SaaS Pricing Strategies that Work: How to Design an Optimal Pricing Model with FastSpring VP Product

So Last week, my 5 year old graduated from preschool to celebrate. Yeah, yeah, give it up, Maisie. To celebrate, I took her to a toy store. We walked in and I said, you can pick out anything in the store that you want. I think it was both the most exciting moment of her life and the most terrifying. I think this is a pretty decent analogy to pricing. Why is pricing so hard in SaaS? Today I'm gonna talk about a few things that I've learned along the way and hopefully leave you with at least one thing you can learn and go and implement in your businesses. But ultimately, the reason SaaS pricing is so hard is because there are an unlimited amount of opportunities in the way that we do these things, right? There's plg, there's freemium, there's free trials. Ultimately, we're selling a product that has very low marginal cost, which makes pricing opportunities almost limitless. It really is confounding that pricing can be such a massive opportunity for us as businesses. But it's so complicated that it quickly becomes very, very overwhelming. Simon Kutcher did a survey a couple years ago of private equity firms that had looked at different value creating initiatives. And I've seen other surveys that have similar outcomes. Pricing is generally considered one of the most impactful things that we can be doing, but we're consistently not spending a lot of time on it. ProfitWell, a few years ago had a study that showed that over the lifetime of a business, people generally spend only six hours researching and understanding their pricing. So we really live in this world where there's this massive opportunity, but we don't spend a lot of time on it. Which leads me to my first takeaway, which is I truly believe that pricing is the most routinely under optimized lever in SaaS. And so today we're going to talk about two ways to think about pricing. There's strategic and there's tactical. Let's jump into the strategic. So first of all, I think that there are four different types of SaaS companies. If you think about the price point or the deal size relative to your tam, there's kind of these four different dimensions. If you're selling something in a low velocity cycle at a low price point and you're in a relatively constrained market, this is not a good place to be, right? You need to be investing in moving up or to the right. But if you're in a large horizontal market with a huge TAM and you have a relatively low price point, you need to be investing and lowering your cac. You need to increase Your velocity. So as you think about strategically positioning your pricing model, it needs to prioritize velocity and reducing friction. So high price point with a small vertical market. Think of this like enterprise SaaS. Generally speaking, here you've got to demonstrate a high ROI. These are mostly ROI based decisions. So you optimize your pricing model around demonstrating how the price that's being paid is coming back in the, in the form of business value or roi. And then lastly, large horizontal markets where you're primarily selling large deal sizes. This is about innovation, right? These are really, generally speaking, rapid growing businesses. And as you think about your pricing model, it has to prioritize kind of growing through innovation and, and accelerating kind of the reinvestment cycle back into your business. So as you think about these unlimited opportunities in pricing for your SaaS, you know, one of the most common models that we see is kind of the good, better, best or pricing with tiers. So I like this example because I think it articulates why SaaS can be so compelling. So why do tiers work so well? Why does the good, better, best model, generally speaking, work so well for SaaS? Well, it's because you can very specifically do your pricing and packaging to target a needs based segment. So when you're doing tiered pricing model really effectively, each tier is targeting a specific segment or a Persona in your market and those segments should be needs based. So the way to think about it is you map your tiers to your Personas and you map your Personas to needs. And so if you haven't done a needs based analysis, that's the first place to start. But ultimately I want you to take away the fact that there are unique benefits to selling SaaS, right? These low marginal costs that we all live in is really unique and special. So make it work for you and how you think about pricing. So what about things that don't fit into tiers, right, or add ons? I saw this quote recently that really kind of encapsulated my thoughts on the matter, which is everything I need is in one tier, except for that one thing in a second tier. But it's not really worth upgrading to that next tier. Wow, that's a really poorly designed segmentation if this is the problem that you're seeing over and over again. So there's really two rules of thumb when you think about add ons. The first, in order for you to charge for an add on, customers have to understand that there is business value in that specific feature. If it is a commodity or a table stakes feature. That should not be sold as an add on, right? The second is it has to be interesting or compelling to multiple Personas. If you design your tiers targeting a specific Persona or user segment, and an add on or a feature can kind of apply in different use cases across those tiers, that's usually a really good indicator that you should charge it as an add on into your pricing model. Let's move on to usage based billing, right? A very hot topic. I have a bit of a contrarian take here, which is usage based is just a new flavor of the day, right? What we're really talking about when we think about usage based billing is how you define your value metric, right? The units by which you price your product. And you know, the most common value metric is seats or users. And