There is a myriad of articles out there about how to design pricing around a value metric, and for good reason — it is a critical concept in SaaS pricing
Author: Bryan Belanger
Author: Bryan Belanger
The concept of the “value metric” is prolific in SaaS pricing. It’s often cited as the centrifuge you should build your SaaS pricing strategy around if you want to succeed. There is a myriad of articles out there about how to design pricing around a value metric, and for good reason — it is a critical concept in SaaS pricing.
There’s a big issue there, though — the value metric is typically not appropriately defined, and thus not typically well understood, especially by founders, full-stack product marketing managers and others for whom pricing is just part of a full-time job. As one of our early beta users put it when exploring our platform: “I have a hunch that this value metric data is really important, but I don’t quite understand what it means.”
ProfitWell, and specifically its Price Intelligently team, is one of the foremost voices in SaaS pricing. The team puts out regular content espousing the importance of value metrics. In this blog, here’s how the Price Intelligently team defines a value metric:
“A value metric is the way a company measures the per unit value of their product for sale. A value metric example is skis, which are sold as pairs. In SaaS, value metrics determine the pricing and subscription terms of a product. If you’re Help Scout help desk software, you’re charging for each seat per month. If you’re selling MacBook Airs, it’s each MacBook Air one-time up front. If you’re Wistia, you’re charging for number of videos hosted and the amount of bandwidth those videos take up each month (a dual value metric).”
This definition makes it seem simple, but the explanation and examples shared are inherently flawed. It talks about value, and then in the examples, it talks about price: “If you’re this company, you’re charging for X, if you’re this company, you’re charging for Y.”
Value metrics are about value. The value metric is a per unit measure that defines how customers get value from your product. The value metric is not necessarily how you charge for your product.
Take the example of Help Scout that ProfitWell uses in its definition. It’s clear the company uses a per-user pricing model. But is adding seats really how the customer gets value from the Help Scout software? Perhaps indirectly, if the customer is able to use the software to scale their support team or better manage support, for example. But aren’t those other things (not the seats themselves) the measures of value? Isn’t it more likely the customer is getting value by making their customer service teams better and faster and, in turn, delivering more value to their end customers through better support? Perhaps Help Scout isn’t such a great example; perhaps Help Scout would be better served examining value metrics and deciding on a pricing metric that more closely tracks the value they deliver.
There are several ways to quantify the vectors of value associated with a SaaS product. In the Help Scout example, none of these has to do with how many agents the software supports. Number of seats isn’t a value metric for Help Scout — it’s the company’s chosen pricing metric, which is the means by which it charges its customers.
This is an important distinction: Value metrics measure value, while pricing metrics determine how you charge customers. Value-based pricing involves designing a pricing metric that either is equivalent to the value metric or closely tracks the value metric.
Conflating value metrics and pricing metrics urges you toward hasty decisions on how to price. Many companies jump straight into pricing without considering value; they start looking for the silver bullet value metric that will unlock their pricing strategy.
Separating these concepts is a forcing function that requires you to sufficiently define and assess your product’s value before you make decisions regarding pricing. How you define and shape value will in turn influence customers’ willingness to pay, so it’s really important to start with value.
Starting with value means doing your research and identifying and quantifying not just one, but multiple value metrics that define the economic value of your SaaS product. This is a process that is well described by pricing expert Steven Forth of Ibakka in several of his articles, as well as Product Tranquility Found Dan Balcauski in his recent blog series on value, which has proved to be a really deep well of insights for us. We won’t go into details on value definition and value management here; check out those posts if you’re interested in digging in and learning more. Balcauski suggests prioritizing three to five value metrics; that’s about right based on what we see in our XaaS Pricing benchmarking data.
Taking a value-based approach helps you define your ideal pricing metric as well as the other value metrics that are important to how customers consume your product. These other value metrics become the foundation of what we call usage metrics, which are the fences you use to segment your product into tiers that align to each of your ideal customer segments. As Forth puts it in his article “Don’t set prices. Design pricing!”: “Use value metrics not chosen as pricing metrics as fences to guide buyers to the appropriate tier (you can also use functionality as fences so that different tiers get different functionality).”
There is a tendency for most SaaS companies, especially since so little time is typically spent on pricing, to land on a pricing metric that represents their value metric, and then to design packages around that. Paraphrasing Balcauski, companies tend to measure what’s most easily measured, not necessarily what’s important to measure. Guesswork drives the pricing design, versus a research-backed, quantitative approach that focuses on defining and measuring value prior to establishing pricing. This creates packaging that does not fully resonate with target buyers, and fences that do not incentivize upgrades.
To illustrate these distinctions in action, let’s apply these concepts to our previous example of Help Scout, which currently employs number of users as a pricing metric. The company sells three plans for its product, ranging from $20 to $65 per user, per month for an annual subscription term.
