How Our Average Sales Price MRR Increased by 48% after Changing the Pricing and Packaging of Our SaaS Product
SaaS (Software-as-a-Service) is an amazing business model. Customers are subscribing for the right to access your software. Unlike the perpetual model, customers do not own the software, they are paying for the right to access and use it during the subscription period, very much like your subscription to the gym. Having this model, businesses do not need to deal with the installation and update of the software nor with the hardware running it. They have the latest and greatest version of the software available on-demand. SaaS is a win-win model. Not surprisingly SaaS is flourishing. There’s never been more traction for investments, founders pitching ideas, and businesses willing to try new tech.
How Would You Price a Subscription Service?
One of the main business challenges with SaaS is how do you price and package it as your business is growing, as well as your competitors.
At every stage of the life of the business, you should review your pricing & packaging. During the seed stage, you asked fundamental questions like who will pay for the product you just built and how much will they pay for it. At this stage, you have very little data, but endless possibilities to innovate and experiment with pricing. At this stage, most startups just look around their competitive landscape and match their pricing and packaging to what they find around. It is important to remember that this was just a guess and should not be something to stick with for long, as many startups do. Pricing and packaging your product should be an ongoing learning activity. If you didn’t revisit them in the last two years, it's about time.
At the expansion stage, you have a well-defined product, you know who you’re selling it to and you have customers who are paying you for it. You are now in land-grab mode. At this stage, it is important to identify the buyer persona (who is budgeting and approving the purchase of the product and how big is that budget) vs the user persona (the person who is using the product).
At the growth stage, your business is much larger and more mature. You’re more risk-averse than you were at previous stages of growth since you have a large base of existing customers and a steady stream of revenue to worry about. At this stage, changing pricing and packaging become more complex to execute across your large customer base, however doing it smartly will have a big reward for the business.
Put simply, companies that do not review their pricing and packaging regularly are literally losing money because of it. The challenge isn’t just to make a change, but mostly to make your customers understand and support it the next time they renew the contract. The better you package your software to fit the value they need, the more opportunities you have to charge more for it.
Thanks to outstanding teamwork, we managed to increase the ASP MRR by 48% across over 2000 brand clients around the world. A great outcome for the business.
Who Should Be Involved in Managing Pricing & Packaging?
This is not a job of a single person working with Excel, nor a task for Friday afternoon. Managing pricing and packaging should be ongoing cross-functional work. CEO, Sales, Product, Marketing, and even Finance should be involved every time you consider a change. As any change will impact the entire business, you better set a committee with representatives from all groups. You should consider inputs from all sides of your business before making a decision and start rolling out a change. Alignment is key to success here.
The First Step on My Journey
Back in 2017, when I took the CEO role at a MarTech SaaS company, the business struggled. I had to find different ways to improve business performance. I looked at how to stop the leak of revenue (churn), as well as how to increase the top-line revenue. You can read about the efforts around gross revenue retention on my other posts here.
One of the areas I looked at was the pricing and packaging of our product. The model we had at that time was in place for a few years, back when we were at the seed stage, rather than the expansion stage we were at when I joined. The average sales price, ASP, of the product, was flat over a long period of time and packaging didn't exist much. The business tried to upsell with some new features the product team delivered.
In theory, it may seem simple, just increase the subscription price and your top-line revenue will look great. In some cases, I found startups that felt their pricing is too expensive so they reduced it to win more business. While they did manage to win more clients, the revenue line didn’t go up. I know only one direction for pricing in software, it is up.
Unfortunately, the reality is very different and challenging. Customers have alternatives, your competitors. Customers have a budget for each SaaS product they purchase. You need to convince existing clients to pay more. Just raising the price and expecting magic to happen is not the way you should go. Where do you start?
The Market Research Phase
We initiated market research to collect publicly available data. It was important to map the alternatives customers were having in the market. For each competitor, we identified the package and pricing. Some competitors had a single, while others had multiple, packages. Some competitors, mostly focusing on the enterprise market, did not disclose their pricing and packaging publicly on their website, as the small and mid-market vendors did. In such cases, we asked our sales team to leverage their relationships with enterprise brands and kindly ask them to share information they are allowed to share.
An additional data source we used was our own deals lost database. We looked at all deals we lost because of pricing. As we recorded each win/lost case on our salesforce database, we had a good source of data to analyze from the early days of our business. Yes, you should keep records not just of your wins, but also about your losses.
