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How to Develop Your SaaS Pricing Model

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Developing the pricing model for your B2B SaaS app is one of the biggest marketing challenges your company will face. …

Developing the pricing model for your B2B SaaS app is one of the biggest marketing challenges your company will face.

This is a guide to developing your SaaS pricing model was created by noted SaaS Marketing expert and Growth Hacker Lincoln Murphy of Sixteen Ventures.

This guide takes you through the questions you need to ask about not just your market and customers, but about your company and goals, to help you figure out your SaaS pricing model.

Whether you have a self-service sales model or one that requires outside sales reps to drive business, the tips and techniques contained in this guide and the source blog post will help you create a profitable and successful SaaS pricing model.

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  • 1. How to Develop Your SaaS Pricing Model A guide by Lincoln Murphy, SaaS Marketing Expert with Sixteen Ventures
  • 2. Pricing isn’t Rocket Science Developing your SaaS Pricing Model isn’t Rocket Science, but even in the Rocket Science business, you need to price your work so you can sell it and make money! Copyright© 2013 Lincoln Murphy. All Rights Reserved.
  • 3. Pricing Model != Pricing Page Just so we’re clear, your Pricing Strategy is so much more than your Pricing Page. It’s about far more than not leaving money on the table and making a profit; though profit is a good thing, after all, that’s why we’re in business! Copyright© 2013 Lincoln Murphy. All Rights Reserved.
  • 4. Pricing... is everything Your SaaS Pricing Model will help determine – among other things – your market position, whether or not your target customers can buy from you, and whether or not you can provide the level of service required by those customers. It’s pretty important. Copyright© 2013 Lincoln Murphy. All Rights Reserved.
  • 5. Presentation Source This presentation is based on my popular “How to Develop your SaaS Pricing Model” post... you can find a lot more detail on the techniques and ideas presented here: http://sixteenventures.com/develop-pricing-strategy The presentation continues ☞ Copyright© 2013 Lincoln Murphy. All Rights Reserved.
  • 6. A SaaS Pricing Model has Various Inputs These ‘inputs’ when developing your model are: Internal - focused on you, the SaaS provider External - focused on your market & customers Focusing most of your energy on the latter will likely prove to be the most successful route to take Ask the questions on the next slides to help you develop your SaaS pricing model Copyright© 2013 Lincoln Murphy. All Rights Reserved. http://sixteenventures.com/
  • 7. Internal / Strategic Questions Quantity vs. Quality: Do you want a massive amount of customers or fewer, potentially more profitable customers? There are pros and cons to both… Market Position: Do you want to be the low-end, low- price leader or Super-Premium, high-end offering targeting elite customers only? Who do you want to pick a fight with in the market that we’re entering and how will you compete? Hint: SaaS doesn’t mean Cheap! Copyright© 2013 Lincoln Murphy. All Rights Reserved. http://sixteenventures.com/
  • 8. External/ Customer-Facing Questions Once you have the internally facing, big ideas figured out, then you move on to - and spend most of your time going forward on - external/ customer-facing questions. Remember... pricing is not a one-time, set-it-and- forget-it deal. As you enter new markets, target different segments, etc. you’ll have to revisit these questions Copyright© 2013 Lincoln Murphy. All Rights Reserved. http://sixteenventures.com/
  • 9. Who are you marketing your SaaS offering to? If you’re new to market… who’s your ideal customer? If you’re In-market… look for patterns within your customer base to define market segments If you have different segments you’re selling to, the questions below should be answered for each one Copyright© 2013 Lincoln Murphy. All Rights Reserved. http://sixteenventures.com/
  • 10. What value will they get from your offering? Not the features… not the benefits… what VALUE are they going to get from your offering? The benefit of the benefit is a good way to think about this This requires that you really understand your customer Copyright© 2013 Lincoln Murphy. All Rights Reserved. http://sixteenventures.com/
  • 11. What will the ROI – monetary or perceived – be on that value? This is the hard part usually… takes a lot of work to figure this out You really have to know your customer… often better than they know themselves I’ve written about the 10x ROI pricing rule before… Copyright© 2013 Lincoln Murphy. All Rights Reserved. http://sixteenventures.com/
