How to create and use a pricing strategy as a blueprint to drive profitability.
Pricing is equally as important as your business strategy. Still, so many SaaS companies overlook it.
If you haven’t defined a pricing strategy, you don’t understand who your customers are and you don’t know if you’re driving them away with poorly-framed pricing and packaging of your products
— or missing the chance to grow your revenue.
Getting your pricing right isn’t just about driving profitability, it’s a reflection of everything your organisation does. It’s a common mistake to look at pricing as a one-off activity dictated by just one person in the finance or sales team. Market conditions and competitors are changing constantly — so your strategy should be too. And don’t forget to involve everyone, from the management team to sales.
Leif Bohlin“When you start addressing pricing in a structured way, you start getting positive side effects. Without a strategy, you’re in the dark.”
In this ebook, we’ll take a look at how to get started with your pricing strategy and make the most of a roadmap that sets not just your revenues, but your long-term vision and goals. We’ll also take a look at the major dos and don’ts of pricing and what other companies have learnt from their own strategies.
Marcus Jarde“Pricing is gaining an increased focus in the SaaS world as businesses realise its value as a lever for growth.”
This is a valuable 12-minute read but if you only have two minutes, you can jump to the key takeaways.
Advice is only as valuable as the giver, so let’s meet the brains behind this ebook’s insights:
— Partner at Monterro and CEO, Maintmaster
Leif is a veteran of the SaaS world. He has over 20 years’ experience starting, building and managing SaaS companies, both Nordic and international. He is part of the Monterro team and currently CEO of Maintmaster.
— CPO, Kivra
Marcus Jarde has extensive experience from product management and pricing from several SaaS and tech companies. He currently works as CPO at Kivra.
— Managing Director, Blue Ridge Partners
Brian is definitely an expert in the Pricing area. He has helped many companies, especially SaaS, to do a pricing transformation. He works at Blue Ridge Partners that specialises in growth strategies, commercial effectiveness, and pricing has been recognised by Forbes as one of America’s Best management consulting firms.
— CEO, Hypergene
Urban Bucht is CEO of Hypergene and has a long background from being a leader in SaaS and tech companies. He is a passionate about building high growth and profitable businesses, and has been involved in numerous pricing projects.
Ok, so if you were listening, we did just say pricing isn’t all about revenues. But that doesn’t mean profitability isn’t also important.
SaaS companies who implement a pricing strategy typically see an increase in revenue growth between 10% and 20%, because things happen faster than in other sectors.
But many SaaS companies are more focused on new products than the core pricing of their existing ones. This means casting an eye over this area usually pays dividends, in no small part because SaaS companies are typically valued by growth rate.
Brian Bailard“Improving your pricing strategy is one of the biggest levers you have at your disposal.”
It’s especially important in the scale-up phase, when your business is in the expansion stage of its market and trying to sell as much as possible. For more established companies, looking at your pricing doesn’t necessarily mean you’ll see an instant jump in profit. But the long-term benefit of evaluating every part of your business, from your target customers to your competitors, means you’ll be reaping the rewards in the long run.
Leif Bohlin“With the current economic climate, right now is a good time to initiate your pricing strategy. Increasing prices are on everyone’s agenda so it’s worth reviewing your strategy to stay competitive.”
Once you start analysing pricing, you can get to understand your products and audience. What are your customers willing to pay more for? Why? It can also help you narrow down your ideal buyer and identify who drives the most revenue.
This is a question with many answers, and it varies by company size and set-up. Ideally your product manager should own your pricing strategy, but it’s not a one-man show.
Actually, pricing is at the heart of your entire business. The challenge this creates is that all of your marketing, sales, and products have to be developed with the positioning, packaging, and pricing of your product in mind. Pricing touches every part of your business, but it’s often ignored because it’s at the intersection of marketing, sales, and product — so nobody in the organisation owns it.
But ideally, many departments will be involved in the strategy and it should start from the top. Pricing shouldn’t just be on the product team’s agenda, but the CEO’s, too.
