How to Price and Package Your SaaS Product w/ Kyle Poyar, Senior Director at OpenView Partners

Hey everybody, this is Mike Belsito, co-founder of Product Collective, and we are back for another industry interview. If this is your first time, welcome. Hopefully you will enjoy yourself today. And I know we have a lot of other return attendees too, so I was looking at the list beforehand and I see some familiar faces. I should say familiar names, but hopefully I could put some of the faces with those names pretty soon. But Anyway, if this is your first time, I just want to give you a little bit of a lay of the land and let you know what to expect. And yeah, take a little bit of time and then we'll get right into the conversation. But these industry interviews, what we do is usually twice per month unless there's a random holiday or something like that. There's a lot of those these days, but twice per month on the first and third Wednesday of the month, we chat with product leaders from really all over the world and These are pretty casual Q&A conversations. I like to get things started with a few questions, but I really love to take in as many audience questions as I can. So a couple of things to that. You probably see two things. You see a chat right on the side view, right? That is for you to introduce yourself. You know, let us know where you're from, what product you're working on. It's— for me personally, it's really cool to see where everybody's from. So definitely feel free to do that. But there's also a section that says, ask a question. And if you have a question for our guest, I would love for you to put it in that ask a question section instead of the chat, if possible. What I'm going to do is throughout our conversation, I'm going to be looking back at that ask a question section. And if it's relevant to the topic we're talking about right then, I might ask that question right then. Maybe towards the end, I'll take some questions. But either way, I would love it if most of the questions for our guests came from you and not necessarily all from me. So feel free to do that. I also wanted to let everybody know, if you are just tuning into this for the first time, you might not even know about Product Collective. And I mentioned I am the co-founder of Product Collective. It's really a community for product people. And we have all sorts of stuff for product people throughout the year, these industry interviews. We have our Product Collective newsletter that goes out weekly to 15,000 product people. We have a very active Slack channel. In fact, I think there's about 6,000 product people that are on the Slack channel asking each other questions, getting feedback, that sort of thing. And then of course, we put on our conference every year, actually twice a year, which is called Industry, which Kyle, our guest today, and I'll introduce him in a second, but he was a speaker at Industry in Cleveland just a couple months back. But Industry, it's, one of the fastest-growing and top-rated software product management conferences really anywhere. We do the conference twice a year. Our global edition is in the US in Cleveland, Ohio in October, and our European edition is in Dublin, Ireland in the springtime. Actually, it'll be mid-April this year. So if you go to industryconference.com, you could learn more about it. And also, if you wanted to speak at Industry, if you go to the very top, you know, there's a section that says More, or it'll just say Speak. And you can actually fill out a, um, there we have a call for speakers going on right now. And if we do select you, um, we will fly you out to either Cleveland, Dublin, put you up for a couple days, and, and you'll get to really be integrated into the whole industry experience. So I hope that you will consider doing that. But, um, with all of that out of the way, you know, I want to get to what we're all here for, and that's to talk SaaS pricing. And I think the person to have that conversation with, it's Kyle Poyer at OpenView. And Kyle, you know, with your experience, I know you've spent most of your career in SaaS pricing one way or the other. I figured we're going to talk about this topic, no better guest than you.

Yeah, let's face it, I am a bona fide pricing nerd. I accept it. I don't quite embrace it, but I accept it.

Well, hey, I love that. And I also love that you have You spent some time in my neck of the woods here in, in Ohio, so I think that's pretty cool too.

Yeah, grew up in Northeast Ohio out in Chardon, so anyone that's familiar with Chardon, definitely, uh, ask a question. We'll prioritize that. Well, Mike's in charge, so for sure prioritize that.

For those of you that aren't familiar with Chardon, I know they get a whole lot of snow there, so if that's your sort of thing Um, but anyway, I, you know, let's, let's start talking about SaaS pricing. And actually, you know, my background has been mostly on the early stage startup side, and I've actually been part of a couple companies where, you know, we launched and we had to figure out pricing right from the get-go. And that, that was hard, you know, figuring out, because we don't— we're like, is this the right thing to do? You know, you, you can only do it the first time once, right? So I'm just— maybe we could start there for those that are just getting started. Maybe they're launching a brand new product, maybe it's a brand new company, where— how do you start? You know, how do you figure out this initial pricing for your product?

