more days and nights and weeks and months to really, really go deep on pricing. And when you are about to scale to go to what we'd like to call T2D3 growth, you need to do serious product marketing. Which includes - to go through high, scalable growth Mike, we often talk about diversifying your demand gen, improving your conversion rates with your funnel, making sure you keep your customers to drive churn rates down. But the other really big component is what we like to call ARPU expansion.
You need to get more revenue per unit, per user, per customer. And that includes thinking about how do you price things? So how do you do that? There are a couple of very important fundamentals. One is the unit that you pick to base your pricing on. For most SaaS companies, that will be per user based pricing. Another example would be per customer, but some companies still price their software per device. Like Microsoft, who used to do this with Windows where you have one license per actual physical hardware device. And they're still other products. Sensors, for example, for maybe an AI based maintenance sensor product. Where you pay per device that gets managed.
So there are multiple units that you can pick. And what's important when you do so, is that you realize that picking that unit is going to have a huge impact on how easy it will be for you to do what's called value based pricing. And you want to do value based pricing. You don't want to stick in cost-based pricing or maybe market based pricing, where your pricing is based on what the others do. You really want to get to value based pricing. And when you want to communicate to your customers that when they pay you more, they will get more, they will get more value, then the unit will determine how easy it is to do that. So that's the first aspect of building a pricing model for SaaS.
And then the second is that you want to base your pricing structure on the journey that your customers and your prospects will go through. How do you make sure that when they have a need that the price point that you're offering, the product that you get for that is aligned with what their needs are, what they're looking for early in the journey. And then also, how does that then also allow you to maybe charge more to have them upgrade? Or expand the number of units that you selected as your pricing unit grows over time? So you grow the revenue per customer. And as they go through that journey you'll encounter either points in the journey where they go from trying something to committing, right? Then that might be a good reason to do, for example, the try-buy model. Or where they go from using something that is relatively commoditized, that they could buy from your competitors as well, to using things that only you can do. And that would be more of a freemium-premium model.
So when you understand that journey, what do people look for when they start for the first time? You're looking for a solution for the needs that you're solving. Or at what point will they be experiencing enough value that they're willing to pay for it? That will drive a lot of these decisions. Do you have a try-buy model? A freemium-premium model?
And then finally packaging, right? If you... We all sort of see this when we go put gas in our cars. There is a typical number of pricing options that you can typically get when you go to the pump. Three, usually. Regular, premium, and V power, if you go through a Shell station. Something else with their competitors. There's a reason for that, right? People like choice. When you look to a home improvement show or a show where people buy a house, there's typically three options. One that they really like, and one that's a lot cheaper but also not very nice, and one that they can't afford. And there's a reason for that, right? It's called the decoy, the hero, and the anchor.
So most pricing plans follow that model where you have three options. People want to be able to choose and now it's your job as a marketer to define and design these packages in a way that the majority of your customers will land in the middle. So, yeah Mike, that's not very short, but a couple of things that go into pricing your SaaS product.
Okay. I have a couple of questions. So just to... I guess to be clear. So market-based pricing is when you let alternatives on the market actually dictate how much your product is worth. Is that right? And how does that compare to value based pricing in your eyes?
Yeah. And it also immediately tells you that you're not necessarily doing a lot of unique things, right? If you have to resort to market based pricing, it means that you're in a crowded space, there are a lot of alternatives, and maybe you have a better cost basis, or you do certain things in a way that makes you very profitable. It might still be a good market for you to be in. But the chances of that are not high. So if you're in market based pricing, you might not even be in the right market. So it's time to, like what we talked about in another episode, it's time to niche down and to find a part of that market where you actually have something unique to offer, where there's something that only you can do. So that now you can turn it into what value does that create for your customers, and put a price on that. And go to value based pricing where you're not maybe as easy to be compared with by the alternatives.
Sure. And that's more of a positioning play then than anything.
And then when you talk about finding the unit that you use as your variable component, how would you recommend a company make that decision? That feels like there's a lot of variables that are at play there.
Yeah. If you think of what your unit drives, there's a couple of things that are easier to do, or harder, given different units. If you have a per user based pricing model, it is relatively easy to make that value based because often users who work for your customers, they do work that you maybe are making more efficient or you're letting these users have more impact. So if you're able to quantify the downstream impact and build a story that describes the value created and connect that with how you price your product, it's easier with user based pricing. It's also typically easy to understand because most SaaS companies use that model. And then it's also typically a model that helps you optimize lifetime value of a customer. It's not as easy to predict how much you will make from these customers over time, because you don't know how many users you will have. And if your product is consuming resources that are not dependent on the number of users using it, let's say the cost of running your product is about for example, storage of data. Then there's no correlation between the number of users and maybe the cost that you have. So that's maybe the only disadvantage.
