A look at 5 SaaS pricing tactics we’re seeing mentioned in-depth across Twitter
Author: Bryan Belanger
I’ve been spending more time than I probably should looking at Twitter (and social media generally). You probably gathered that from our blog. We mine Twitter a lot for content. But guess what? There’s a lot of it out there, and it’s usually interesting. This month has been no different. My Twitter trip wire has been set off recently by four different threads (these are just the ones I’ve seen, so there are likely more):
This content went out to over 100,000 of the authors’ collective followers and was retweeted hundreds of times. Each thread linked to other threads, examples, and templates for individuals and companies use in setting their pricing. Presumably, these posts are intended to become a critical resource for entrepreneurs in all industries who are wrestling with pricing challenges.
Interestingly, these posts follow the same structural playbook. They distill the complicated and resource-intensive process of pricing into steps you must take, or tactics you must deploy, to optimize your pricing. There is a resource available for download at the end of each thread. The implication is that if you digest the Tweet, download the resource and enact the pricing tactics for your business, your pricing strategy will be successful.
Reading each of these threads over the past several weeks prompted me to turn on my analyst brain. Given how many people are likely consuming and running with these tips, I wanted to break them down, find commonalities and differences, and share my own point of view on how to put these types of tactics into action for your pricing strategy.
Pricing Twitter’s most common advice
Across these four threads, there were approximately 30 total pricing tactics mentioned. About half of those were mentioned by more than one person, and the other half were unique bits of advice.
Most of the advice was not novel. The tips and tricks each author discussed are the same ones you can find on similar listicle-structured, SEO-thirsty blog posts if you Google “best pricing tactics for my business” or something similar.
Here are the five tactics that were mentioned across each of these posts, along with a quick definition:
Price Anchoring: Providing buyers with context to help establish the value for price of your offering. Context is usually provided in the form of alternatives, such as price comparisons to your other products or services, or relative to competitive alternatives. Anchoring can also be executed via high-low strategies where you show a higher price that is discounted to the current sale price of a given offering.
Decoy Pricing: Positioning pricing for comparable and related offerings with different levels of features such that certain offerings serve as decoys to guide buyers to the preferred option. This strategy is often used in combination with price anchoring and applies to other pricing psychology concepts as well, such as the “magic of the middle” concept that Aprilynne Alter mentions, which suggests customers naturally gravitate toward a middle option when they are given three choices.
Dynamic Pricing: Prices are variable, not fixed, and change based on a defined variable such as customer groups, time, supply or demand. The Twitter thread authors cited in this article lump together many different strategies as “dynamic pricing,” including price localization, promotional pricing and other approaches.
Freemium/Free: Providing a free offering that motivates the purchase of another offering, and/or deploying a strategy in which a free offering is used as an on-ramp to the customer’s eventual migration to a paid tier of an offering to access more usage and/or features.
Bundling: Combining multiple related products and/or services that would or could be priced separately into a package that carries a higher price. Customers perceive greater value in the combined bundle than if purchasing the individual products at a higher price.
Breaking this advice down for SaaS and XaaS
Each of these articles espouses the authors’ top pricing advice. It stands to reason that the five most commonly cited areas across these threads must be the most important, must-implement strategies for founders and pricing strategists. So how do these apply to SaaS and, more broadly, the B2B technology subscription services market?
Price Anchoring, Decoy Pricing, and Bundling
Pricing, bundling, and decoy pricing in XaaS usually means adopting a tiered packaging and pricing strategy for your offering. In fact, ProfitWell’s Price Intelligently team said this directly in a post about price anchoring. Their point and ours is that if you use a tiered strategy, you’ve already built price anchoring and price decoys into your approach. Guess what? You’ve also addressed bundling too, assuming you’ve done your customer research to understand and design your packages around relative preference of features. There are nuances to bundling, such as how to determine add-ons, but you’ve also built bundling into your core packaging strategy.
We’ve talked before about packaging strategies and how to determine the appropriate one for your offering. Our data tells us that for most XaaS companies, the typical good-better-best model or a slight variant works well. Assessing your peers and doing your customer research is your ultimate guide to an appropriate packaging model that aligns to your ideal customer profiles, but it’s likely that in doing so you’ll build price decoy and anchoring into your strategy.
Similarly, in establishing pricing based on an assessment of value and ultimately willingness to pay for those products and tiers, you are reinforcing price decoys by creating market-aligned price fences between the tiers of your product. In SaaS, there is something called the 1x, 2.2x, 5x rule that suggests you should have three tiers, pricing the second tier 2.2x higher than the entry-level tier, and pricing the most expensive tier 5x higher than the entry-level tier.
While this rule happens to bear out in the market data, it’s no substitute for basing pricing on research with customers. You should set pricing for each tier based on your assessment of value and willingness to pay. However, the underlying logic of this rule is based on the psychology of price anchors and decoys. If you use a methodical, research-based approach to determine pricing and packaging, and use standard SaaS constructs to guide you, you’ve built favorable psychology into your offering.
Freemium or free strategies are less of a “pricing hack” than these threads would suggest and more of a strategic decision about your company’s overarching product and go-to-market strategy. A freemium approach is about designing mechanisms of customer acquisition and engagement, and it is a nuanced decision that must consider your target customers, category, product, go-to-market structure and overall organizational philosophy toward growth. We wrote in detail about how to determine if a freemium approach is right for your product.
In SaaS, where “free” offerings often make broader sense for most businesses is in the positioning of packaging and pricing. In our view, the best breakdown of this is Tomasz Tunguz’ blog post on linear pricing versus two-part and three-part tariff models in SaaS. The three-part tariff model, per Tunguz’ definition, involves structuring a subscription plus overage pricing model where the software is partially based on seats or a flat-fee, and then a usage-based overage charge is applied. A customer is allotted an included amount of “free” usage and must pay the overage fee for marginal usage beyond the allotted volume of free usage.