Yeah, definitely. And let me just preface this by saying there's a lot of pressure to get that launch pricing right, but you have to also accept that your pricing will change and will evolve as you get more feedback from customers, just as really any part of your business will. So you should be looking at any of your initial sales conversations or any of your just initial sales as great data points, learning opportunities to evolve what you're doing. So don't necessarily get too tied down to the price that you pick to launch. Like, I, I see companies, they come up with something, they think it's a great idea, and they stick with it for longer than they should just because it was the original idea but not necessarily the best idea. And I guess the other note to start is, uh, People talk a lot about product market fit in the startup community. So you're— when you're launching a new product, you're trying to find that right product market fit. But it's actually about product market pricing fit. You need to hone who the target customer for your product is. So really, who has the value proposition, how you want to go to market to that target customer, right? So if it's a large enterprise, Maybe it's an enterprise field sales team versus, or maybe it's an inside sales team, or maybe it's self-service. So how you want to go to market for them. And then the price really gets highly connected to all of that, to the, to the channel, to the target customer, and to the value that you solve for them. So product-market pricing fit, super important. Some ways to look at the pricing component of that. So First of all is competitive analysis, and broadly, like, what are the customers' alternatives? Are they buying software right now? Are they just doing things manually? How much does that cost them, and where would the budget come from? Is this something that a VP already has budget for, and there's a line item in the, in the budget that you're pulling from, or are you creating budget? And then you can also look at the economic value, and this, this is sort of a finger-in-the-air exercise initially, but how much, how are people currently doing things and what's the dollar ROI value of changing the way they're doing things? So maybe that's time savings, maybe you're driving more revenue for them, maybe it's more accuracy or lower risk. You can probably capture about 10 to 20% of that incremental ROI. And so that's a great way to understand like what your value is. and how to, and how to be charging. And then finally, ask questions around pricing. And so there are survey techniques out there. The Van Westendorp method is one where you can just get feedback from your target market to understand what price did— when they understand your value proposition, what price point do they think is acceptable? Do they think it's a bargain? Do they think it's, you know, expensive for your solution? And that way you kind of know that your mental models and the, that what your customers are thinking. And then the last point, and going back to like product market price fit, the way you want to go to market with your customers has a major implication for your cost of acquisition, right? And you want to be able to pay off your cost of acquisition and have your LTV, your lifetime value to CAC, be attractive enough that you can actually make money as a business. And that's more important, I think, than even just cost-based pricing or looking at your margins, because the cost of sales and marketing is probably a more significant driver than actually the, the cost of delivering your software, right? And so if you're selling field sales, you need to think about how, how many reps are you gonna have, have, how much are you full— are you paying them on a fully loaded basis? What's their quota? How many deals can they sell? And then you can sort of back into how much you need to charge in order to make that model effective.

That's, that's great. That's why I think that's a great start, especially for our conversation. One of the things you said that stood out to me was that, you know, hey, just like products, you know, pricing can be iterated. So don't, you know, if you choose the wrong one, wrong pricing set right in the beginning, you can, you can iterate to get there. That, so I guess my question is how, how much can you iterate, you know, without frustrating customers? Or, you know, how long does it take to figure out whether the pricing might be the issue and that should be something that should be changed? Do you have perspective on that?

Yeah, it's, so I think it depends a bit on how you go to market, right? So if you're, if it's a totally new startup, you, you're selling yourself or or you have, you know, 1 or 2 sales reps, you don't necessarily need to be transparent with your pricing initially. And you can explore as you're talking to customers, and this works best face-to-face, but you can get it through Zoom as well. When you talk about the price, what's their reaction? Do they have no complaints immediately? Do they kind of go, do they ask about everything but price? Or does price stand out as a major barrier? If you're finding that price isn't blocking deals, Maybe try just increasing the price by 10 or 15% the next time around and then keep going 10 or 15% higher until you start hearing a sizable enough number of your prospects that are having trouble with it or really, really push back hard against it. So that's an option that you can explore. Or if you have a sales team, you can carve off a pod or a rep and do testing like that with them. Because for many businesses, pricing doesn't necessarily need to be transparent on your website, especially for earlier stage companies. But other than that, I like doing testing in a research context. So doing customer development, surveying, basically the techniques that product people are already doing to build the right products, just incorporating pricing questions into that, that exercise. And then those in that kind of setting, you can explore as many options as you want. And find ways that are going to help you drive more revenue from your products without disrupting or creating a negative relationship with your customers.

