Go Ahead and Price Your SaaS Low — But You Better Nail Customer Success!
By Tom Krackeler
Jason Lemkin is the king of actionable advice for the business side of running a SaaS startup.
Here’s an article where he explains how low you can price a SaaS product and still utilize an inside sales model, not just pure self-service online buying. It’s chock full of practical advice and back-of-the-envelope numbers from Jason’s experience at EchoSign. It’s a must-read for SaaS leaders if the market is telling you to price low, but the buying process requires 1:1 demos, multiple stakeholders, and thoughtful objection handling.
Use an Inside Sales Team for a $99/mo Product?
Jason’s point is that even though conventional wisdom (and math) suggests that an inside sales model won’t work for average selling prices below $299/mo, it can make sense for inside reps to work deals as low as $99/mo.
To begin with, the marketing money was already spent to produce these leads, so the marginal cost of taking the business is just the sales effort. It’s also a great training ground for new reps. And most importantly, your best inside sales reps will get so efficient at qualifying, demoing, and objection handling that they can generate enough volume to make it worthwhile — assuming your marketing team can produce the leads.
But there’s another important factor that Jason doesn’t cover here: customer lifetime value (CLTV). If you can retain customers and grow them over time, and if you do it with a scalable customer engagement model, SaaS businesses can justify an inside sales model at some uncomfortably low price points. And guess what — if these customers love your product they will start referring new business and bringing you into their new companies when they change jobs.
All of this is amounts to what Jason has elsewhere called “second order revenue.”
Your Customer Success Model Makes All The Difference
I went through an exercise like this at Convio when we were launching a new product called Common Ground — CRM designed for small/medium nonprofit organizations and built on the Salesforce.com platform.
We used an inside sales model and wound up setting our baseline pricing at $200/mo. In the first year, that’s the price point where most of our deals got done. But as we learned, replacing a donor database or adopting a CRM is a big decision for even small nonprofits — it required a bunch of selling. So, as you would predict, our cost of acquisition (CAC) started out in the tank. But we had decent growth rates and bet that we could make the unit economics work by focusing on two things to drive high customer lifetime value.
The two things that all SaaS companies with low price points should obsess over post-sale are:
(1) Scalable Customer Success Programs. If you can figure out to make customers successful without much staff intervention, you can profitably serve low price-point customers and pay back that cost of acquisition in a reasonable amount of time. However, if it takes sales effort to close a deal in the $100–300/mo range and then requires a bunch of implemententation services and 1:1 troubleshooting for the customer to get value — it’s game over for your SaaS business.
So here’s a recommendation that goes against conventional wisdom. From early on, you should point some of your R&D capacity at streamlining your customer engagement model. It’s hard as hell to do that instead of building the next feature that prospect just asked for. Do it anyway.
At Convio Common Ground, we took everything that a customer needed to be successful, and we baked it right inline within the product itself, treating it like it was another core product feature. So accessing things like support, knowledge base, forums, web trainings, and user groups were absolutely frictionless for our users. And we promoted the hell out of them to our customer base.
Establishing this programmatic and community-led customer service model probably caused us to lose a few deals on features, but we put ourselves in a position to have a customer base that loved us and a customer engagement model that could scale.
(2) Expansion Revenue. It’s imperative to find the right revenue expansion vectors for your low-price customers. At Convio Common Ground, our expansion path was a coordinated effort of (a) getting new users from other teams, and (b) selling add-on modules that complemented our core fundraising offering. Now both of these required investment in new product development, but allowed us to take those $200/mo customers up to the mid $400’s in less than two years. And believe me, nothing is sweeter on your SaaS unit economics than doubling ASPs. Now of course, you need a frictionless upgrade path — it defeats the purpose if the inside sales team needs to get deeply involved to close the add-on deals and there is a bunch of implementation messiness to go live.
To Sum Up
Jason Lemkin explains that, from a purely sales and marketing perspective, it can make sense to point inside sales reps at deals with ASPs as low as $99/mo. I think a critical part of the “how-low-can-you-go” calculus is your customer success model. If you (1) can deliver high retention with a scalable engagement model, and (2) believe in your revenue expansion vectors, then don’t be afraid to price as low as $99/mo and keep your inside sales team.