While project management tool Basecamp has many loyal fans, it has often been criticized for one thing: Charging only $99/month for its product, no matter how many users or projects an organization has.
From a customer’s point of view, this is a great deal. So why all the flak?
The price fails to account for the product’s value to customers—such that Basecamp could potentially be leaving a lot of money on the table.
As Nathan Barry, founder and CEO of email platform ConvertKit, commented on his blog:
“At ConvertKit we get so much value from Basecamp that if they doubled their price we wouldn’t blink.
Really, they could 10x our price to $1,000 a month and they would still provide more value for us than we’d be paying.”
While Basecamp has eschewed value-based pricing—even taking the time to explain its pricing stance—this doesn’t mean your own business can’t adopt it to capture its significant upsides.
However, value-based pricing can be tricky to implement and maintain.
The main challenge lies in being able to regularly and accurately assess the value customers get from your product, and then price accordingly.
If you get this right, you may be able to significantly raise your recurring revenue while facing little customer pushback.
But do this wrong and your pricing strategy could backfire, causing customers to leave in droves.
Want to avoid that happening? Of course, you do. Here are some tips.
1. Know Your SaaS Business’s Value Metric
Before you can accurately price your SaaS product based on value, you’ll need to know how to measure the value your product offers customers.
In other words, what’s your value metric?
Different SaaS businesses have different value metrics. For churn reduction software ProfitWell Retain, its metric is the amount of churn recovered, shares ProfitWell CEO Patrick Campbell.
This figure can be directly measured, so customers are charged a variable fee based on the amount of recovered revenue.
However, other value metrics may not be so easily measurable.
Campbell gives the example of marketing platform HubSpot, which offers software for email marketing, customer relationship management (CRM) for sales, customer support, and content management.
A HubSpot customer could be a marketing agency that uses the platform’s sales CRM software. If the agency’s salesperson closes a sale, how much credit can HubSpot’s software take for the sale—compared to other factors, such as the salesperson’s persuasiveness?
In cases where a product’s value metrics are more difficult to measure, Campbell recommends using proxy metrics. These are indicative (but not conclusive) of the value the product provides.
For HubSpot’s CRM software, a proxy metric could be the number of contacts a customer has managed to gain.
Test New SaaS Pricing Strategies Relentlessly
In a survey of more than 2,200 SaaS companies, almost 80% of respondents shared that they changed their pricing at least once per year, according to OpenView Venture Partners. In fact, 43% of them do so multiple times a year.
What about your business?
Pricing is a continual process of improvement, not a one-off exercise,” writes Amanda Greenwood for workflow management software Process Street.
“The only way to keep up with the fast-paced nature of the SaaS industry and its fickle customers, speedy advances in technology, and stiff competition is to constantly experiment with, and test, your SaaS price model.”
In its earlier years of business, Process Street experimented with various pricing strategies to identify which would best capture its product’s value, while still being at an acceptable price point for customers.
One of these strategies involved adding a usage limit to its existing per-user fee. In other words, if a customer exceeded the usage limit, extra fees would then apply.
That said, the business made the usage limit generous—more than what a typical customer would need.
While Process Street thought this new pricing strategy offered a lot of value, customers didn’t see things the same way.
Instead, with a usage cap in place, they felt they were getting less value for the same price.
Conversions started to drop drastically, so Process Street reverted to its previous pricing strategy.
3. Get Customer Feedback on Your Product’s Value
At the end of the day, you’re building a product for customers that pay for it because they value it in some way.
So, when assessing how accurately your pricing strategy reflects your product’s value, who better to get feedback from than your customers themselves?
This is exactly what team communication tool Chanty did when it started out in 2017. Olga Mykhoparkina, CMO at Chanty, recounted the experience on the Product Tribe blog.
First, Chanty sent out surveys to potential customers, new beta testers, and its blog readers.
These surveys included questions such as the following.
- What communication challenges do you typically face in your company?
- What made you sign up to use our product?
- Why do you pay for your current communication tool?
Next, Chanty identified possible buyer personas for its product. This was an important step, because customers of different profiles may value the same product differently.
Finally, the business considered how much customers were willing to pay for its product.
But instead of simply asking, “How much would you be willing to pay for our tool?”, it asked its customers for prices they thought would be:
- too expensive
- too cheap
- a bit expensive, and
- great value for money.
Plotting these more nuanced responses on a graph, Chanty arrived at a monthly fee of $2–4 per user—which it still follows today. Its current Business pricing is $3 per user per month.
4. Build Flexibility Into Your SaaS Tech Stack
Adopting a value-based approach to SaaS pricing is both an art and a science. It involves understanding the value that customers get out of your product and having the ability to quantify this value.
And as you continually experiment with new SaaS pricing strategies, your tech stack also has to be able to flexibly accommodate them.
Take your subscription billing software for example, which is in charge of actually processing payments for your pricing strategies.
Perhaps you want to try charging your customers recurring fees instead of one-time fees.
Alternatively, you may want to offer completely personalized plans and fees to just a few select customers.
Whatever the case, your billing software should have a catalog that’s flexible enough to cater to these different offerings.
Consider BitHeads, a software development business that offers backend as a service (BaaS). The business’s complex, usage-based pricing system required a flexible, convenient, and secure way for customers to pay.
By moving to an adaptive recurring billing solution, BitHeads has gained the flexibility and automation it needs to manage its elastic pricing model.
If your current tech stack is unable to handle frequent, real-time pricing changes, it’s worth considering expanding its capabilities, or switching to a more flexible solution.