3rd Base - Drive T2D3 Growth

B2B SaaS Pricing Fundamentals & Strategy

Maximize revenue and scale your B2B SaaS company by learning pricing fundamentals and strategy.


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The price your customers pay for your services is the second biggest growth driver for a SaaS business—right after churn. With a higher ACV you need fewer customers. Larger customers also typically have lower churn.

In addition, price is so much more than just a variable in your revenue economics. Price affects your positioning, your brand, your marketing segmentation, and audience targeting. Pricing has enough depth and breadth to fill a book, so here I will focus on the core principles that are key to scaling a B2B SaaS venture the T2D3 way. Let us start with some fundamentals.

Pricing strategy

To maximize revenues, you need to determine the right pricing strategy—one that strikes a balance between profitability for your company and a rich experience for your customers.

In setting the right price for your product or service, it helps to keep four factors in mind.

  1. Market share: Your goal is to attract as many customers as possible at a cost that you can sustain until you get a dominant position that you can defend.
  2. Simplicity: Once customers are convinced that they need your offering, make it as easy as possible for them to give you money and understand what they get.
  3. Choice: Give your customers the feeling they are in control by giving them a choice. Let them know they have options and feel they are driving the transaction.
  4. Value: Demonstrate how your product or service continues to provide value. Especially in SaaS, where customers must experience this value repeatedly as they keep paying for their subscription.

There are three primary pricing models that companies adopt: cost-based, market-based, and value-based.

Cost-based pricing

Cost-based pricing is the easiest for customers to understand and for companies to calculate. It is the most basic model. Prices are determined by the cost to produce the goods or services, plus an appropriate markup. Think of products like ice cream or car tires. Cost-based pricing only makes sense in a very commoditized category where you compete on efficiency and cost control, this is not a place where B2B SaaS ventures should end up.

Market-based pricing

Market-based pricing means you let the alternatives to buying from you help dictate your pricing. Consider what the market will bear, what your competitors charge, and where you fit within the budgets customers have set aside. Airfares are a good example.

The upside of this pricing is that it is very transparent for customers. They can compare your offering with others. Unfortunately, the upside is also the downside. Customers can compare what you offer with others. Instead of being viewed as a business partner, you are now at the risk of being seen as just another vendor.

The challenge with market-based pricing is you are not controlling the narrative, the market is. If you have a unique position, you need to determine how valuable your offering is. If you are delivering something with special attributes and great differentiators, you want to define the pricing, not have the category or market define it.

Value-based pricing

Value-based pricing is the alternative based on the ROI your product or service drives. In most situations, value-based pricing is the ideal model that you can usually implement after winning a part of the market where you have a unique value proposition. This allows you to stop competing on price with other providers.

The Microsoft Office Suite is a good example. With it, companies can be far more productive than without it. The suite’s value is seen every day by every user. Companies are willing to pay much more for it than just the cost of producing the software, or the price of some alternatives (some are free).

With value-based pricing, you dictate the narrative. Your key differentiators let you control how you position your product against the competition. You demonstrate your service’s value to customers and define the price commensurate with that value. You no longer become a price fighter in a crowded category; you become a price setter and own the category. By doing so, you maximize profitability.

Cost-based pricing
Market-based pricing
Value-based pricing
  • Easy
  • Cost-of-goods vs. Cost-to-service
  • Leave money on the table?
  • Transparent
  • You become a vendor
  • You follow the category
  • Customer-friendly
  • You are a partner
  • You make the market
  • Maximized profitability

Pricing Dimensions

In defining your value-based pricing, you need to figure out how your customers will measure the value they receive. Pricing units could be users, a la Salesforce and T-Mobile. The unit can be per device like Windows OS or iPhones. Per device is also applicable when you have a pricing model per sensor, for example, for a specific SaaS product. A third pricing model is by volume such as with cloud storage or gas for your car (often called usage-based pricing or consumption-based pricing). When you pay for data, for example, Dropbox, or you pay for transactions, or you pay per the number of photos that you store, that is an example of per usage-based pricing.

And then finally, there is pricing per capability, per feature if you will. And when you think of pricing per feature, you need to figure out a way to model your pricing structure to come up with price plans that allow you to do something. On websites, you often see a basic version of a product followed by premium and pro versions of the product. Often, these price levels are determined by, let us say, feature one, feature two, and feature three. In basic you only get this one feature, in "premium" you get these two features, and in "pro", you get these three features. That is a typical capability-driven price plan structure.

I do not count duration as a dimension. While the cost of many services that are subscription-based are centered on time, such as SaaS or Netflix, this is so fundamental to SaaS businesses that it is not really a separate dimension.

Most plans use a combination of pricing dimensions. Cell phone plans have various voice and data combinations combined with new smartphone discounts, all bundled into multi-year contracts.

Cable or satellite television services often bundle phone and Internet with TV. They offer various price plans per network package. They, too, attach a time element to their pricing. Every time you fill up your car with gas, the price on the pump is dictated by a combination of volume and octane of fuel purchased (feature-based pricing).

Denominator
(per X)
Cost Based
Market Based
Value Based
Easy to Understand
Lifetime Value
Easy to Predict
User
?
?
Checkmark Checkmark Checkmark
?
Device
Checkmark
Checkmark Checkmark Checkmark    
Usage
?
Checkmark Checkmark
?
Checkmark  
Feature
  Checkmark Checkmark Checkmark    
Duration
  Checkmark
?
Checkmark Checkmark Checkmark

The more complicated your pricing plans become, the harder they are for you to enforce and for your customers to understand. As a rule of thumb, a combination of three pricing dimensions is the most you should consider. Most-used combinations have one pricing dimension in common, see the following examples:

  •       Duration, per user, per feature (subscription plans)
  •       Usage and per feature (gasoline)
  •       Per device and per feature (mobile phones)

Feature-based pricing

In the three pricing dimension combinations above, each example had features in common. Feature-based pricing is often found in the most innovative industries—and with complex products and services. Such plans are typically structured around multiple price levels that are aligned with the capabilities or features provided.

 
Basic
Premium
Pro
Feature 1
     
Feature 2
 
   
Feature 3
 
 
 

Plan names usually follow a tiered approach such as Basic-Premium-Pro, Silver-Gold-Platinum, Starter-Professional-Enterprise. I am personally a fan of more creative names, that ideally convey the target persona (“Who’s it for?”) or even better, the utility value of the plan (“What is it for?”).

Of course, it is very hard to do any kind of pricing unless you can understand what benefits are being accrued from which features. You must do the hard work of translating the capabilities you offer into what they enable the user to accomplish. Once you understand better what the impact of those capabilities are—the benefits being accrued—you can start thinking about how to measure that impact and how to turn it into value-based pricing.

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