One can infer that Help Scout has chosen number of users as the pricing metric that most closely tracks its value metric. Based on Help Scout’s descriptions of its three product tiers, we can also infer that the following represent Help Scout’s other identified value metrics, which the company has translated into fences across its plans:
This is where Help Scout is at today. But is it where the company should be? Is it managing value appropriately and translating that into its pricing model?
That’s a question we’d want to answer ideally through customer interviews with current and prospective customers within each of Help Scout’s target customer segments. We don’t have that resource, but what we do have, and what is always an instructive starting point, is the ability to consider that question through the context of Help Scout’s next best competitive alternatives.
In Help Scout’s category, there happen to be many alternatives. If we were Help Scout, we’d do a detailed teardown and create normalized comparisons of value metrics and pricing metrics versus competitor offerings. We didn’t do that for the purposes of this blog, but we did scan the pricing pages of Help Scout peers such as Zendesk, Freshdesk, Front, Helpwise, Hiver, Enchant and several others. We examined these companies to understand value metrics and pricing metrics associated with their products and plans.
There were a few areas where Help Scout’s approach was pretty consistent with its alternatives. These included:
There was one particular area where things were very different — usage fencing metrics. This suggests companies in this category look at value metrics very differently.
Help Scout’s primary usage fencing metrics are based on functional use of its software, such as the number of inboxes a customer is using and the number of support sites a customer can create. These are direct measures of utility, but they indirectly track customer value. What do we mean? The customer gets value from using inboxes, but the inboxes themselves do not measure value.
When we compare this approach to others in the market, we see vast differences. Some alternatives such as Helpwise have selected similar fences. The bulk of the market, however, does not impose limits on Help Scout’s primary gates of inboxes and sites. The most notable example is Hiver, whose pricing page states very clearly that it does not limit consumption by shared inboxes, or really any other metrics except users. Hiver offers feature fences for its entry plan, but generally offers unlimited use of features for its other paid plans. Alternatively, Zendesk has many fences on its plans; we counted as many as 16, depending on the plan.
This suggests there are two options in this category: (1) establishing traditional fences for plans based on value metrics, or (2) establishing fences primarily based on features.
The latter model suggests that value is a function primarily of the number of agents you have and cannot be reliably quantified and measured by other factors, implying that all customers should have access to value equivalently based on the size of their customer support organization. Value increases as a function of support team growth. This seems to be where much of the market, particularly newer players, are positioning.
The former model is where Help Scout sits, and where it potentially stumbles, particularly relative to competitors offering unlimited usage alternatives. Help Scout’s model defines limits around functional measures that don’t distinctly track value. Help Scout’s entry-level plan offers two shared inboxes for $20 per user per month with a limit of 25 users; Hiver offers unlimited inboxes for $15 per user per month with a limit of 10 users. It becomes difficult to weigh those plans and make a value-for-price assessment.
Where Help Scout and others could be well served is to assess how fences might be established that better track value. Help Scout’s own marketing site homepage talks about ROI and mentions things like the speed of deploying the solution, improved support team productivity, and the ability to support millions of customers with inbox zero. Guess what! These are excellent indicators of value that could be quantified and translated into value metrics that are used as fences for Help Scout’s plans. For example, you could imagine a fence that is based on the number of customers supported, with progressive pricing tiers (whether published publicly or not). This is effectively the model that HubSpot has introduced for CRM with pricing based on marketing contacts. This could be introduced as usage fencing to Help Scout’s plans without disrupting the industry standard pricing model that is based on users.
There’s no substitute for doing the above type of analysis (in a much more detailed and quantitative manner than we just did) for your specific SaaS product(s), and there’s definitely no substitute for talking to your customers.
But in aggregate, there are industry benchmarks and guardrails that can help you think about value, pricing and usage fencing metrics. Here’s what we see across the SaaS industry broadly:
Our primary area of pricing expertise is competitive and market category pricing analysis. That’s a key element of establishing value, but it’s just a part of the equation. We often come into the picture to help with questions like “Here’s what my competitor’s value metrics are — what do I learn from that?” We frequently lean on others who are experts in the field of pricing to round out our knowledge on value-based pricing.
One of those experts is Forth of Ibbaka. Forth and his company offer a wealth of insight, resources and connections in the world of value management and pricing, and I highly recommend following him and his team to access further reading, resources and insights on the topic of value-based pricing. He has a great article on the Ibbaka blog that speaks tactically about the concepts of value metrics, pricing metrics, and how you should look at them for establishing pricing and packaging for new functionality. It is both conceptual and tactical and has helped us to better understand these concepts. Check it out!
Want to talk SaaS pricing and value metrics, or have a question about how these concepts apply to your product? You can find me on Twitter at @bbelangerTBR or send your feedback directly to [email protected]. And be sure to subscribe to get our content sent to your inbox once it publishes. Thanks for following along!
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