So, now you know why pricing matters, it’s time to get started on your strategy.
Most companies are confident they know their customers. But the truth is the majority of businesses have limited knowledge about who their customers really are. Quantified buyer personas are key for understanding customers and core for defining a pricing strategy. It’s important to have different pricing strategies for different segments, ensuring you have the right packaging for each of your products.
A structured approach to pricing is essential, with a strategy that’s integrated with your business strategy. Every aspect of it should be part of your budget and financial planning.
Even if you don’t see a huge uplift in a blink, you’ll typically see ROI within a year. But this isn’t one-and-done. You should ideally have a three-year roadmap where you can forecast your pricing strategy while making sure you continue to assess it constantly.
Sounds like a bit of a headache? You’d be surprised at the positive side effects. Without a strategy, you’re in the dark. With a good one, your whole business is illuminated.
Urban Bucht“Launching a new pricing strategy is like launching a new product, because you package available functions and features along with pricing. Both the pricing and packaging are something you can launch to new customers and support a new way of selling.”
Step 1: Understand the strategy of the company
The first step is to go back to basics. Do you understand the strategy of your company? What are the goals of the business? Is it to increase profits, cashflow, growth or market share? Your strategy might not be the same for your home market as new geographies, so it’s worth assessing every aspect of your business. You should also bring in multiple stakeholders to set your strategy so that it’s understood by different functions, even if one department is ultimately responsible.
Urban Bucht“We interviewed a sample of our current customers to understand our pricing strategy. This included non-customers and lost customers and gave us a really valuable understanding of what people were willing to pay for the different modules, functions and areas so we could set the price curve in a good way.”
Step 2: Understand the customer and target audience
Now you 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? The answers to these questions will help define whether you’ll use value-based or cost-based pricing. 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.
You need to know who your main competitors are inside-out. How are they pricing their products? How do you stack up? It’s worth gathering as much market intelligence as you can so you can benchmark against them. It’ll also help define your value proposition if you haven’t already — which is a huge benefit in the long run.
Step 4: Define some key rules early on
A key part of implementing your strategy is understanding where you’re starting from so you can draw up different scenarios and see where the potential is. Should you sell everything to the customer when you sign the contract, or start with a small package and offer add-on services? How will you treat discounting?
Do you have clear rules for the sales teams and clear guidelines for how discounting should be applied? Structure for every part of your pricing strategy is essential. Set some clear rules and follow through for the best results.
Leif Bohlin“It’s one thing to have a price list, but have you decided what you’ll get out of your customer when they sign a contract? You need to have a good view and understanding of your overall strategy so you don’t just land contracts, but expand them.”
So, you’ve got an idea of the direction of your pricing strategy. Now you need a way to pull it all together.
A roadmap lets you structure, prioritise and identify immediate, easy wins, as well as set your long-term vision and goals.
Marcus Jarde“You shouldn’t look at pricing as a one-off project. Things move quickly in the SaaS world, so pricing needs to be an area that has a constant focus. Making a separate roadmap for it and building structures around it helps put pricing higher on the agenda.”
But what should you be thinking about when you’re piecing it together?
1. Build a three-year pricing roadmap to set long-term goals, even if these goals inevitably change. The structure of your pricing strategy is something you shouldn’t have to overhaul for a few years, so having a long-term view can help.
2. Establish a pricing forum with your CEO, CFO, CPO, CMO and CSO to work through your roadmap, and work out what you need to do now and next.
3. If you have a commoditised product, it’s worth packaging it with a high-value piece to take out the price pressure issues.
Urban Bucht“Pricing is not a cost-saving exercise, it’s a long-term strategic initiative.”
4. A bundling structure can also help to simplify buying and selling. You can create different bundles for different customer segments, depending on the value they see from your product, their priorities and their willingness to pay different prices.
5. Don’t forget to work out your payment terms, whether they’re upfront or after the signed contract, as well as how you’re going to be paid. This is all an important part of your strategy.
