5 Lessons on SaaS Pricing

Pricing is the exchange rate you put on all the tangible and intangible aspects of your business. Value for cash.

– Patrick Campbell

For young SaaS founders, navigating the complex world of pricing can be very overwhelming. With such a wide variety of pricing models, billing frequency, payment methods and more – it’s not hard to see why! So where do you start?

Last week, we attended a fantastic webinar featuring ProfitWell‘s Patrick Campbell, SaaSCapital‘s Todd Gardner, and Chargebee‘s Krish Subramanian. Part seminar and part Q&A, these veteran SaaS experts shared some truly brilliant, eye-opening and inspiring SaaS data and discoveries that are sure to benefit SaaS founders of all kinds.

Here are 5 lessons we learned from this webinar!

1. Base your prices on value.

While some products may benefit from feature-based or per-user pricing, Campbell points out that companies using value-based pricing typically grow much faster. But why is this? Statistics show that in the modern SaaS marketplace, the value of individual features is going down. This means product value can go up, allowing you to charge per seats, tracking things month to month and quarter to quarter and making adjustments as you go.

Value-based pricing is also very helpful in terms of decreasing churn, allowing customers to downgrade certain seats and upgrade others. Giving customers the power to adjust features according to what they do and do not need will discourage them from churning in pursuit of a cheaper option.

Price is what you pay. Value is what you get.

– Warren Buffett

2. Be careful with long contracts.

Calling back to his earlier statement that price is the exchange rate of your value offered, Campbell cautions founders against long SaaS contracts. Most younger companies use monthly billing structures due to their customer’s reluctance to give new companies a lot of money upfront. However, statistics show that as companies mature, over 50% switch to annual billing methods.

While this progression is normal and even preferred, Campbell warns that transitioning from annual contracts into multi-year contracts is where things can get dangerous. Contracts work both ways, and this means that while your clients are committed to paying what they agreed, you’re committed as well. SaaS companies rapidly improve, regularly adding features, tweaking them and ultimately adding value. You have to be able to increase the cost of the value offered, as this value increases over the years. When SaaS companies commit to 2-3 year contracts (or 5-10 in the education industry), this increase becomes impossible to achieve. Long contracts are a threat to longterm SaaS growth!

The moment you make a mistake in pricing, you’re eating into your reputation or your profits.

– Katharine Paine

3. Premium products are worth what they cost.

Todd Gardner points out that across the SaaS landscape, more people are starting to defend higher price points, due to the value offered. As mentioned above, if you build from a value-first perspective and charge based on the value you offer – your value will be worth the price you’re asking. Using the analogy of premium products such as the iPhone, Campbell explains that while any flip phone is capable of making calls and sending texts, consumers interested in a more premium product are happy to spend $1,000+ for the iPhone. This logic applies to SaaS products as well.

If you offer premium value, it’s worth the premium cost.

Pricing is actually pretty simple…Customers will not pay literally a penny more than the true value of the product.

– Ron Johnson

4. Get creative with discounts.

Digging deeper into the subject of value and pricing, Campbell discusses why growing companies should be careful when giving discounts. Though advocating for SaaS founders to understand their value and hold a firm belief in it, the panelists don’t ignore the fact that there will be times when discounts may be needed.

Though the moral here is a little more conceptual and open-ended than others, Campbell encourages companies to explore their creativity when it comes to giving SaaS discounts. He cites HubSpot‘s strategy of not touching the subscription price but rather discounting upfront set-up costs, pointing out that discounts should only be offered on one-time charges. There’s a big difference between discounting a one-time setup fee and discounting the monthly cost of your product. Not only are product discounts a recurring drain on revenue, but they also compound negatively over time. And of course, the higher the discount – the more you have to deal with in terms of churn!

The better you understand your market the easier it will be to create an offering that they perceive to be high value, meaning more revenue and profit for you.

– Lincoln Murphy

5. “Free” doesn’t mean “free forever”.

Campbell advises companies to take advantage of the true power that free products can offer. Sharing the strategy behind ProfitWell’s Price Intelligently tool, he explains that building a powerful tool intended to fix a common SaaS problem is one thing, but giving it away for completely free (forever!) is another. While this strategy may seem crazy to some, Campbell explains why giving away something for free can have dramatic long-term effects.

ProfitWell’s strategy was built in two parts:

• 1. Build an amazing free product.
• 2. Go premium on all paid products.

By getting potential customers hooked on your free product, you effectively secure a lead and gain the ability to hold their attention and nurture the relationship. Once you’ve gained their interest, you can monitor their use and make suggestions, adding premium features and premium products to the free products, slowly moving each lead deeper into the funnel until your unpaid users become your paid users. Free doesn’t have to be free forever!

Freemium is an acquisition strategy, not a monetization strategy.

– Patrick Campbell

What are some of your takeaways?

Did you attend this webinar? Let us know if you have any takeaways of your own, or if you have any questions or comments about the ones we listed above.

Thanks for reading!