Value: The often talked about, but not deeply understood, centrifuge of SaaS pricing strategy
Author: Bryan Belanger
Sometimes there are people in your line of work who seem to share your opinion on every topic, and always seem to articulate exactly what you’re thinking before you can put it into words. That happens often for us at XaaS Pricing when we consume the content that Dan Balcauski, founder and chief pricing officer of Product Tranquility, publishes. “You really get us” is basically verbatim what we said to Dan when we first reached out to him on LinkedIn for a meeting.
Dan recently published a blog post called What the Hell is Value Anyway? that is a must-read for anyone from any size or stage of company who is responsible for establishing and managing a pricing strategy. We won’t rehash the post in detail here since we recommend you go to Dan’s site and read it for yourself. It is chock full of insights and helpful, simple pricing frameworks. Our favorite is the “Value Cascade” from Tom Nagle’s book, The Strategy and Tactics of Pricing, which is considered the tech industry’s foundational resource on value-based pricing.
The essence of Dan’s point is this: Value does not equal price, and you need to cultivate a deep understanding of value before you can begin to understand pricing. This includes understanding value relative to market alternatives, an opinion we also emphasized in a recent post. In his blog, Dan provides a number of approaches and methodologies to go about defining value.
This value concept, as well as its implementation in practice, is extremely important but is often overlooked. For example, let’s take this guest blog post by ProfitWell’s Patrick Campbell for Lenny’s Newsletter, a Substack publication by Lenny Rachitsky. The post dives right into designing a pricing strategy with “Step 1 – determine your value metric.” This is excellent advice on how to translate value into pricing strategy but skips a step that we believe exists before determining your value metric — “understanding your customers’ value cascade.” If you don’t understand the value your product creates and how that aligns to the value cascade that your customers experience, you can’t define it in terms of a value metric. For more experienced SaaS pricing strategists and consultants, this may be implied or the work to define value may already be done. For others who may have less experience or are focused on pricing strategy, this has to be an intentional step in the process.
Value is the critical foundation in designing a pricing strategy. In the remainder of this post we break down the different steps in defining value from our perspective and then provide guidance on how to translate an understanding of value into a pricing strategy.
Step 1 — Customer context definition
The first step in understanding and defining value, and in turn, setting a pricing strategy, is to understand the customer context. The Lenny’s Newsletter article referenced above actually positions this step after “determine your value metric,” but we’d argue that it should be at the beginning of the entire process. The first step in our view is to deeply understand the problem you are trying to solve and concretely outline who you are solving that problem for.
This is particularly true if you have multiple plans that serve different customer personas. You should spend time defining those personas in detail (Lenny provides a solid framework for that) and defining their unique version of the problem you are solving.
At the risk of getting ahead of ourselves, let’s illustrate the importance of this step. Let’s say your product solves the problem of “reducing meetings to increase productivity levels.” That’s a problem we can all get behind, right? Now let’s dissect that problem for a 10-person boutique strategy consultancy versus McKinsey, which according to the latest Technology Business Research, Inc. Management Consulting Benchmark has approximately 25,000 billable employees. Let’s assume that the theoretical product can eliminate two hours of unnecessary internal meetings per employee, per week for each of these companies, and that the average consultant day rate for each company is $4,000. On a monthly basis, that’s a per-employee revenue productivity gain of $32,000 ($4,000/day x 2 hours per week saved x 4 weeks per month). For the boutique, that’s reclaimed productivity of $320,000 per month, and for McKinsey, that’s $800 million.
This is an oversimplified example, but clearly there is a different scale of value created for different types of customers. This would correlate to potential differences in willingness to pay for a solution that delivers this value. Figuring that out comes later. It starts with understanding who you are creating value for, and then defining that value, which we’ve done with the example above and will summarize in greater detail in the next section.
Step 2 — Value definition
This step is largely covered by Dan’s article, referenced in the first section of this blog. The first part of this step is understanding the structure of value (i.e., value cascade), and the second part is leveraging that understanding to actually measure value. Dan recommends multiple techniques and methodologies to do this, including Jobs-to-be-Done (JTBD), in-depth interviews, mining for value insights during customer support calls, Kano modeling, Feature-Benefit-Value Tables, “so what” questioning, and “fill-in-blank” statements, among several others. Try them liberally as you get into this process to determine which combination of tools works for you.
The ultimate goal is to come out of those exercises with a quantifiable understanding of the value a solution to the problem that you are addressing creates for your customers. Dan calls this “creating Use Value Formulas.” If you sell different plans targeting different customer personas, as discussed in Step 1, it’s critical to go through this exercise to understand the value each plan provides to each customer persona.