This model as described makes sense for companies that deploy usage-based pricing. But the foundational logic is now broadly used across SaaS. Most SaaS companies price with a per-seat or flat-fee charge, using tiering strategies in which each tier has three to five usage factors that are limited to that tier. These companies don’t always charge for marginal usage as Tunguz suggests, but at a minimum they motivate customers to upgrade to more expensive tiers to unlock greater usage. In this way, the base or entry-level plan has a “free” amount of allotted usage, and unlocking additional usage requires upgrades.
While not purely a “freemium” model, free has a much broader and more specific pricing context in these examples, versus purely as a “freemium” customer acquisition strategy.
Dynamic pricing was referenced in multiple ways in our sample of Twitter threads. Some referred to it in the context of adjusting pricing to supply and demand, while others talked about dynamic pricing in the context of “creating urgency to purchase before the price increases” or as part of a price localization strategy.
When it comes to using dynamic pricing in SaaS, our friends at ProfitWell break it down best: True dynamic pricing has more risk than upside in most cases. There are ways to introduce dynamism into your pricing strategy without having truly dynamic pricing. As ProfitWell notes, these include tiering (as we discussed previously), discounting and promotional offers. We would add localization to this list. There are opportunities to localize your pricing to specific geographic markets both cosmetically (converting into currency) or by truly localizing pricing to the willingness to pay in the geographic markets you serve.
These types of approaches allow for controlled dynamics. For example, let’s say you sell a SaaS that is priced per seat, and you have a customer that wants to purchase 1,000 seats and requires annual invoicing and another customer that wants to buy a single seat via self-service. If the self-service customer found out about the enterprise pricing, they might be annoyed, but the one-off pricing difference is manageable and explainable. However, if you are A/B testing your pricing and offering a different public price to different types of customers, this could create a complicated and difficult situation to explain at scale.
A framework for putting pricing Twitter in context
Each of the Twitter threads cited in this post refer to “pricing strategies.”
At the risk of making a semantic argument, the content in those posts has little to do with pricing strategy. What it really focuses on is pricing psychology, as well as the implementation of pricing psychology into specific pricing “hacks.” Don’t get me wrong, both of these things are important and impactful, and they are related to strategy. But they should not be mistaken for true pricing and packaging strategy.
We won’t make this another detailed post about the iterative and research-intensive processes associated with defining value, willingness to pay and pricing. But we feel obligated to put these Twitter “pricing strategy” tactics into proper context.
Assuming you have identified a market and a problem and have established a SaaS product or concept to address that problem, a pricing strategy process involves some or all of the following activities:
Identifying your ideal customers
Segmenting those customers
Defining the problem to be solved or job to be done for those segments
Defining and quantifying the value (use, economic and perceived) of your product for those segments
Assessing willingness to pay for your product
Determining your positioning
Analyzing the role of pricing in your firm’s go-to-market strategy
Determining packaging strategy
Determining pricing model strategy
Setting price points relative to willingness to pay and positioning
Establishing commercial mechanisms such as term and volume discounting guidance and discounting tiers and thresholds
Establishing pricing operational mechanisms such as approval responsibilities and thresholds, deal reviews, pricing governance and pricing team structure
Establishing pricing systems, such as your product pricing page, and back-end systems, such as configure, price and quote (CPQ) tooling
Establishing pricing assets for marketing and sales
Creating systems and processes for collecting, processing, indexing and acting on customer and seller feedback on pricing
Creating systems and processes for when, how and why to enact pricing campaigns such as promotions
Building all of the above into a recurring, repeatable pricing strategy process
That’s probably a partial list, but you get the idea. There are a ton of activities involved in pricing strategy and operations. Things like decoy pricing aren’t your pricing strategy; they are helpful pricing psychology rubrics to use in generally understanding buyer behavior. These tactics, especially in SaaS, are (1) already integrated into your pricing if you follow a methodical and typical pricing process; (2) don’t apply to your pricing strategy at all; or (3) come well after much more important and foundational elements of pricing strategy.
It is no secret that we are fans of pricing research. If you have systemized competitor and customer research in your pricing strategy process, there’s no need to run with a listicle’s worth of pricing strategy hacks as the foundation of your pricing program. You can analyze your pricing strategy with real market data and make informed decisions about how to use these techniques in practice.
The bottom line: Pricing is complex. If you want to level up your pricing strategy, it’s probably best to take what you read with a grain of salt, especially on social media.
Leaving on a positive note
There were a few kernels of truth among the insights shared across these Twitter threads. My favorite came from DiPietro, CEO of The Hustle. Before veering into pricing psychology tactics, DiPietro’s post offered two insights that resonated with how we think about pricing:
“Competitive Landscape: Before you start pricing, ground yourself in reality by doing some competitive analysis. You need to survey the landscape and price within reason.”
“Customers aren’t always right, and often their self-analysis is misguided or incorrect. You should still validate pricing with future customers. Find those prospects and ensure your price feels right.”
These get at points we talk about all the time. The first speaks to the process of assessing value by using next-best competitive alternatives, and assessing positioning in a market category.
The second emphasizes that, while important, customer research is only part of the process. Customers can introduce biases that should be considered.
Want to roast me on Twitter about roasting people on Twitter? You can find me @bbelangerTBR or send your feedback directly to [email protected]. We read all replies. Be sure as always to subscribe to get our content sent to your inbox once it publishes. Happy pricing!