I would argue that is in essence a version of usage based billing, right? So why is your value metric so critical? Ultimately, it's what helps your customers or your prospects link value to your price, right? We all know that intuitively. But if we think about value based pricing, the value metric is absolutely key. It ultimately determines how much you can monetize. Right? So how do you do it? Right? First thing you have to do is you have to link the pricing metric to customer success. So this notion of value has to be defined by the concept of your customer's success, the outcomes that they generate from using your product. The second is you have to make it simple. So what does that mean? Right? It has to be easy to understand, easy to estimate and easy to forecast. If you're pricing off of a value metric that can fluctuate wildly, how do you expect your customers to budget and forecast? Forecast. At the end of that budget cycle, you're probably in for an unpleasant surprise. So when to start thinking about usage based billing or usage based pricing? Well, my view is, you know, right now. But here's the thing, you might already be doing it right? So you might already be using this concept of usage based billing in a per seat model. Ultimately, if the success of the usage of your product is linked or correlates with the number of people using the product, in effect, you might have the right usage based metric. This study done by KeyBank, I guess, last year shows, you know, seat based pricing or user based pricing is still the most common. And my view is that this is probably the right model for most businesses. Again, it's because the number of users or seats is generally very well correlated to the value that's being delivered. So, last takeaway on the strategic piece here is that your Value metric is the single most important decision of your pricing model. If you're having second thoughts or if it's hard for your customers to link the value they get from the product to how much they're paying, take another look at this. Let's jump into some tactical things that you can be doing to improve the way that you're pricing. So when you look out into the landscape of kind of pricing, thought leadership or advice, I think there's a bunch of different schools of thought. I always like kind of doing some Google searches to see the newest flavors of the day. I found this one. Somehow I had not seen this one until recently, but Sequoia has and I'll call this the VC approach. This is a very academic approach to pricing, which I think can be really effective. A couple things about this that I really like. First of all, the most academic framework for understanding how you should price is that it's gotta be in between the cost to serve and deliver the product and below the willingness to pay or the perceived value of the product. Right? Pretty intuitive, pretty obvious. But if your business doesn't understand where those bookends are, that's something that's really helpful to understand so you at least understand the range that you can play in. The second is this distinction between horizontal and vertical, right? And you can see in the horizontal segment that would be where you would apply a needs based segmentation analysis and you would say, hey, I sell to these different types of segments or Personas and and so I'm going to design a package and a pricing model specific to that segment versus a vertical solution, right? So if you're selling into the oil and gas industry, you might be better off going to a pricing model where people can grow and expand with you. Maybe there's a basic version of the product that can get them hooked and then you can upsell them to more premium features and functionality that you introduce at a later date. One of my favorite thought leaders on pricing, Patrick Campbell, has a different approach. This spreadsheet is online for free. I love it that he gives away a lot of his stuff for free. Effectively what he's doing here is a version of needs based segmentation in a lot of ways. So thinking about the specific customer segments that you're targeting and just being very methodical, I think a lot of times people assume everyone is on the same page with regards to what these segments are and what they look like, the technographic information, et cetera. Putting this down on paper, aligning as a business is really one of the Most powerful things you can do as you go into a pricing model design, and then you've got the consultant's answer. So I will say I do have a very strong affinity for both of these tools, which, if you have the time and you've got the budget, there's not many things that are going to help you understand how you should be pricing than doing a Van Westendorp survey effectively, that ultimately is gonna help you understand where the sweet spot is for the price point that you wanna sell at. And then a conjoint survey or a study that can also be really effective in helping you think about the trade offs when you're doing your pricing and packaging or designing tiers or things like that. But all of this to say, right? There's a lot of models that you can apply, there's great resources that are online. Ultimately, though, across all of these, there's one single truth, and that is the best path to pricing excellence is repeated testing, right? It doesn't matter what approach you apply or what framework you deploy. Ultimately the best businesses that are monetizing to their fullest potential are doing so by testing repeatedly every single quarter. They're running one small test, right? And there's a lot of ways to do that. And we'll talk about a few more here as we go on. One of my favorite thought starters when exploring pricing is, you know, what would happen if we increase price 10%, 20%, 50%, 100%? Jason Lemkin yesterday was talking about, I think it was 60% of the respondents in the survey cited that they had raised price in the last