You’re in the market with a product and customers, already running hard, and now wondering, “Where do we start with pricing?”
Nov. 9, 2022
Author: Bryan Belanger
I think most people would agree that SaaS pricing is confusing and difficult. Some might even say it is “annoying” or “not fun.” Most entrepreneurs are builders, sellers, or both, and pricing is an art and science that sits somewhere between those two pillars. While there is a lot of advice around pricing available online, it’s often incomplete or contradictory, making it difficult to know where to get started.
Figuring out where to start is also highly dependent on where your company’s actual starting point is. Yes, it’s difficult to establish your SaaS product’s Day 1 packaging and pricing. You are a new player in the game and trying to build a value proposition and brand, and you have to build around a price position that reinforces your differentiated value in the market. That’s a tall task.
But it’s almost harder if you are already in market, with some traction, and are now trying to step back and look at pricing and packaging. Once you have living, breathing customers, you have set an expectation on pricing and value and have contractual commitments to uphold. You also have other fires burning in your business or with your product on a daily (OK, hourly) basis. Once you’re in the arena, pricing and packaging are just two other things to figure out on your to-do list.
Those very same folks at OpenView recently released an excellent set of resources for running a pricing project. This should be an immediate download for those who are thinking about or currently undertaking a pricing strategy project. Inspired by their post, we wanted to share our perspective on the topic, specifically focused on those of you who are in market with a product and customers, already running hard, thinking about your pricing and wondering, “Where do we start?”
Start by figuring out what you want out of pricing (and write it down)
You’ve decided that you want to prioritize your SaaS pricing strategy. You might have said to yourself or your team, “It’s time we take a look at our pricing and packaging strategy.” That’s great. But what does it mean? It could mean a lot of things, depending on your specific company situation, the team, the resources you have available for pricing-related efforts, your market category, your competitors and customers, and many other factors.
Here’s where we recommend designing a minimum viable pricing process. It’s tempting to design a project around a particular issue(s), and then assume that will solve all of your pricing challenges and allow you to move on. The truth is that like your product, market and competitors, pricing is ever-changing. There are multiple elements and sub-elements to pricing, and over the life span of your company you’ll want to look at all of them. How do you find the time and resources to do that? By establishing a process for pricing.
We call this a minimum viable process because we don’t want you to try and bite off more than you can realistically chew. You aren’t going to have the same pricing process or resources that an established, publicly traded enterprise technology company has. We know that there are constraints and that you have personal lives to somehow lead as well.
Determining your minimum viable process requires getting together as a leadership team and coming to an agreement on the answers to the following questions:
What are our pricing goals? What is our pricing strategy?
How does that connect back to our wanted value proposition and competitive positioning?
What resources (e.g., time, budget) are we realistically going to be able to dedicate to pricing for those individuals?
What data sources are we going to use for pricing?
How frequently are going to evaluate pricing?
What aspects of pricing are we going to evaluate and when (relative to the overall timeline)?
What deliverables do we expect from each pricing and packaging strategy effort?
How will we source input from internal team members of pricing topics?
How will we inform the company about pricing plans and changes?
How will we inform and roll out changes to our customers? Who will own that?
How will we evaluate and prioritize pricing projects?
What dependencies does our pricing and packaging strategy have on our current billing and other IT systems?
What won’t we do?
A good analogy is to think of pricing the way you think about your product management process. It should be living and breathing and managed with the same process rigor.
We recommend workshopping the above questions by first meeting with your chosen pricing team and developing some internal hypotheses. Next, look at the market — what can you find out about how similarly situated SaaS companies are approaching pricing? What changes do they seem to make and when? Who is responsible for pricing? Use those insights to inform and refine your internally derived plans.
Once you’ve landed on an outline, write it down! We always like to point to GitLab’s pricing strategy documentation as a guideline here. It’s important that you put pen to paper and publish your strategy internally. You don’t have to open source it as GitLab has done, but you should codify it and commit to it in writing for your organization so your team can start working against the plan that’s been devised.
A minimum viable process that works for most
At this point you might be saying, “OK, great. You gave us a list of questions and homework, but what we’re really looking for is answers.” That’s fair. We’re analysts and consultants. Our answer to anything is typically, “It depends.”
But you’ve got a business to run. We can’t just leave you hanging like that.
