Pricing can be a key way to gear up your growth strategy, but most companies lack the right approach to make pricing a pillar of profitability.
Your pricing strategy is equally important as your business strategy, and it should be treated as such. Without a clear understanding of your pricing and packaging, you’re probably also lacking critical information about your customers — and missing out on a key revenue driver.
Most SaaS companies initially focus on acquiring new customers, but data shows that pricing is 4x more effective than acquisition at improving revenue. If you’re looking to drive profitability, especially if you’re a SaaS product company, it’s important to make pricing a priority.
In this blog we explore how you can avoid four common pitfalls with your pricing strategy, so you can make yours is a growth driver, not a one-off effort.
This is a valuable five minute read but if you only have one minute, you can jump to the key takeaways at the end of this article.
Let’s dive in.
Mistake 1: Making pricing an operational initiative – not a strategic one
Creating the right pricing strategy for your business takes a lot of work (in fact, we wrote a whole eBook about it that you can check out here).
The first step to creating one that isn’t just a one-off exercise is to make it a strategic, rather than operational, initiative.
If you view pricing as strictly operational, your strategy will only ever be an internal-focused project that’s limited by the simple method of balancing cost with profit, without taking into account wider information about your competitors or customers.
In short, it won’t become a true growth lever (and you can wave goodbye to real profit gains).
For true impact, you need to understand the detail behind how your customers use your products and how much value they’re receiving. For example, there should be a close alignment between your licence metrics versus the usage of the product.
This will help manage any changes customers are experiencing in the market, and perpetually reinforce the value you create with your customer base.
"Pricing is gaining an increased focus in the SaaS world as businesses realise its value as a lever for growth." - Marcus Jarde, CPO, Kivra
Mistake 2: Focusing on cost not customer value
As we’ve already mentioned, if you’re a SaaS company, a cost-plus pricing model is never going to be a solid strategy for growth. If you have an inward focus that centres around production costs, it will be difficult to calculate the right price to drive profitability.
A value-based model that focuses on the external value you’re bringing to the customer will help create new revenues. To achieve this, you firstly need to think about your customers and your ideal audience. How do you define value for them? How will your customers actually use the product?
It’s also worth assessing different prices for different regions and segments, so do your research. You have to ensure you’re selling to the right people with the right value proposition, so gathering data will help you understand how willing people are to pay certain prices across segments.
Next, understanding the value metrics of your product is essential. A ‘jobs-to-be-done’ framework is a great way of working out this value, by mapping out your customers’ specific goals and how your product meets those needs. Instead of focusing simply on a features roadmap, where success is measured by launching a new feature or product, this framework prioritises helping customers achieve their goals.
This is the essence of good product management: generate value for customers, which in turn generates value for the business.
Mistake 3: Overlooking your packaging
For a high-growth SaaS company, you need a true understanding of how your pricing and packaging work together. This includes how you can communicate your value proposition to different audiences and grow them along the way.
A key part of growing your customer base is a land and expand strategy, which your pricing can support.
If you start with a small offering and then grow, the cost of your customer acquisition can come down. It also helps you to remain competitive in the market by pricing aggressively in stages, rather than starting with a high price upfront.
How you package your different products is a key part of this. By ensuring you’re not offering too much at once, you can make a good revenue increase over time with loyal customers.
The way you package your products can also help incentivise new usage and any technology shifts. For example, having more attractive pricing for a cloud offering creates an incentive for the customer to switch.
Mistake 4: Not assigning a leader for pricing
Pricing is at the heart of your entire business. That means all of your marketing, sales, and products have to be developed with the positioning, packaging, and pricing of your product in mind.
But pricing is often ignored because it sits at the intersection of all these disciplines so nobody in the organisation owns it – and there goes your chance to use it to drive growth.
It’s equally important not to throw the responsibility of the entire pricing strategy on one person and expect them to run it as a one-person show.
The balance here is, you need to give someone ownership of pricing to ensure it remains a strategic priority but also allow the input of every department to shape your approach.
Who you choose to lead on your pricing strategy will vary by company size and set-up. Ideally your product manager should own and then ensure the input of every department is considered.
Top tip: whatever you do, don’t forget to involve your actual CEO.
"You can’t just assign your pricing project to one person in the organisation and hope it will happen." – Leif Bohlin
- LOOK BEYOND AN INTERNAL EXERCISE –
To make your pricing strategy actually strategic, it needs to focus beyond your internal operations and look externally at the customer value.
- RESEARCH, RESEARCH, RESEARCH –
Gather data on your customers, regions, segments, competitors — everything. Leave no stone unturned.
- START SMALL –
Focus on a land-and-expand approach. Price aggressively in stages for real payoff.
- ASSIGN A LEADER, BUT INVOLVE EVERYONE –
A product person is usually ideal to lead on your pricing strategy, but pricing touches every area of your business, so get everyone involved.
We're Monterro, an investment firm (of the get-your-hands-dirty with strategy and operational support variety) that helps Nordic software companies hit their biggest growth and profitability goals.
If you want to dig into the nitty gritty of how to develop a stellar pricing strategy and roadmap, check our B2B SaaS guide to pricing. It’s a 12-minute read you really don’t want to miss.