A per device pricing model is in that sense a little better. It's easier for you to predict the cost of running your software or running your product. It's still... Also it's easy to make that value based and it's relatively easy to understand. The one dimension that I sometimes see that is a little trickier, that is usage per volume. When you think of Dropbox you pay per the usage of your account, or a lot of other sort of more storage based, or transaction volume is another one. Those are good for lifetime value, they're value based. They're a little harder to understand, right? For customers. They don't know necessarily of what they're buying, if what they're paying for is a good deal or not. Unless you're in a commodity part of the market, where you can compare Dropbox with the price of Google Drive. But a lot of other usage based models are hard for customers to understand, which means the sales process might be a little more complex.
And then you also had one that you mentioned before, which is the per feature, which is an interesting one.
Yeah. Per feature is not necessarily the unit that I would use.. You could, but what often happens is if you have a per user pricing model, that in that same model you also have maybe the basic, the premium, and the platinum version of the product. Which would go up with an increased number of capabilities or features. That's just a way to optimize your average revenue per unit.
And it's kind of that example of the homes that you're talking about, right? There's one expensive one that kind of anchors people. It's a higher price. There's one, that's maybe the goldilocks. Just right. And then there's one that's a lot cheaper, but it might not have everything that you want it to have. And that's where I think a lot of those... At least when we, when clients work with us, and they're trying to kind of build those pricing tiers, there's the decoy, the hero, and the anchor. There's a lot of complexity, I guess perceived complexity, about how to put different features into those different tiers. So I'm curious to hear what your thoughts are in terms of how, if there's any way that you can summarize how you can go about of arranging your features into those different sets?
Yeah. It's really important, I think, to start with what are my users or my clients trying to do? Can you align those packages with sort of the workflow, the job to be done? That's the first, I think, comment I would make. And then we have some tools. One of them is called the feature matrix that we use in the book that we also have on our website, that helps you organize capabilities, things that you do that have value for your customers, along basically two dimensions. One is how many people need this? How relevant is this capability for the market, basically? And then how unique is this? How is it something that only we can do? Or that some other products can do as well, but not many. And if you have those two dimensions, now you can actually say, well, the things that are needed by a lot of our customers that sort of qualify for going in that goldilocks, the hero plan. The plan that you want 70% of your customers to use. That's where you put the things that are not only very special, that people will pay for, but that are also used by most customers.
If you have things that are used by many, but not necessarily, there are not that unique, you could make those part of your basic plan. And then things that are very, very special, very unique, but not maybe needed by so many? Those would be great things to put in your top level plan. That's maybe a good upsell for a smaller amount of your customers. I like that you used the word goldilocks, Mike, I've never used it for a pricing plan. We could, instead of hero, but it gave me a good reason to sort of add a fourth plan. So when we have the decoy and the hero in the middle, and then the anchor, there's a really interesting type of plan that you could put to the right of the hero. It's called hero plus, or maybe now we'll call it goldilocks.
A lot of our SaaS customers have a great hero product, but they also have some intellectual property. Some standards, some templates that are not necessarily the actual product, but they're very valuable for customers. Like an onboarding methodology that gets them going in the first couple of months. Templates to do things a certain way. And I've seen very interesting successes where customers have a fourth plan, like right next to the middle hero plan, that's a little more expensive, 10%-20% more expensive, and it includes all that intellectual property. It's not the product, but it includes a lot of things that get customers to succeed and get the most out of the solution. So let's call that the goldilocks plan. So we have a decoy, a hero, a goldilocks or hero plus, and then the anchor. And those then can be filled with the features based on the feature matrix.
And generally the idea is that you want to keep, what is it, 60% to 75% of your customer base, you want to drive them towards the middle, the hero, and the goldilocks, so to speak?
Yeah. You want the majority of your customers to fall in that middle, right? That your product is really designed for them. And then there will be people who are going to grow into that, but they're not ready. They can fall maybe to the left. People who have very specific needs that you service really well. They're pretty unique, those needs.
So they're willing to pay more for them, and fall to the right.