Consistently nailing pricing strategy—as your product and customers’ expectations evolve—is essential to reduce churn and generate recurring revenue, both of which are intrinsic aspects of growing a successful SaaS business. That being said, price optimization isn’t even on the radar for many SaaS businesses. In fact, most expansion-stage startups say that handling pricing isn’t on anybody’s job description at all.
Nobody. Nada.
So, whose lap does it fall into? Inevitably, the task ends up with the CEO, who almost certainly has their plate full already.
It’s no surprise that the optimal price point is so elusive, then. Real price optimization takes dedicated resources. For starters, you need:
- deep and thorough research,
- rigorous data analysis,
- a dedicated pricing committee, and
- at least twice-yearly reviews.
Hardly something a busy CEO can pull off single-handedly.
Now there may be no such thing as the “right price”—but price optimization will help get you as close as possible. While far from exhaustive, this article will provide direction for SaaS business leaders who are unsure where to begin.
The first step when implementing price optimization solutions is to get to know your ideal customer, using customer and market data to form an ideal customer persona (ICP).
Develop an ideal customer persona
As the saying goes, you can’t please everyone all of the time. Trying to do so can very quickly drain your marketing budget, throw product development off-course, and damage customer relationships. You might expand your user base in the short term. But, over time, churn rate will likely go through the roof as poor-fit customers realize their needs aren’t being met. This can send recurring revenue plummeting and spell disaster if not rectified quickly and diligently.
On the flip side, having a clear understanding of your target market means you can develop a product that solves customers’ specific problems and a pricing strategy that meets their exact needs.
Best-fit customers:
- increase expansion revenue (by purchasing add-ons or upgrading their subscription as their business grows),
- have higher lifetime value (LTV), bringing you more recurring revenue, and
- show stronger brand loyalty and are less likely to churn.
Developing a clear ideal customer persona is a critical part of the price optimization process and key to a successful SaaS business strategy. It allows you to predict customer behavior and fine-tune your offer accordingly. So how do you go about it?
Analyze current customers
You’re already sitting on a goldmine of customer data that can provide clues as to the traits of your ICP. Segment your audience using indicators like business size, frequency of use, and subscription type, and consider the customer behavior that best matches your business goals.
Speak to existing customers
Surveys, interviews, and in-person roundtables provide vital qualitative data that guide pricing optimization. Meetup successfully used this customer survey data analysis to monetize its enterprise product, as did x.ai (the virtual assistant) when it relied on beta customer input to determine its tiered pricing strategy.
Added bonus: when users feel genuinely listened to, it should improve customer loyalty and trust.
Identify similarities
Use the data you’ve gathered to look for around 5-10 common attributes within your customer segments. These will include things like:
- Technographic tools (the business’s tech stack)
- Firmographics (demographics for organizations, like company size, revenue, industry, and location)
- Business role (the role of your client in charge of the ultimate purchasing decision, such as CIO, marketing manager, or sales manager)
- Psychographic drivers (opinions, personal interests, lifestyles, values)
- Pain points (the nitty gritty problems that motivate businesses to pay for your solution)
Build your ICP profile
Finally, you’re ready to put together your ICP! It should be highly specific, not overloaded with too much information, and clear to understand. You may end up with more than one ICP, and they may evolve over time. Most importantly, leverage your ICP to inform pricing price optimization decisions and ensure you’re delivering the best possible price points for ideal-fit customers.
Organize a pricing committee
If you’ve spent any time researching pricing optimization, you’ve probably come across the shocking statistic that most SaaS businesses spend just six hours on their pricing strategy… ever.
While things have improved slightly (data now points towards <10 hours per year), there’s still a lot of money being left on the table. Businesses that adjust pricing every six months have almost double the average revenue per user (ARPU) as those that do it less frequently.
The problem? Price optimization requires pricing reviews, which can be resource-intensive. However, the juice is clearly worth the squeeze.
Gather a representative price committee
Start by selecting a team of leaders from multiple departments, including customer success, sales, marketing, product, and finance. Including people from different areas of your business makes sure everyone understands and is on board with your price optimization strategy.
The committee’s role will be to collect data and provide insight into customer perception of value, competitors’ pricing, business costs, ideal customer profile traits, customer acquisition costs (CAC), churn data, and other information relevant to pricing optimization.
Ultimately, they will take into account both quantitative data and qualitative data, then use it to make key pricing decisions that drive stable profit and growth.
Hold your horses a minute! Won’t price changes every six months confuse customers? Or at least impact customer satisfaction (especially if new customers get different price points, potentially better ones, than existing customers)?
There’s an easy way around this, and the solution lies in A/B testing.
A/B test pricing strategies
You can do all the research you like, but sometimes, you never know until you try. A pricing strategy you thought was a sure bet could turn out to be a dud, for reasons you didn’t see coming. Likewise, you might expect pushback over a bold move (like a price hike) yet see it have the opposite effect.
A/B testing pricing strategies lets you offer different prices per customer segment. If it sticks, then great—you can roll it out across your user base. And if the pricing experiment crashes and burns? Simply revert back to your old pricing with minimal disruption caused.
Some other things to consider when using price optimization software with A/B testing capabilities include:
- Different customer segments may be more receptive to a particular marketing campaign
- You could offer some customers a promotional price, or discounted price, according to certain pre-qualifications
- The ideal price point may change over time and A/B testing lets you keep your finger on the pulse
Overall, historical data will never provide the real-time feedback that you can gain from pricing experiments. A/B testing is an invaluable tool for SaaS pricing optimization as it lets you measure the impact of various pricing strategies with less risk.
Optimize pricing with all-in-one software
Holistic subscription management software should include features and functionality to assist with pricing optimization. It should include the ability to segment customers, use price automation, and manage prices on a customer level. It should also offer a way to easily test common pricing strategies and models (such as pricing tiers and value-based pricing), as well as have enough flexibility for you to think outside the box and implement custom solutions.
Ultimately, pricing optimization with the right subscription management software lets you:
- Measure price elasticity using machine learning technology
- Determine the results of multiple pricing strategies
- Constantly develop and evolve your pricing (dynamic pricing solution)
- Get maximum growth-driving revenue gains
- Maximize sales by putting the user at the center of your pricing strategy
With this in mind, go forth and start your journey to optimal pricing! The pricing process is a never-ending one. But, when you find the optimal price points for your product or service, it’s like striking gold.