  • 12. What metric(s) will the price will be based on? Could be a ‘seat’, user, functionality, storage, etc. This is the thing that your customer will say “yes, I need 7 of those…” and feel good about the purchase. Segmenting your pricing tiers/bundles on something of value avoids this issue and keeps people from gaming the system to avoid forced upgrades Done right, customers will even be happy to upgrade because they’ve reached a greater level of success. Copyright© 2013 Lincoln Murphy. All Rights Reserved. http://sixteenventures.com/
  • 13. How many will they buy? How many of the metric from above? If you sell bundles of 10 *metrics*, how many bundles of 10 will they sign-up for? How many will they sign-up for at first? How many will they add over their lifetime as a customer to drive Expansion Revenue? (hint: you want this number to be higher than the “at first” number) Copyright© 2013 Lincoln Murphy. All Rights Reserved. http://sixteenventures.com/
  • 14. What is their estimated Customer Lifetime? 3 months? 3 years? This is the metric that will help drive our Acquisition spend… if a customer pays $1000/mo but only stays 2 months and you paid $3000 to acquire them, you lost $1000 + support/operating costs. This is bad. If you think you can keep a $1000/mo customer for 36 months, and you pay $2000 to acquire them, we’ll have 34 months of profitable revenue from that customer, even if they don’t expand their use of the service (Expansion Revenue) over that time. This is good. Copyright© 2013 Lincoln Murphy. All Rights Reserved. http://sixteenventures.com/
  • 15. Presentation Source Remember, this presentation is based on my popular “How to Develop your SaaS Pricing Model” post... you can find a lot more detail on the techniques and ideas presented here: http://sixteenventures.com/develop-pricing-strategy The presentation continues ☞ Copyright© 2013 Lincoln Murphy. All Rights Reserved.
  • 16. What is their buying process? This determines whether you go the e-commerce or higher-touch, human-powered route Price doesn’t determine which model should be used Complex products often require more human interaction But some markets – regardless of product complexity – require a human touch As much as you’d like to think you can drive this, this is a market-driven element of your business model unless you are so big and powerful you can change consumer behavior (be realistic here) Copyright© 2013 Lincoln Murphy. All Rights Reserved. http://sixteenventures.com/
  • 17. What is their internal procurement process? This is different than – but directly impacts – their buying process! Who are the various players in that process? What are the steps that need to be taken to get sign-off within their company? How do they pay their vendors? Can they use a credit card? Will they pay annually or monthly? Will they want a contract even though you don’t require a contract? Copyright© 2013 Lincoln Murphy. All Rights Reserved. http://sixteenventures.com/
  • 18. What level of service must you provide the customer? If you come in “cheap” your market might be savvy enough to know that you won’t be able to provide the level of service they require once you get more than a handful of customers and might pass because they realize you don’t “get it” yet, even though your price is lower than the other guys Data loss and security breaches are never tolerated so you have to ensure you have enough margin to provide that baseline level of support. Support is where your “big margins” become important! Copyright© 2013 Lincoln Murphy. All Rights Reserved. http://sixteenventures.com/
  • 19. Some other things you need to consider Should you bundle features / functionally, include everything and charge per user, or do a la carte? Will prospects want or expect a Free Trial? What is the on-boarding process going to require? What do your commercial competitors do? What other things – homegrown or re-purposed software – are you displacing in the market? Copyright© 2013 Lincoln Murphy. All Rights Reserved. http://sixteenventures.com/
  • 20. That’s just the first pass... Once you have all of these questions answered – oh, and those aren’t all of them, either – you can start to put together your Pricing Strategy, including the actual price – the number – that you’ll charge for access to your SaaS or Cloud offering. So yeah, developing your SaaS Pricing Model isn’t Rocket Science… …it’s just a super-important, high-level Strategic initiative that requires many different inputs and can ultimately determine whether your company thrives or goes out of business! Copyright© 2013 Lincoln Murphy. All Rights Reserved. http://sixteenventures.com/
  • 21. Presentation Source Remember, this presentation is based on my popular “How to Develop your SaaS Pricing Model” post... you can find a lot more detail on the techniques and ideas presented here: http://sixteenventures.com/develop-pricing-strategy Copyright© 2013 Lincoln Murphy. All Rights Reserved.
  • 22. Thank You! Lincoln Murphy Sixteen Ventures lincoln@sixteenventures.com http://sixteenventures.com @lincolnmurphy Copyright© 2013 Lincoln Murphy. All Rights Reserved.

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