Based on running hundreds of pricing projects and working with a lot of repeat clients over the years, there are a few common foundations that you can adopt to accelerate your pricing and packaging strategy. Remember that we’re mostly speaking to companies without a dedicated pricing function here. If you are a multinational tech company with a large pricing team, you’re probably past this stage.
Evaluate quarterly, make changes annually: ProfitWell breaks this down further in its pricing strategy guide, and we agree with its proposed pricing strategy timeline. If you’re looking to make major changes more frequently than annually, you’re probably biting off more than you can chew. But you should be evaluating different elements of pricing and collecting data quarterly.
Establish a recurring baseline: You are likely going to have specific projects you want to tackle related to pricing. Maybe you’re expanding into new geographies. This might trigger the need for a price localization project. But it’s important to set a recurring baseline of pricing analysis and evaluation so you can track progress over time. More on that below.
Interrogate your data: The foundation of effective pricing is data. You have data everywhere across your organization. Does it help you achieve what you’re hoping to achieve with your pricing strategy? Why or why not? What is missing, and how will that inform your go-forward plan? As you take on projects and start to establish a pricing road map, you should always be assessing how the data you have and the data you don’t have will support your road map goals. If you don’t have the data you need, figure out a plan to go out and get it.
Get specific: In each quarterly and annual strategy sprint, get as specific as you possibly can on goals and wanted outcomes. You should have a recurring baseline analysis plan in place as noted above, but these projects can and should vary widely. The most important element is that they should be really specific and the entire team should agree on the need. If you enter a quarter and say, “We need to look at pricing,” you’re setting yourself up for failure. If you enter a quarter and say, “We need to evaluate whether or not we are bundling the right features into our freemium plan to incentivize upgrades,” that’s a much better starting point.
Be practical and realistic: More on this later, but generally, stay rooted in the land of “strategic-minded but tactically oriented.” You’re an upstart business that moves quickly, changes even more quickly and is aiming to grow. You can quickly burn cycles on the wrong things if you aren’t focused on evaluating tactical changes that you can realistically make to optimize your product’s pricing and packaging. For example, do you really need a 1,000-person global customer survey when 10 or 12 customer interviews will do?
Setting the baseline
Once you’ve outlined your pricing and packaging strategy and are ready to get started with actual pricing projects, the next step is to establish your baseline analysis.
Here’s a baseline analysis framework that typically works for us. Use it and/or adapt it as needed to get started with your pricing and packaging strategy:
Pre-analysis Workshop/Kickoff: At this stage, it’s time for your pricing team or committee to come together, debate pricing and packaging questions, and develop hypotheses on pricing priorities for the quarter and/or year. With a baseline analysis, you aren’t going to pursue a specific project or initiative, but it’s important to understand what the team is thinking about. This is what you’ll vet in deeper research.
Inside-out Analysis: This stage is all about gathering internal data to assess what it implies about your pricing strategy. The goal is to conduct a consistent, repeatable assessment of your pricing to flag potential issues that could point to pricing and packaging problems requiring deeper investigation.
Internal Survey and/or Interviews: Our first phase of an inside-out analysis is typically an interview and/or survey with the members of your team who are directly or tangentially involved in pricing. First priority is given to customer-facing teams, but we generally want to go as broad as we can at this stage. By collecting a range of perspectives across company leadership, sales, customer success and product, we can start to identify patterns. We generally like to conduct one-on-one interviews at this stage, structured around a standard set of questions. Over the course of 30 to 60 minutes, this provides each team member with the opportunity to provide their unique perspective on pricing, without the risk of bias from the opinions of colleagues. If you have too many employees to realistically interview one-on-one, asynchronous methods such as a survey, Slack or email exchange will work perfectly well at this stage. If you take this approach, we recommend identifying three to five employees for follow-up interviews based on their responses and level of interest in supporting the project.
Internal Data Assessment: Where you take this is going to depend on what data you have available. Our best advice is to realistically audit your internal data. If you feel like you have gaps in your data that, if addressed, would make you more effective at pricing, track those and go fill those gaps! Generally speaking, for most SaaS companies a good place to start at this phase is with a win-loss analysis. Win rate by customer type and plan, pricing and discounting by segment, churn and retention, customer lifetime value, customer acquisition cost, product usage, and win-loss reasons are foundational metrics to track. Ideally, you’ll track these at the customer segment level and product plan level, so you can track trends over time and flag areas where issues arise. As with pricing overall, if you don’t have all these metrics in place, that’s OK. Build a road map to get there over time.