You know, so this is— there's a question that came from the audience, and it actually is somewhat similar to a question that, you know, I had in mind as well, which is, you know, talk about sort of Okay, well maybe we'll increase it by 10%, increase it by 10% the next time. You're experimenting a little bit. What's the best approach though with your current customers? And are these increases for— is it going to impact those current customers? Are we just talking new customers? Nobody— I know as a product person myself, you know, whenever we talked about increasing pricing, it always caused a little heartburn.

Like, ah, what—

when the mass exodus happens, what are we going to do? Should we be that worried? You know, maybe you could just talk a little bit about that.

Yeah. So I think whether it makes sense to roll out to new customers only or new and existing customers, to me, it partly depends on the rate at which you're acquiring new customers, right? So if you're growing like a rocket ship and your new customer cohorts are bigger and bigger and bigger, the revenue opportunity really is with new customers. But if you're a slower growing business, vast majority of your revenue is with your existing customers, then all of a sudden, like, the driver of revenue from changing pricing has to come from your existing customers. And that can be a really big, big win for the business. And so you don't want to necessarily shortchange that. I think also it's important to keep in mind for a lot of companies, your customers probably budget for 3 to 5% price increases annually. And many companies, especially private equity-backed companies, have price increases built into their contracts. So they'll sign 2, 3, 4-year agreements with customers and say, we have the right to raise prices by 3 to 5% per year. And so they're actually pre-committing the price increase when they're selling that initial deal and get customers to agree to that. So it's not something that your customers are going to be totally shocked by. To be honest, many of them are planning for it. And then when you're thinking about— so let's say you've decided we want to roll this out to existing customers. I think there's a few suggestions for what you should do. So first off is, you know, start with your new customer cohorts. That gives you some time to work out the kinks. And also, when you're rolling out to existing customers, don't really make it a big bang. Look at ways that you can start off with maybe those annual deals that are renewing. Get some feedback on cohorts in 1 or 2 months where you can see what the retention is at higher prices, get some confidence in the sales team that they can raise prices with those existing customers. And you also don't need to treat everyone the same. So you can roll out price increases to 80% of your base, but maybe hold off on customers that have a low customer health score, where usage is low, when you don't really want to rock the boat, on certain industries that you've identified as, you know, have special price sensitivity, or you don't have the best product-market fit. So it doesn't necessarily need to be a peanut butter sort of one-size-fits-all approach. You can really be strategic about it. And I think that just comes from having more kind of time, resources, and thought devoted to how to do it, rather than just taking sort of the conventional approach. I guess the other couple of things to keep in mind is that I think Netflix— so Netflix gets a lot of slack about how they've increased prices, but lately they've done a really good job about it. And I think there's a lot that companies can learn from it. So they raised prices about a year ago and saw basically no customer attrition, no extra churn as a result. In fact, they had their best quarter, like by far, stock price jumped. And there were a couple of reasons why it worked so well this time, especially compared to times in the past. I think one is that they gave customers a choice, so customers can actually keep the price as is, but maybe lose some of their features, or they could pay a little bit more, or they could pay a lot more and get more features. So there was options that they had, and they got their timing right. So they were rolling out lots of original content. They had several shows on Netflix that everyone wanted to watch, like Stranger Things. And, you know, if they raise price when Stranger Things is coming out, people will probably notice less than if it's a really low month. Content-wise.

What you're just gonna say, as you're talking about this, I'm just thinking of my own personal experience with Netflix, um, and then also MoviePass this past year. And, you know, with Netflix, I just remember when that price increase happened, I'm like, okay, well, what am I going to do, not watch Netflix? Like, no, like, the value I was getting was worth it to me. Whereas with MoviePass, it felt like every, every day pricing was changing and you know, just kind of got to be too much. So just as a, just a little anecdote there, um, that resonates with me. I get, you know, one question, this is coming from the audience too, um, when we're pricing our products today, right, like we have a feature set that exists, but we know what the product roadmap is ourselves as product people. We know what's going to come out in 6 months, 12 months. Should that have a factor? Like, do you factor in future features, future value when we're pricing today's product, or are we then, you know, readdressing it when those features do come out? Just what's your take on that usually?

