Don’t leave money on the table — Price your SaaS Products RIGHT!

Building a SaaS product is hard work and the worst thing one can do is to put in all the hard-work, energy, sweat and tears, just to end up leaving money on the table.

I am a big fan of Anti-Patterns, it’s a “Via negativa” approach that generally focuses on what to avoid or what not to do. Some of the Anti-Patterns that I commonly come across are :-

1. Cost-based pricing or Cost plus pricing
2. Competitor-based pricing

There are many resources out there that do a great job of explaining how they work and how to implement them, so I will spare you the details. Rather, since we are considering them to be Anti-Patterns I want to highlight what is wrong with them ?

Cost-based pricing or Cost plus pricing

The biggest problem with pricing this way is that your customers/users simply don’t care about your costs. When was the last time you bought something because the supplier had a healthy margin on something ? If you are like me, probably the answer is NEVER.

Competitor-based pricing

The problem with this approach is more often than not, it’s a scenario where “the blind leads the blind”. What makes you believe that your competitor has taken the time to Price Right ? If you are so keen to match your competitors pricing, what are the chances they might as well be doing the same thing ?

Yeah…………Right.

So, how do you figure out what is the best way to Price your SaaS product ? Let’s dig in.

One approach that commonly gets a lot of traction is “Value Based Pricing”. The basic idea is to figure out how much your customers are willing to pay for your product/service.

Generally you start with equating the willingness to pay with either or all of the three things — i.e Earn Money/Revenue, Save Money/Reduce Cost or Save Time. For example — Using your marketing software, customers are able to increase their revenues by $1 million every year. You would then price your product at a fraction of this quantifiable value. In our example above, if we decide to take 10% of the value that the customer derives from our product, our price would be $10k per year. Similarly, if the customer ends up saving 20k man hours of time per year by using your product, you could price your product as factor of the time saved. If we assume that the man hour cost is $250 per man hour, this would mean that the customer is saving $5 million (20k * $250) per year. You could then price your product at $500k per year so that you take 10% of the total value saved by your customer.

Equating the willingness to pay with — Earn Money/Revenue, Save Money/Reduce Cost or Save Time is a good starting point, but it is not enough. What if you are a multi-product company with fairly complex product ? Or you are selling a lifestyle or an inspirational product ? The last time I checked on iPhone — It costs a bomb to buy one and its a time sucker ? The point being that Earn Money/Revenue, Save Money/Reduce Cost or Save Time value proposition might not be right for your product. It is important to deeply understand your products true value proposition and equate those to people’s willingness to pay for them. The tool that comes in handy to do this analysis is Value Matrix or Relative Preference Analysis. The idea is to compare the relative preference of various features or different aspects of the product or services and then cross referencing that(layer that) with willingness to pay(WTP). Essentially Willingness to Pay is Triangulated against various aspects of Your Product.

Example :-

Buying a Bluetooth Headphones one might value following :-

• Comfortable to Wear
• Good range — Within House, Office, Gym etc
• Battery Life — 4/5 Hours
• Controls — Play/Pause.
• Controls — Adjust Volume
• Sound Quality
• Noise Cancellation
• Work with Android/iOS
• Price

Truly understanding what your product has to offer, and what the users/customers are willing to pay is a big step to get you closer to Price your SaaS Products RIGHT!

P.S

The world is dynamic, the analysis need to reflect that. Your product evolves over time, even if it doesn’t user/customers willingness to pay does. Example — someone willing to pay you big bucks for on the basis of your slick looking web app might not be equally willing to pay for it now. The willingness to pay might have shifted to outcomes.