Outside-in Analysis: At the conclusion of the inside-out phase, you should have developed some hypotheses on pricing challenges and specific projects you want to tackle in the next quarter or year. You should have also developed some concepts around exactly what you’ll do about those challenges. The next phase is about testing those hypotheses within the market.
Competitor Analysis: You don’t want to set a strategy solely based on what your competitors are doing. But you should be tracking them regularly to inform your pricing and packaging strategy. Don’t overdo it — choose the five or so that are most relevant and focus on them. Track their pricing and packaging strategies with a formal, consistent and repeatable taxonomy.
Proxy/Landscape Analysis: As with competitors, you may want to look more broadly at adjacent industries or best-in-class SaaS companies. The importance of doing so may depend on the exact nature of the hypotheses that you are investigating as part of your long-term pricing strategy. For example, perhaps you are on a multiyear road map to shift to usage-based pricing and few or no competitors in your industry are employing usage-based pricing. In this case, you may want to look at peers in adjacent industries with similar business characteristics to assess how they are approaching usage-based pricing.
Customer Analysis: Customer analysis is the bedrock of external analysis and should be your priority for any baseline analysis. We’ve written extensively about the different types of customer research you should be doing, and the benefits and drawbacks of each. For a baseline analysis, we like one-on-one customer interviews, but as with internal interviews, any method will do. For a baseline analysis, you’re aiming to gauge how your pricing and packaging are working. You’ll want to ask standard questions of customers to understand their perception and identify recommendations for optimizations.
Strategy Finalization: Based on the inputs above, you’ll have validated or refuted your pricing hypotheses and devised a (relatively) clear picture of where you want to go with your strategy. At this phase, you should aim to define that strategy concretely — what you’re planning to do, what that means, and what dependencies or impacts you’ll need to consider. The purpose here isn’t to do or change anything just yet, but rather to codify what you’re planning to do so you can communicate effectively.
If you take the above steps on a quarterly basis, you’ll start to cultivate a deeper understanding of your pricing and packaging strategy, and a clear picture will emerge for where you are today and where you might need to go in the future. You’ll also identify areas where you need to revisit and optimize your pricing strategy and data collection plan overall to provide you with the resources necessary to optimize your pricing and packaging strategy.
From there, you’ll devise more specific plans and take steps toward rolling out pricing changes. You’ll also want to translate your findings into a pricing road map that sets the course for your pricing strategy. Those elements are beyond the scope of this post but equally important.
A final word of advice: Stay practical
We’ve thrown a lot at you. We’re asking you to deploy a lot of new processes and adopt tactics that may be completely new to you. It’s OK to try it and see what you learn. Doing something is better than nothing. Just get started and let the ball roll downhill.
As you get going, there’s one piece of advice we want you take to heart. We want you to stay practical. As with anything complex, it’s easy to get caught up in the academic theory, think about what-ifs, and head down rabbit holes that may be conceptually important but tactically irrelevant.
We recently worked with an earlier stage SaaS company that is undertaking a pricing project. Our data evaluation revealed there was a clear potential opportunity to evolve the company’s pricing model. We could envision redesigning their entire pricing structure around a new value metric, establishing new price levels and packages, and completely transforming their monetization model. As we thought about that, we asked a simple question, “How would that play with customers?” It quickly became clear that it wouldn’t play well. Their customers would be turned off at any change to the pricing model. Instead of pressing forward with evolution for evolution’s sake, we quickly course-corrected to focus on other areas of optimization.
The lesson? Acknowledge and understand the theory, then steer toward the right frameworks for the long term. But ground yourself in the reality of the day. You’re in the game each day, and you have starting points that you have to work from. Take the lead from your current and wanted customers, systemize the process, and build from there.
Need advice on how to set up a pricing program for your business? Want to throw ideas around? You can find me on Twitter at @bbelangerTBR or send your feedback directly to [email protected]. I read all replies. Be sure as always to subscribe to get our content sent to your inbox once it publishes. Thanks for following along!