So I like to have, I like to incorporate that in packaging. So how you bundle different features, functionality, and services together for different solutions to customers. You definitely need to be having in mind what packages are those features going to go into and whether they're going to be included across the board, if they're going to be in only certain packages, like just the enterprise package, or if they're going to be sold separately as add-ons. I think you, you want to have that plan early on because that gives, that gives plenty of time to guide the sales team. That allows you to communicate better with your customers. A lot of companies have long sales cycles of We're talking like 3 to 6 months for many of our portfolio companies. And so if the product is coming out in 6 months, and this, and the sales team is going to start talking about in the sales cycle, and then all of a sudden the customer doesn't have access to it because this is an add-on and they had demoed it, or they had really highlighted it as a reason why you should go with, you know, that company, that provides a really bad customer experience. So I would definitely incorporate into your packaging. I would say that pricing, you should think of it as an exchange rate on the value that you provide. That's something that Patrick Campbell coined, and I totally agree with. And so to the extent that your products feel, that are on your roadmap, feel real, the sales team can talk about it and can add value to your customers, then that's something that you can monetize and include as part of that exchange rate. If it doesn't feel real, if it's, if it's too far out there, or, you know, might even get deprioritized and released later, then that's just something that is sort of an empty promise for your customer, and that's probably not something that you should incorporate into the price of your packages just yet.

Awesome. By the way, I have a couple more questions for the audience. If you have more questions, keep them coming, because these are great questions. And I'd rather prioritize yours over mine. I did have one though that was on my list that I wanted to ask. You know, oftentimes when, you know, we're running products for our companies, we're, you know, we're on the product team, we're involved with pricing, we're also keeping an eye on our competitors. And I know from the past myself, you know, if competitor rolls out new pricing, maybe they lower their— especially if they, you know, come out with a lower price tier, I'm getting an email from our CEO or, you know, VP so fast. And, you know, so should those situations like cause us to react? Um, should— like, how much should competition play a factor on how much we're reacting and changing pricing on our products?

Yeah, I mean, I tend to find that it's a common mistake actually for companies to react to, uh, too fast in terms of how competitors— in terms of copying what competitors are doing. I think one thing that you need to think about is what's the balance of power. Are you the market leader? Like, are they looking to you or copying you or setting their price in relationship to you? Or are they the market leader where they are setting the tone for the market? So that, that does influence things because if you're the market leader and you react to what they're doing, they're just going to keep lowering the price. Because they're looking back at what you're doing. And a lot of companies, you know, you might not think that like price wars are real in the SaaS world, but they actually are. We have a portfolio company that had talked for years about how their major competitor was constantly undercutting them on price. You know, their sales team had all of these shady tactics to win deals. And then I actually talked to that competitor and they said the exact same things about our portfolio company. And so just keep in mind that what you might think of is, you know, you're the rational party, this competitor is undercutting you. You need to keep in mind, like, did you do anything to start or to escalate the pricing war? And what— and what will— how they— how will they think about any actions you take? But in general, like, you probably don't want to copy what the competitor is doing unless you have a really strong rationale. They might be making a mistake on their side, or your customers— it might only be a segment of customers that are really comparing the two, and price might not even be that important to them. So by making strategic decisions for your company that are not in your best interest just because a competitor is doing it, that's not, that's not going to help you long term.

Great. I want to go to another audience question, and you touched up on this a little bit, but This question has some upvotes here. So I think there's some people that, you know, they're curious about this. How much does initial implementation cost? I'll even go back to something you said before also, you know, desired margin. How much do things like that, how much should they play into, you know, a factor of setting SaaS pricing or should they at all? Like, what's your take on that?

So in SaaS, margins are typically like 80%, but they can range from at least our portfolio companies. I've seen anywhere from like 60 to 95%. So gross margins probably shouldn't matter too much when you're looking at, looking at pricing for your products, unless you're dipping below a margin where it's just not going to be cost effective for you to sell and deliver a product experience. So like when you add up the customer success time, your support burden, your infrastructure costs, and so on, if your margins are below 60%, that probably indicates like you just don't have a healthy enough business at that price point, and that's a signal price needs to be higher. So I would look at it as maybe something that you factor in to kind of gut check with the customer's perception, but I wouldn't base pricing primarily on that. The other thing to know is that you mentioned implementation. Cost. And what I think is, uh, important there is that that's actually where cost is more significant. So implementation does tend to be more of like professional services burden. It's costly to deliver for the customer, and that's something that you probably want to be monetizing. And the way I think about that is, uh, your— any implementation revenue you get is probably not going to be considered significantly in your valuation. Like maybe it's a 1x multiple, your recurring revenue probably gets like a 5, 10, or maybe even a higher multiple on revenue. So with any sort of professional services burden, I like charging for them, but just enough to cover the cost of delivering it. Really what you're doing it for is to make the customer more sticky and to get more of that long-lasting recurring revenue from them. And so you want to cover costs and cover your margins, but, but don't, don't think of that as your profit driver for the business.