This value definition concept was most succinctly and effectively explained to me during an interview I was doing a few years ago for a pricing strategy consulting engagement. This particular respondent was a former VP of sales for the software division of a company that sold large-scale enterprise software deals to telecommunications services providers. I was asking leading questions to understand a particular vendor’s list pricing strategy and structure. In response, he said something like, “We’ve never thought about it like that. Yes, there’s a list price somewhere, but it never comes out of the drawer. We think about the customer in terms of their end goal, which is to increase the number of subscribers on their network. They generate an average revenue per user [ARPU] for each subscriber. So, if we can understand how much our solution is going to expand subscribers, and we understand ARPU, we understand the value we create, and we can price to capture a percentage of that value — maybe 5% or 10%, as a rule of thumb.”
Once you understand and can quantify value, you can then typically identify your value metric and/or usage metrics that will ultimately define your pricing model and pricing strategy. In my example above, thinking through value in the context of how that VP positioned it to me leads to an obvious potential value metric — number of subscribers.
Step 3 — Pricing and packaging
This is where the pricing and packaging strategy activity kicks in, starting with the value metric definition step outlined previously. Once you understand customers and how you create value for those customers, you can start to design the solutions you will deliver to create that value for those customers and analyze the perceived value of those solutions, which translates to pricing.
We’ve covered the methodologies and techniques for this step in other posts, such as this one about pricing research and this one about setting price levels for a new product. We won’t detail those steps here, other than to note that it is important to ensure the value equations and value concepts you’ve defined in the other stages of the process remain at the forefront of this process.
Step 4 — Value articulation
Review enough SaaS pricing pages (like we have), and it quickly becomes clear whether a given company has thought about value and/or effectively integrated their value approach into pricing and packaging. Unfortunately, most pricing pages lack what we call “value articulation.” This is probably the most common issue we’ve advised on when doing our Grade My Pricing Page reports.
Value articulation is about bringing forward your value definition into your positioning to the customer, particularly in terms of how pricing and packaging are presented on the pricing page. Value articulation can have more fundamental issues — if you don’t understand value, you probably haven’t crafted a clear and compelling value metric, and as such you probably haven’t established a particularly effective pricing and packaging strategy. Value articulation can also have more superficial issues — perhaps you understand the value context for your product, but you haven’t carried that forward into how your pricing is messaged to the customer.
Without deeper consultation with individual companies, it’s hard to say which is more rampant — the fundamental flaws with value articulation or the superficial ones. But suffice it to say we see the evidence across many pricing pages we’re asked to audit. Based on what we’ve advised in those audits, here are a few recommendations to consider to amplify the value articulation on your pricing page:
Clarify customer-plan alignment: Don’t get too cutesy or too general with plan names. Make it really clear who each plan is intended for with clear naming and supporting persona summary descriptions. Don’t call a plan “Rocketship” without context; say “Rocketship — for early-stage companies with $X to $Y MRR growing at X% to Y% annually.”
Add benefits copy: Too many pricing pages provide pricing for each plan and then a summary features table that cascades into a more detailed features table. The messaging and positioning on these pricing pages is all about features. Instead, provide a top-line summary for each plan that outlines the benefits of that plan and connects to the customer persona description outlined in the first bullet. Using the previous example: “for early-stage companies with $X to $Y MRR growing at X% to Y% annually, seeking to reduce the time required to establish a competitive pricing strategy program from months to days by accessing prebuilt benchmarks for all competitive intelligence (CI) team users.
Lean on social proof: Use your customers to help fill in gaps in your page design. Be sure to integrate social proof on the pricing page, and don’t stop at sharing logos. Seek customer testimonials from named customers aligning to your ideal customer profiles. Target testimonials that speak to the value they captured from your solution with quantitative success measures summarized, if available.
Explain things you think are intuitive: Sometimes understanding value starts with just understanding what is being offered in general. Pricing page copy tends to include assumptions. often see this with value metrics. Most pages don’t make it clear what the value metric of the offering even is, since most are pricing with flat-fee tiered subscriptions, not usage-based models (i.e., price is $1,000 for 100 sandwiches, not $10 per sandwich). Further, value and usage metrics are often vendor-specific and not clear. For example, you may tier your product based on a primary value metric of “bot sessions per month,” but the way you define that might be completely different than your closest competitor’s definition. If you don’t explain what a bot session is in the Q&A or elsewhere on your page, customers will have a hard time mentally translating your offering to their business context, making it difficult to correlate your “bot sessions” to the measurable value it creates for them.
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