Analyzing the Data
We were not short of data. It helped us understand the different pricing and packaging alternatives brands are evaluating when making a purchase decision. For each package our competitors offered, we looked at the features as well as the value metrics it includes.
Value metric, also known as a usage-based metric, is a very important element in packaging and pricing your software. This is your secret to get and increase the revenue per customer over time. In a nutshell, it means the more the customer is using your product (more users, more data, more reports etc.) the more they should pay. The general idea is to earn more as your customer is getting more value from your product. A fair deal.
A usage-based value metric has a better shot at reflecting the unique value perceived by customers for your specific product. It tracks well with a land-and-expand business model: New customers can start at an affordable price, and then pay more over time as their needs become more sophisticated or as the product becomes more embedded in their business.
How Do You Identify Key Features and Value Metrics Customers are Willing to Pay For?
You should understand where customers are seeing the value in your products very well. It should not be guesswork, it should be data-driven. Obviously, you should not expect that each feature in your product will have a price tag. Customers do not subscribe to features, they subscribe to workflows your software supports and that can help them complete a task. The better it can help them complete a task, the higher the perceived value of your product can be. Your pricing is the exchange rate on the value you’re creating for your customers.
The Value Matrix
The value matrix mapping is where we started. Having a conversation with our sales team, support, customer success, and a few customers, we positioned each of the features of our product on the quadrant. This exercise was the first a-ha moment for many of us. It helped us understand the high-value features vs. features customers are willing to pay (WTP) for, even if we did not consider them with a high value (e.g. support for SSO, single-sign-on). It took us about three months to come out with the final version everyone agreed on, as we ran a few validation rounds with our Sales and Marketing teams.
Thanks to this quadrant view, we identified the high-value/ high willing-to-pay features in our platform. That set the foundation for our packaging project.
As the value matrix of our product is confidential, I came across an example of ZenDesk value matrix as prepared by Profitwell.
https://www.profitwell.com/recur/all/pricing-tools
The Second Step on My Journey
Having the value matrix, we started to look for value metrics that can better indicate the value customers are getting from our product as they use it more. At this stage, we considered the buyer and user personas our Marketing team identified. We also looked at product usage patterns to highlight the workflows and features our users were using the most. The combination of these data points helped us to further learn how to better package and price our product.
For example, although a typical user persona may use single-sign-on (SSO) once a day, the feature is mandatory at almost every mid-large company due to security requirements. SSO is an example of a Low-value/High-WTP feature as there is not much value in it for the user that needs to get the job done, however, they must have this feature as part of their internal corporate security policy. Another example can be the per-seat value metric — while many SaaS companies include a price per-seat, we learned that the teams we were selling our product to in the mid-market are not large. In our case, we preferred to give as many users as possible access to our product to drive another value metric up and charge more, than to limit the usage by the number of users.
The outcome of this phase gave us a clear visualization of the different packages, as well as, the upsell path between of them
During this phase, we also managed to identify additional value metrics to include in our packaging that will further contribute to our revenue.
The Execution Phase
The more complicated challenge, when changing pricing and packaging, isn’t the research and study phases, but the execution phase. How would you renew the subscription with your new pricing and packaging without losing customers? Why would a customer pay you more when there are cheaper alternatives in the market, your competitors? How will your winning strategy be set? How long does it take to see results? When and where you should set warning flags? How do you train your teams about the new packaging and pricing? This section requires a separate post, but it is important to note that it is not less important than the research phase itself. :-)
The Business Impact of Our Work
They say hard work pays off, we can confirm that. In the first quarter, after we started to roll out the new packaging and pricing, we started to see results and they were just great. As we were having the subscription renewal conversations with our customers a few months ahead of the renewal date, it took us 12 months to complete the first migration cycle, and 18 months to have the majority of our customers (over 2000 brands across the world) subscribed to the new model.
When we draw the trend line of the average sales price of our product, since we started to roll out the new model, we were all pleased with the outcome. A nice 48% increase in the average sales price.
As noted earlier, this shouldn’t be a one-off project, but an ongoing task. As the business is growing, competition becomes more challenging, customer needs are evolving etc. Just don't forget to revisit your packaging and pricing regularly.
