Only few things are as critical as the right pricing strategy for Software-as-a-Service (SaaS) ventures. There are several good analyses on SaaS pricing models and strategies in the space of SME customers like https://blog.chartmogul.com/saas-pricing-pages-2017/ or lists of interesting SaaS pricing articles like https://labs.openviewpartners.com/saas-pricing-resource-guide/#.WzzYeKczaUk. One reason for that is that public pricing data is available on every website and studies can be conducted easily. When it comes to (individual and non-public) enterprise SaaS pricing, little recommendations or insights are given. I have seen many start-ups in my life that left lots of money on the table as they started with a wrong pricing strategy and/or did not verify and adjust it on a frequent basis.
In order to understand the focus of this article, it makes sense to have a look at the following chart.
When I talk about enterprise SaaS pricing, I look at firms whose software is creating high value for their customers. However, this comes (almost always) along with a complex sales process. This is shown in the upper right quadrant of the graphics above. A complex sales process goes hand in hand with high customer acquisition costs and longer sales cycles. With a portfolio of almost only enterprise SaaS ventures, we at Senovo learnt a lot during the last years about right and wrong pricing strategies. As I am often asked by founders how to elaborate, adjust or apply the best pricing, I have decided to write some words about pricing strategies in the space of B2B Enterprise software for entrepreneurs who think about or have already founded a B2B enterprise SaaS venture. One remark in advance: my experience comes from lots of board meetings, due diligences of potential investments, own operational experience and discussions with founders and experts in this field. Nevertheless, enterprise pricing (similar to sales and marketing strategies) has to be adapted individually to market, target customer group and region. Therefore, this post can only give some insights about what used to work well in the past with certain software solutions and what you might try with your start-up.
The Importance of a Pricing Strategy
Many start-ups in the enterprise software space struggle finding the best pricing model. Founders often look at competitive pricings or just add a contribution margin (e.g. 20%) to their customer acquisition and marginal overhead costs. Doing so, often leaves lots of money on the table. The goal of every pricing strategy is to achieve a high price with long contract periods within a certain sales cycle.
In order to stress the importance of a pricing strategy, it is necessary to understand where pricing is relevant within the entire value chain. I have illustrated below a typical product development and customer acquisition and retention cycle within the enterprise software space. If different steps work better according to your experience at your firm, you should adjust it accordingly.
The marketing department is responsible to generate leads and position the company’s brand and products within the relevant ecosystem. Marketing channels vary depending on the pricing level at which your product is positioned. High prices might be irrelevant for small companies. Expensive events with only few potential customers might be irrelevant for lower priced products. The initial contact is mostly done by a SDR. Depending on the pricing strategy, this entire process can be extended to extensive RFPs and product demos, if the conversion rates and the pricing scheme is right. If not, SDRs must shorten or lengthen the process accordingly. The testing and closing phases are similar to the initial contact phase. The higher the potential price, the more complex PoCs can be and the longer the negotiations might last. When it comes to software roll-out, the necessity of customizations and implementations must be considered within your pricing. This goes hand in hand with the support your customers need or expect from you. Apart from service level agreements, this aspect must also be considered in your pricing strategy. Moreover, the effort you have to put into retention, new product migration and upselling should be part of your thoughts about pricing, too.
Last but not least, why have I added “costs” on the very left side? Costs (not only product i.e. development costs, but also sales and marketing costs resulting into customer acquisition costs) are important to consider in order to assess one’s own business model as well as finding a lower pricing boundary. With a new product just launched, estimating CAC is really hard. Then, experiences with other products might help to set an initial lower limit on your pricing which must be adjusted with more insights gained after a certain period.
Stakeholders of Pricing Strategies
There are many stakeholders that have an influence on pricing or should at least be taken into account when thinking about your pricing. So, who should be actually involved in a company’s pricing strategy?
- Competition: Looking at the pricing of competitive products can be a first pricing indication. However, with RFPs and ACVs greater than 100k€, only few enterprise software companies follow an open pricing strategy and disclose their pricing on websites. Moreover, as a new venture entering into an existing market, your product should not be just 10% better than competition but 10x and more. So, it is difficult to find a good comparison. It is getting even more complicated if you create a complete new market with your product where competition is little or non-existent.
- Financial Controlling: This is probably the worst stakeholder in order to determine your highest price. The financial guys at your company should set the lower limit on your price tag in order to not sell your product with a negative contribution margin. But be aware — the better you know your customers and your industry, there might be a situation where you should sell your product for little money in the beginning, knowing that there is large upselling potential in the future.
- Marketing & Sales: Both functions can be combined in this context. They do not directly influence pricing, but indirectly. Depending on the sales and marketing channels used, the conversions, the sales process and quality of the people involved, three main factors contribute to pricing. (1) customer acquisition costs, (2) sales cycles, and (3) market intelligence of customers. The last factor is especially important to assess the value of the product for the customer.
- Value for the Customer: This is probably the most crucial “stakeholder” of pricing, but also the most difficult to catch. Depending on the increase of efficiency and/or the reduction of costs and time your product contributes to your customer, the price can be determined, increased or decreased. Insights can be generated by talking, talking and talking to (potential) customers in order to find out the real value of the product. This involves marketing and sales. Moreover, product management also contributes significantly to this. Prioritization of certain product features alone influences the value and therefore the pricing. The value generated can differ for different target customer groups.
