SaaS Pricing Introduction

Last week I wrote about the need to talk more about value, not just price.

I’ve had some interesting responses, I can tell you that. I’ve had some fun ‘louder for the people in the back’ messages. I’ve had some hilarious stories about bizarre cost structures being tossed around with unashamed bravado by vendors – ranging from the one-line figure with no justification to the multi-page pricing manual with equations and calculations galore, both of which boil down to an arbitrary number they think they can get away with and enough obfuscation to allow them to flex when necessary.

I also got a lot of requests to write a price guide, a this is not how you do it piece. And I’m inclined to comply next week: trilogies are all the rage, aren’t they?

And I’ve gotten some mildly defensive messages, if you don’t mind me saying that, friends. And this week we’re going to stay with that defensiveness and discomfort.

I expected messages telling me at length how ‘we are already doing what you say we are not doing’ and how dishonest I am. Surprisingly, those messages were few and far between. What I mostly got was ‘you don’t understand: this is hard’.

Of course.

Yes, it is hard. It is meant to be hard. Nobody said it was easy.

But it is hard in the same way that learning a language or a new skill is hard. It takes work. Dedication. Practice. Determination. It takes time, patience, and effort. But it is almost doable.

It’s not as difficult as winning an Olympic gold medal or an Oscar: unattainable and unattainable, but reserved for the few.

Pricing your SaaS product right is tricky because it involves work.

It is achievable. It is achievable for all of us. It does not require any specific talent or skill. It just requires you to do the work. Work through each step and work your way to an answer. Don’t skip any bits or ignore any data you wish you had seen differently.

I hate to say it, but there is no art or science behind pricing. Just elbow grease and math. And this is what it looks like:

First, calculate your cost to serve. I know. Crazy idea. If you’re an established entity, chances are that number is known… sort of. Known, albeit opaque. You know what goes out of your coffers each year, but not what goes into that number.

As a start-up, you know how much you spend, but you are not sure. The magic word ‘growth’ hides all kinds of sins.

But the reality is that in order to run a business, to value a company, to price a product, you have to know the answer to a simple and fundamentally existential question: What does it cost you to exist? What do you spend making and running the thing that you make, sell, and run?

You need to know what that number is and what’s in that number because it’s one of your few levers to adjust your price down if you need to. It’s essentially your only lever.

So: figure it out.

Be honest with yourself. Be precise. Be accurate in updating this number as your cost basis increases or decreases. There will never be a time when this number is not important.

Once you’ve done that, or if you feel like it, while you’re working that out… you need to do a benchmark.

What is the competition asking? What is your customer paying now? What is ‘normal’ for your market and what are they getting for their price tag?

How do you score in comparison?

Are you a budget solution, cheap and cheerful? No frills in functionality or price?

Are you reassuringly expensive? Premium?

Where do you fit into the mental landscape that your customers have when they look at your solution? How does your product fit? Not just the price tag. The service too. Are you asking the price of a Bentley for a fixie? Are you undercutting? Are you competitive?

Determine where your product is in terms of functionality and service and what your competitors’ prices are. You need to know how you are going to behave in the market.

In the meantime, like a TV chef, you have calculated your costs to serve. And now you know where it plays in the market.

Do you need to be flexible? Are you way outside the range of what others charge and what customers pay?

If so, you may need to think about and work out your cost basis before proceeding.

If your number isn’t off the page, you can continue. Because you’re not done yet, of course.

You take that number and factor in a margin: it should reflect market volatility, the length of the sales cycle, and the conversion rates for your vertical market (if you’re selling to businesses, you’ll lose the most, so factor in how long that takes).

Then add your profit margin. Because that’s how business works. You calculate your percentage profit margin at this stage of the process. You don’t start there.

Have you heard that tech founders? You. Don’t. Start. There.

Then you go for a test drive.

Once you have a number – not plucked out of thin air, but worked out – take that number and the homework behind it to real buyers and prospects and discuss your pricing with them. First friendly meetings. Then focus groups. And then early sales efforts.

You test the road and listen to the feedback and reactions. You can test at any stage of this process, by the way. You want to make sure you don’t exhaust and irritate your potential buyers, but if you have people who are willing to give feedback, do it as early in the process as possible and keep looking for it.

If you’re lucky, you might even score a real sale through this process, and that feels great, although (trust me, because it’s happened to me in a past life) it can be a very misleading statistic: just because someone was willing to pay what you originally thought they were asking doesn’t mean someone else will be willing to do the same. So, test with enough customers to get a meaningful sense of whether your price shocks, outrages, or scares them.

Are you too expensive, too cheap, just like the bear’s porridge?

Listen to the feedback and think. Do you need to adjust? Is there room to play, to ask for more, to adjust a service?

Should you look at operating costs to lower your price or should you work on articulating your value proposition?

Listen. Think. Decide what you need to do to get it right and then do it.

We’re almost there. But you’re not done yet. And if you’re thinking, “I’ve worked in this space before, I know instinctively what to ask, I don’t need to do all this work,” all I’m going to say is… come back next week, we’ll talk about how not to do it, and tell me if you see yourself in those stories. For now, if you’ve done the work, there’s one last step you need to take.

Make sure your salespeople understand your pricing: that they understand how the number works, why it is what it is, and where the flex is. Where the value is. Where they can play with it and where they can’t.

Also make sure that your customers can easily understand it.

Adjust as needed. People are less willing than ever to accept a number as we once did.

I remember once getting a 16-page document from a vendor explaining how volume-based pricing worked. Did I even read it? Did I just read it?

Did I learn anything from reading it? Not from your life.

But it was acceptable then. It becomes less acceptable with each passing day.

So. Make sure your salespeople understand your prices so they can explain them when customers ask.

Practice explaining and defending your pricing the same way you practice your demos and sales pitches.

Practice your answers: what is the price, what do you get for it, how does it compare to your competitors and most importantly, why should your customer pay this price?

That’s it. These are the steps. No art. No science. Some methodical work and you’re done.

Or maybe not. There’s one more thing, if you want to go all the way.

You see, I’ve been in more sales processes than I care to remember. On both sides of the table. And the unspoken truth is that salespeople who know their product is overpriced can’t completely hide that knowledge. Not really.

It’s in their awkward answers, the willingness to add sweetness. The silent plea of ​​‘give me a longer contract and I’ll flex all things to give you more value, dear customer’.

So.

Save yourself: When you’ve done the work and come up with a price and a pitch and a story about why your service is worth it and not just the cost… pause for a moment and think. In your heart of hearts: do you believe your product is worth what you’re asking, or are you hoping for luck? Luck that someone will agree to pay your inflated price tag or luck that an investor will fund your unsustainable price point. It almost doesn’t matter which, they both end up in the same place. Unsustainability.

Because if fake it until you make it And get away with it are part of the pricing strategy, then… you can fool a few people for a while, but it won’t be long before you have to go back and do this work. When your funding or your luck runs out.

You need to map out your service costs and market comparisons and value drivers.

You need to get feedback from the market and explain your value drivers.

You’ll have to do this eventually anyway.

And maybe you can get away with not doing it for a while and that seems appealing. But remember, by the time you mess up, go back, work it out, and come back, the customers may not be listening. Not to you, anyway.

#LedaWrites

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Leda Glyptis is FinTech Futures’ thought provocateur: she leads, writes about, lives and breathes transformation and digital disruption.

SHe is a banker in recovery, a former academic and active in the banking ecosystem for many years.

Leda is also a published author – her first book, Bankers like us: messages from a sector in transition, you can order here.

All opinions are her own. You may not have them, but you may debate and respond!

Follow Leda on X @LedaGlyptis and LinkedIn.