Great. You know, we have time for a couple more questions, and this is an interesting one that came in too, but it's what if we're pricing something for what seems to be a completely new market and there's not very many historical reference points, at least that we can draw, like how, what should be our approach when we find ourselves in that situation?

Yeah, I mean, I think that goes back to understanding the real economic value that you're creating for the customer. Based on whether that's revenue generation, cost savings, etc., etc. They're looking at that, but then also just trying to understand the customer's mental model for this. So if this is something where software doesn't exist today, the company might be buying software that they think of in the same bucket. So maybe if, if you're like, for instance, a sales productivity tool that, or a kind of a tool that helps sales reps. While there might not be a competitor for the exact thing you do, there's a number of other software products out there that companies use to improve the efficiency of their sales teams. And there's Salesforce, which is the 800-pound gorilla. And so they're thinking of you probably as a certain percentage of what Salesforce costs. Like if you charge twice as much as Salesforce, that doesn't really look credible, right? Your system of record and system of engagement with the company, they're probably going to pay more for that and they're going to start comparing you to other solutions that they buy for their sales team. Like maybe it's a Yesware, even though that's not the most fair comparison. That's what's going on in their mind. So you either need to embrace that with your pricing or you need to develop a really strong ROI story and prove that the value that you're creating and delivering is that much better than these analog products.

Great. You know, I know before you had mentioned one, you know, a common mistake being that sometimes people stick with pricing for too long. Are there other sort of common mistakes that you see people make time and time again that, you know, as we're approaching pricing, might be good for us to know of these common traps so we can avoid them?

So in general, uh, companies undervalue their products. That's the one of the biggest trends I see when I talk to our portfolio companies about how their pricing has evolved. It's almost never gone down. It almost always goes up. Uh, in some cases it's 3, 4, 5, 10x higher now than it was when they launched. Uh, so that's just a classic trap. A lot of companies don't want anything to get in the way of new customers adopting their product, of getting feedback from that market. They're really technical people and they don't really understand how price might not be as important for a B2B buyer. B2B buyers care more about budget and whether they can put something in their budget than how much something actually costs. So that's common. I also think companies just aren't incorporating enough time, thought, and resources into pricing. So like, how much, how many hours did you spend on pricing tasks? When you're launching a new product. I think that that number is, it's a lot lower than you might think. Like pricing to me, I'll sometimes see it as you have a new product launch plan that's this great like 50-slide deck or something, or Google Doc that has all of the different points around how you're gonna launch this new product. Pricing is a small part of that and no one ends up really debating it. So you just launch with a gut decision that never really got pressure tested or researched. So making pricing a priority and doing your homework on pricing. I think the other thing I have in mind, I tend to see is that especially product people tend to think about pricing and packaging from the product perspective. Like, here's this product, what checkboxes do I make for these different packages? Like, here's a feature I can enable or not enable. But you need to design it from like, with the customer in mind and based on the willingness to pay of that customer. So Product is a major— that, like, what the product can do is a major input, but, uh, don't get— don't fall in the trap of building a product-based pricing. Build a customer-focused pricing.

Well, I— there are a lot of other questions I could ask. I know there's more coming in, but we're really at the end of our time now. So, um, time flew by pretty quick with you, Kyle. I will say, if there are other questions that people have, um, you know, maybe you could share how people could keep tabs on you. I know you're, you're on social and, you know, maybe you could just talk a little bit about that and folks have other questions, maybe they could hit you up there.

Yeah, definitely. So if you have questions, odds are I've actually written about it. I wrote a book that you can find online called Mastering SaaS Pricing, and that's available as a download on OpenView Labs. You can follow me on Twitter, which is @HoyerK, and I'm releasing content and posting on there. Or just feel free to email me too. I'm pretty good at responding to email. So my email is kyle@ov.vc. Pretty easy.

Awesome. And I'm pretty sure if you go to productcollective.com/videos, Kyle's talk from Industry, I believe it's up on— you gave us permission for that, right? I believe we've got the video live. So if for those that weren't at Industry, you could watch Kyle's talk. You just go to productcollective.com/videos so you could check it out there. Kyle, thanks a lot for joining us. I really appreciate it.

Thanks, Mike.

And, and thanks everybody else for joining us. Our next session is coming up in 2 weeks with Katherine Ulrich, and Katherine's a managing director at FirstMark Capital. She had been the chief product officer at Shutterstock, Weight Watchers. She's an awesome product person. I can't wait to chat with her. So hopefully you all could come back and join us for that. But until then, everybody have a great day. Thank you.