year, which was actually quite a bit higher than I would have expected. And I'll share some more data on what I've seen in FastSpring's customer base in a minute. But this thought starter can be really compelling to start to unlock the possibilities that people are just naturally blocked to explore, right? So if you have a senior team to sit down and say, what would happen if we did this? And even better yet, let's go test it, right? Let's go test it with a couple of reps or a couple of deals, let's really understand the price elasticity in our market and how compelling our product market fit is, you are not going to understand this in any better way than to go and test it and ultimately to get people over the hump to exploring more creative ways of pricing. Because the truth is, the right answers are not in the executive team, right? The right answers are with your customer base and with your prospects and what they're willing to sign up for. So we recently did a survey or a study rather with FastSpring customers. So fast Bring is a billing and subscription management solution that powers about 3,000 software companies around the world. We have some really interesting data on what's been happening over the past few years, years, especially with regards to the inflation that we've seen and now the more recent market turmoil. And so one thing I want to share with you is we looked back and we said, hey, over the last year, how many customers of ours or software companies in general have raised price more than 10% and it was 37%. So interesting that, you know, Jason Lemkin's data showed 60. But in general there's a lot of companies raising price. So I think one thing to kind of give people a little bit of a kick in the butt here is, you know, be a little bit more aggressive than you think you need to be. Right? Because a lot of your peers are already doing it. And people understand and are used to having price increases. They see it every day with all of their vendors. So what happened to these 37, or rather how much did they increase price? So it does seem to correlate a little bit with the average price point point across these customers. So this is about 270 global software companies. And you can see the average price increase over the last year, you know, grows from 18% for smaller ticket items up to 35% for larger items. The other way that we looked about, looked at this is by B2B and B2C products. So similar to the AOV analysis, B2B companies are more likely to have increased price over the last year. But really interesting, the impact was relatively the same. Right. So what we looked at is the average year over year revenue growth of the customers that increased price. And probably not too surprising, but the companies that increased price have grown a lot faster over the last year. And the impact across B2B and B2C is pretty similar. A live case study that I'm tracking and I encourage all of you to keep an eye on is Bare Metrics. BareMetrics is a subscription analytics tool, a really solid product, recently rolled out a large pricing increase. So what they did was, and by the way, this is all public, they have a transparent dashboard where they show all of their information, effectively increasing their arpu, basically doubling their price points across the board. So what we saw on the average revenue per user is basically a doubling. And not surprisingly, but the MRR sort of followed suit. Right. So in the near Term, it appears to have been highly effective. But we're all asking this question, how is this going to net out in terms of churn, obviously, or what you would expect was a one time uptick. And I think it's going to be really interesting to see where this normalizes, to understand the total impact that they see. But the indications are really positive that the increase, the pretty massive increase that they rolled out is going to be accretive to that business. One of the other thought leaders that I think is really smart in the pricing space, a guy named Patrick McKenzie, I think he sums it up the best for me, which is acquisition, conversion and churn often require significant cross functional effort to improve pricing typically requires replacing a smaller number with a bigger one. It's not quite that simple, but sometimes it is. So generally speaking, I've seen this time and time again. There is a strong bias, there's a natural disposition to be risk averse as we do not want to disappoint our sales teams and our customers in raising price. And generally what we are doing there is we're underestimating willingness to pay. It's a pretty systemic bias. And so I'd encourage you all to consider if you have some of that in your business and should you be revisiting. So what's going on with inflation? Right. How should we be thinking about pricing with regards to inflation? You know, there's a really interesting interactive dashboard that can help you understand inflation by geography. It's a Financial Times on their website. I think they pull it from Refinitiv, but I encourage you to go look at it if you're curious. But the point here is inflation is not consistent across the world. Right. And it's an obvious point, but we all need to understand it and internalize it because it has some pretty meaningful implications to how we price. And you can see here how they vary across some of these major markets, not only by geography but also by industry. Right. We're seeing this in our daily lives in gas prices versus food, et cetera. So the rates of inflation are not consistent. It's not one size fits all. So a few things you should be thinking about or might be able to do to combat the effects of inflation that I'll go through pretty quickly here. So first is make sure you're regularly assessing in some way, ideally through a live test, the true willingness to pay, either by geography or by industry or whatever, the segmentation that makes sense for your business. The