6. Start small, learn and then expand. Change doesn’t happen in a day. This enables you to continuously refine and improve your solution, based on lessons learned from implementation.
Strategic planning and business intelligence software company Hypergene partnered with Monterro at the start of the year to take a new approach to its pricing.
Hoping to help customers with cloud conversion, it moved from a perpetual to recurring revenue model. This supported its shift from a consulting company with software to a product company.
Its pricing also became managed by its chief product officer, with collaboration with other go-to market functions, to ensure it had the most attractive model possible for customers.
One of the biggest changes the company made was to ‘de-bundle’ its product offering, in order to offer competitive and transparent pricing as customer usage of its software evolved. This made customers feel they were getting better value for money.
In the first 12 months, Hypergene is hoping to see ROI from its new pricing strategy, but it’s already felt the impact on new customer generation in as little as three months.
Urban Bucht“We used pricing as a growth lever, helping to transition us to a product company. Pricing should be strategic, not operational, otherwise it won’t be successful.”
Most SaaS companies initially focus on acquiring new customers, but retaining them becomes even more important when it comes to revenue growth.
Pricing can be a key part of your growth strategy and drive new profitability, especially if you’re a product company. Here’s how.
If you keep pricing strictly operational, you can still increase prices with indexing, but it doesn’t become a true growth lever.
Pricing shouldn’t just be viewed as an internal cost-saving exercise, but rather your strategy should sit closely alongside your understanding of your customers.
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.
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.
Urban Bucht“Pricing needs to follow value generation, which is truly important for a SaaS company.”
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, the first thing you need to understand is the value metrics of your product.
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.
Marcus Jarde“Value-based pricing is easier if you’re building a product that generates more revenue for your customers, rather than a product that cuts costs. The better you are at visualising that revenue, the more successful you’ll be. Key is to really understand the job your product is doing.”
Now we’ve shown you how to prepare, create and make the most of your pricing strategy. But what should you absolutely avoid?
Read on for our hard-won hints around pricing pitfalls we’ve seen time and again.
For a successful pricing strategy, you need commitment across the organisation. This means buy-in from the CEO and CFO from the get-go, as well as a cross-functional team led by a key player such as product management. Getting these basics right from the start will make your life a lot easier in the long run.
You might implement new prices for certain products as a one-off project, and approach different segments into different waves, but you need to have an overview of your budget planning and pricing initiatives so you can plan for upcoming changes for the long-term. When you integrate your pricing with your business strategy, it allows you to continuously adapt and move with the changes. It’s an ongoing process as much as your business plan, so treat it accordingly.
Leif Bohlin“You can’t just assign your pricing project to one person in the organisation and hope it will happen.”
You might have looked at your pricing before in a strategic, but not structured way. Taking a structured approach is essential to long-term success. This means doing your homework around your existing customer base and putting time into how you can roll out your pricing strategy and repackage your products if necessary.
It’s important when you’re gathering data on your customers and the market to also include non-customers, lost customers and your competitor’s customers. Don’t just focus on what’s going on inside your own company and make an assumption about how to be cost efficient, but take a look at the bigger picture and align your strategy with the value generated for your customers. This will give you an outside-in view — and will ensure you take a holistic and competitive approach.
Once you’ve done your homework to understand your customers, you need to also understand their behaviour. Will they value something they got for free or does the right price assign more value to your product? Often, if customers are paying for something, they’ll be more engaged with it and use it more as it’s an indication of the value you’re bringing to the table.
And that’s it. Here are our key takeaways…
Your pricing strategy needs an owner, but it should also involve everyone from marketing to the CEO.
Do your research to understand what value you’re bringing to your customers and how this links to your business strategy.
Set long-term goals and set structures around them to achieve success.
Pricing and packaging should work together to deliver on your value proposition and create the most attractive offering to customers.
Your pricing strategy is an ongoing process as much as your business plan, so don’t see it as a one-off project. Keep your finger on the pricing pulse.
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 goals.
