One of the biggest mistakes you can make as a SaaS business leader is not re-evaluating your pricing strategy on a regular and ongoing basis. Patrick Campbell, CEO of Price Intelligently, bluntly states, “If you haven’t changed your prices in the past 12 months I guarantee you’re losing money.”
However, the actual process of reviewing your SaaS pricing strategy can be a big job, which is why many businesses simply set their pricing models and forget about them. Campbell goes on to quantify this, saying, “The average SaaS startup spends just six hours on their pricing strategy.”
Six hours…in total, for all time.
This is a poor decision when the data shows that businesses that update—or at least review—their pricing strategy every six months see nearly twice as much average revenue per user (ARPU) than businesses that update their pricing once per year or even less frequently.
The review process is a big task with big implications, requiring research and careful analysis. So you have to approach it right.
Here are four key steps to performing a SaaS pricing strategy review:
Begin by putting together a cross-functional pricing committee that can provide accurate data and meaningful insight. This team should include people from the sales, finance, customer success, marketing, and product departments.
Basically, you need to include people who can provide information on customer perception of value, the costs of running your business, competitors’ pricing, target customer personas, and growth potential. You’ll need to evaluate your current metrics such as your customer acquisition cost to customer lifetime value (CAC:LTV) ratio, churn rates, ARPU, and so forth.
However, while equal representation across your departments will help ensure the best result, it’s important to keep your pricing strategy committee small and focused so you don’t end up with too many cooks in the kitchen.
Additionally, appoint one person to be the final decision maker so the committee doesn’t become bogged down by analysis paralysis.
It’s often wise to choose someone from the marketing or product department, as they tend to have a finger on the pulse of the customer base and are far enough away from direct incentive to make an objective decision on pricing strategy—something that may be hard for sales and finance team members to do.
In large organizations, the final decision-maker is typically a C-level executive, and in smaller businesses, it’s usually the CEO or founder.
Once your committee is assembled, plan blocks of 7-9 weeks twice per year for pricing strategy review. While this may seem like a huge swath of time, keep in mind that your committee will not be working on pricing review tasks full-time—it will be fitted in around their normal duties, and much of the data-gathering can be automated.
However, if you’re running a larger business, you may want to consider employing someone at least half-time as a pricing strategist.
Then, over those 7-9 weeks, start digging into the data.
- Collect data on all the metrics outlined in step one and revisit your customer profiles and segments to ensure they are still accurate.
- Look at whether your pricing tiers, packages, and bundles are aligned with how your customers are currently shopping.
- Measure price sensitivity, which tells you how much demand changes when you adjust the price of your SaaS offering.
- Conduct a feature value analysis and consider assembling a customer advisory panel to help inform your review.
Okay, I know that was a lot. You might be thinking, “Even with a team of people working for two months, how will we find and organize all of this data?”
A recurring billing platform like Stax Bill makes it easy by providing:
- calendar reports for sales forecasting,
- sales reports for product development,
- customer reports for refining marketing messaging,
- monthly recurring revenue (MRR) reports for customer retention,
- accounts receivable (AR) aging reports to stay on top of unpaid invoices, and
- revenue reports for revenue recognition compliance.
With these real-time reports easily accessible, it becomes much easier to productively review your pricing strategy and get a full picture of the health of your business, which allows you to…
Based on what the data shows, your pricing strategy committee can determine whether your current pricing model is working optimally or whether there’s room for improvement. Keep in mind that you don’t have to make a change after every review.
While making this decision, consider your:
- business model,
- costs, and
- the perceived value of your product.
While value-based pricing is often touted as the most effective for SaaS businesses, usage-based pricing has also been surging in popularity recently. It offers a low barrier to entry that helps draw in customers and allows for quick and seamless usage scaling. You may also wish to make a change to another pricing scheme altogether.
For example, you might try:
- Freemium + upsell
- Multiple editions
- Base + overage
- Price segmentation
Again, listen to the data—don’t make a change simply for the sake of it. Keep in mind that as Jason Lemkin outlines, “[P]ricing increases on existing customers usually aren’t worth it.” That’s because they tend to increase churn and harm referrals, case studies, and so forth. So, it’s best to maintain steady, predictable pricing for your existing customers and target your pricing changes (if and when you make them) at new customers.
Think about problems your business is currently experiencing, the cause, potential solutions, and what the implementation of your various solutions would look like. Some SaaS businesses find that more than one pricing model—think: a flat fee plus some level of usage-based pricing—suits their product, so they offer a combination or a hybrid pricing solution.
But don’t get too carried away with offering dozens of different pricing packages, either. A study has found that too many choices can actually be demotivating in terms of making a purchase—shoppers were presented with either 24 or 6 types of jam at display booths in grocery stores. Although both groups sampled roughly the same number of jams, shoppers who were presented with just 6 types of jam were 10X more likely to make a purchase.
So, keep your SaaS pricing model simple with a few carefully considered options that match what your customers are looking for in terms of features and value. And remember, too many big changes happening too frequently can both scare away your customers and consume lots of time and energy for your team.
Finally, run pricing experiments to test out the various solutions you identified in the last step. Implement the scientific method (question, hypothesis, test, iterate) to home in on exactly what works best for your SaaS pricing strategy.
Product engineer Yoav Shapira advises, “[K]eep experimenting. Change the pricing strategy often, if needed, until you get the signup, engagement, and retention metrics you [want]. Yes, experimentation may be a bit more time-consuming than a product feature, but it’s at least as important here as elsewhere.”
One of the easiest ways to run pricing experiments is to divide your customers into cohorts and perform A/B testing. Then, monitor their subscription lifecycles, review the results, and act accordingly.
With agile, comprehensive billing software, you can run these types of tests on small groups of customers first before you make a global change. That way, if your plan backfires, only a small segment of customers will be affected, and you can go back to the drawing board for a different pricing strategy.
Naturally, you may encounter some pushback when it comes to changing (read: raising) your prices. Fortunately, there are some tools available to help manage this. For instance, you can prepare a scripted response for handling complaints, offer transition or legacy discounts, or grandfather in some or all of your existing customers.
Emily Smith, Growth Specialist at Cobloom, sums it up nicely, saying, “The worst thing you can do is just to set-and-forget your pricing. You need to treat it as a constant work in progress – your pricing strategy will never be perfect because your competitors, the business environment and your customers’ requirements change over time.”
While it can be an onerous semi-annual undertaking, reviewing your SaaS pricing model has the potential to double your average revenue per user—it’s certainly worth the time spent.
By following the above steps and investing in modern billing software that can generate and organize virtually all the data you’ll need for your review, you can create a smooth, efficient system for getting it done.