- Target Customer Group: I am not a big fan of publicly disclosing pricings models within the enterprise software space. Each industry and each functional department might have different pricing points and budgets. The more you disclose the more price anchoring you provide. Either you sell your product for too little money for accounts with larger budgets or smaller accounts drop out of the lead generation process as the pricing on your website highly exceeds their budget. Of course, it takes some time and decent investigations in order to find out how valuable your product is for certain customer groups and what kind of budgets are available.
Overall, all stakeholders described above might have a certain influence on the pricing strategy of an enterprise software venture. Nevertheless, my experience shows efficiency and target customers represent the most influential factors. So, what are the key observations and learnings how to approach an enterprise pricing strategy for enterprise software ventures?
Approaching an Enterprise Software Pricing Strategy — Key Learnings
Having seen many approaches and discussed different pricing strategies for more than 10 years, here are my main learnings and insights:
Key Learning #1
Trial and error!
Play with pricings. Founders and managers focus too much on pricing schemes that they knew from previous jobs or that were accepted by the first customers. They rarely “play”, i.e. test and change pricing strategies. This is a must in the first year of launching a new product. After that period, I recommend that at least once a year the management (including sales and marketing) should review and adjust it accordingly.
Key Learning #2
Incentive schemes should reflect pricing models!
If incentive schemes for marketing and sales teams are not adjusted to the product pricing conditions, motivation and sales rates will decrease. Amendments to bonus regulations are often forgotten after changes in pricing are undertaken.
Key Learning #3
Losing customers is natural!
It is not a shame to let a potential customer walk away because of pricing. Founders and managers often reduce pricing at the beginning of a product life cycle in order to acquire the long tail of customers as well. However, pricing reflects quality. In the enterprise space, it is important to show this to customers. This is also an important message to sales managers.
Key Learning #4
Cash flow is important for start-ups!
Try to find a pricing model which incentivizes upfront payments. As a SaaS company, it is in particular important to focus on it. Otherwise, you will have to raise more money in order to finance sales and marketing in advance before receiving positive cash flow from customers.
Key Learning #5
Cash flow might be also important to customers!
If you can afford it, be flexible on the payment terms when it comes to existing customers. Extending an existing contract or upselling an extra feature typically comes at much lower CAC than closing a new customer. This should not be a standard procedure, but it might be necessary for certain cases.
Key Learning #6
Never do proof of concepts or pilots for free!
Some large corporations love testing software for free. Their employees often have little to do. If there is a designated budget available within an organization, a licensing of a software solution is probable. If not, do not waste too much time on demos and free PoCs. You should be able to convince a customer beforehand that your product is worth trying it with some money coming back to you.
Key Learning #7
Price carefully — and always expect a discount!
Rather go into pricing negotiations with a little too high pricing, than the other way around. Even with tenders, the final decision is only made after a decent amount of price negotiation efforts. Moreover, an enterprise sales process with high annual contract values at a certain stage almost always involves the friendly people of the procurement department. Expect that you have to give at least 10–20% (in some industries even much higher) discounts on your quote as an incentive to the procurement guys of your customer.
Key Learning #8
Don’t disclose your entire enterprise pricing on your website!
This learning is not related to competition. If your competitors want to find out your pricing, they will eventually do so. This is rather related to your customers. Budgets are different depending on the size of the company, the functional department and industry. Moreover, some costumers will negotiate better than others. Therefore, keep them away from public price lists. You will be in contact with your customers anyway — as you operate in the enterprise space. However, there is one reason why communicating the price for your product/software with the least features available (=the lower boundary) can make sense: if you position yourself in the high-quality high-price segment and show your lowest price tag, you prevent customers with much less budget available from distracting your sales managers.
Key Learning #9
Clusters within pricing schemes!
Develop pricing schemes for internal use and training of sales people. Cluster prices according to your learnings from previous sales and customer segments. This might include clustering according to type (corporates, academic, government), region, and size (in this case rather enterprises than SMEs), functional departments (e.g. collaboration software used from marketing via sales until customer success), upselling potential and industry among other things.
Key Learning #10
Stage your pricing according to the customer’s needs!
This is one of the trickiest, but also most relevant, learning. The better you know the need and ROI of the customer benefiting from your software, the better you can stage your product pricing. This task can only be achieved by gaining insights of existing customers. This task is normally accomplished by your customer success team. But be aware, the ROI of your customer can extremely differ between regions (in terms of labor costs) or industries.
Key Learning #11
Don’t reinvent the wheel!
Try different business models, but never bet only on a new pricing that customers are not used to. I give you an example: if, within your industry, it is commonly accepted that you price a software product per seat on a monthly basis, don’t start to try to sell it on a per usage basis. However, you can (and maybe even should) test new business models with designated customer peer groups in the mid- and long-term.
Key Learning #12
Keep pricing schemes simple!
Even if you serve different customer groups, start with a simple e.g. 3x3 pricing matrix which is features and consumers (accounts or seats) based. Within the next months, you can extend and adjust it according to learning made. However, keep in mind, the simpler the pricing scheme is, the easier it is to align to sales managers’ incentive schemes.
Key Learning #13
Lock-in effect is important!
When you think about pricing, consider the ROI for the customer (as described above). However, also keep in mind how you can generate a high lock in effect within your customer’s organization. This includes a single user’s activity (which is hardly influenced by pricing but rather the quality of your product), but also how many people within the and among different departments use your product. The latter point can be strongly influenced by your pricing strategy.
If you have any comments on this blog post or made different learnings in the space of B2B enterprise software pricing, just send an email to firstname.lastname@example.org. I am happy to discuss your thoughts.