second, can you make inflation adjustments automatic? Right. So if you're in a B2B enterprise SaaS business model and you're doing multi year agreements. Do you have inflation baked into the contracts? If you have them baked in, you'd be surprised at how often people are not enforcing those. So it's worth doing a spot check audit. If you do have inflation based increases in your contracts to go back and make sure that they're being upheld, consider pricing positioning for specific verticals. Again, inflation is varying across different industries. One of the things that I think is really smart and effective is thinking about your value metric and if it can be linked in a more clear way to an inflation metric, right? So for example, can you price on a percentage of revenue? And then the other thing that you'll see pretty common is types of surcharge. This is highly dependent on the industry and the, you know, the expectations of your customer base. But it can work in the example here is something like Uber, right, Where they're gonna have a fuel surcharge in response to the pace of inflation. A couple of other kind of tactical tips here to give you some evidence based impact numbers. Are you accepting the right payment methods? In our research we generally see 5 to 10% lift just on ensuring you're offering the right preferred payment methods. Payment methods vary around the world. I think I have a bit of a US bias understanding that that is such a large market and obviously a more European centric crowd here. You probably appreciate this more than I do, but it was surprising to me to see that the numbers can jump 5 to 10% by being more explicit and expansive in the product payment methods that you offer. Localizing price so you can double and this is in a B2C context, right? So a lower AOV, but you can double your conversion rates pretty consistently if you're localizing the price that you're displaying and billing your customers in. The other thing that's really interesting is there's some some new research. It's not yet conclusive, but billing is the most frequent touch point we have with our customers. So making sure that you're making that as customer friendly and efficient as possible possible is starting to indicate or become a driver of nps. So do you have a really customer friendly billing process to make it easy for folks to pay? Because if you are, you're probably gonna incur, you know, you're gonna increase your NPS and you're also gonna get paid faster. Right. So there's kind of two benefits there. So this takeaway here is I think there's too many companies out there that are really Making it hard for your prospects to become customers and for customers to pay you. So reduce the friction if and when you can. All right, so let's wrap it up with some takeaways. And I think if I leave you with anything, try to capture something on this page that you can take away and help improve your business. So the first is pricing is a lot of things. It's more important than you probably realize. It's more complicated, but it's also more solvable, right? Second, SaaS gives you an infinite degree of freedom in how you do your pricing and packaging. It's really valuable to use this to your advantage. There's some really creative ways we're seeing this with some really creative and exciting new usage based billing models that are emerging. Revisit the assumptions, you know, across SaaS. We want to leverage all these benefits and how we go to market and reduce the friction in adding customers and retaining customers. You know, fundamentally speaking, pricing is about fairness, right? It's an exchange of value. And so ultimately our jobs when we design a pricing model is, is to make sure that this value and price relationship is on par. Pricing and fairness cuts both ways, right? If you're giving too much value away in your product and ultimately your customers are getting it for a really cheap bargain or inflation, right, Is hitting you, you're having the increased salary of your employees, et cetera, your costs are increasing and you're not able to sort of pass that through through to your customer base in the form of pricing. Ultimately that's not fair on your side as well. So really think about this. And the fairness point needs to cut both ways. You know, the fourth thing, you know, start the habit of asking these questions continually. None of our markets are static. They're constantly evolving. Our pricing models and our pricing, pricing and packaging models, they need to consistently evolve. Test one thing at a time, right? A great habit to get into is develop one hypothesis stack, rank all the hypotheses you have every quarter, pick one thing that you want to test, one thing a year even, and that'll really help you kind of get into this habit and start your evolution to a better pricing model so you can monetize your business in a more compelling way. And then the last thing is there is this trend that I believe is starting to really accelerate, which is B2B buyers. SaaS buyers are bringing B2C expectations to work. And what I mean by that is in our personal lives, we're used to one click checkout, so to speak. The seamlessness with which we buy all online, order dinner, whatever it may be. We're the same people. When we show up to work, we don't automatically transform into different people. So how can you make it easy for your customers to understand your pricing model and buy from you? How can you make it easy for them to pay you every single month? We're going to continue to see this conversion of B2B and B2C. I think the meaning of those terms is is going to continue to lose kind of relevance. And so think about how you can make a more B2C like experience. You see this in creative PLG models all the time. And you know, good leaders and good companies are going to be ahead of the curve in this way as we continue to grow. So thanks so much for listening to me, Sam.