There are many pitfalls Web App & SaaS companies need to look out for when it comes to pricing. If you keep the "Pricing is Marketing" mantra running through your head and "What's In It For Them?" (them being your customers) as the framework for that marketing, you will avoid many of these mistakes:
This isn't a "Top 5" list, these aren't in any particular order and the list is certainly not complete - 5 seems like a nice odd-number - but these are five things that SaaS & Web App companies (startups or not) should look out for and try to avoid. What are others? Have you done any of these and had a good or bad experience? Please share your experience in the comments.
Under Value Your Offering
Probably the top issue we see is that SaaS & Web App companies completely undervalue their offering. This is not limited to startups, and certainly not limited to SaaS or Web Apps. But with a web app and the pedigree of being a "cheap" alternative to traditional or legacy software, this is pervasive. This boggles the mind since the vendor takes on all the infrastructure burden for the clients, updates the software daily in many cases, reacts quickly to market changes, customer requests, etc. And yet, SaaS vendors in many cases put a low price on their offering. Why?
The reasons are many and varied but from what we see is a twofold problem. First, many SaaS and Web App companies are started by technologists. These technologists often feel "burnt" by legacy software and want to invoke change and completely undercut the "competition" - not understanding that they actually solve the problem better or more efficiently and could offer a *lower* price and undercut the legacy players but don't need to do so in such dramatic fashion. In many cases, the opportunity is there to offer exponentially more value that they could actually charge more for; to have a low price-point on this makes no sense.
For many technical founders, and the thing that drives nontechnical people crazy, is that building the product is often relatively easy. "Oh, that's just a CRUD app with some filters and a couple of calls to the vendor's API" to a super talented developer might be the difference between for a supplier to Walmart adhering to their latest mandate or losing a product line with their biggest customer. Get it? Easy for you (which is great) might have tremendous value to your customers.
Of course, the biggest reason for Under Valuing comes from the SaaS company failing to clearly understand the use cases or the potential of the product. Who is the customer? Why should they care? What's in it for them? Or more precisely... what is the Value Perception of the customers? Here's the hint, outside of IT/Infrastructure stuff, it is generally not the technology. Just as with the other problems of under valuing, when a company's executive team - or startup founders - are highly technical, they tend to focus on the "hard stuff" that they had to do, or that the application / service does and forget about the real value the customer would find in the product.
For a very honest, real-world, from-the-trenches view of this be sure to check out Chris Ashworth's great article titled "My 2 Bucks on Pricing" where he talks about his issues with pricing his software product too low, the feedback from his customers, and what happened when he raised his prices (along with a major feature update, by the way).
The bottom line is that you need to get out of your own head and focus on "What's in it for them?" - or what your customers get out of the service. This will change your game. If you under value and thus under price, you might have to raise prices later and unlike Mr. Ashworth's experience above, it could end disastrously - so try to avoid undervaluing and get it as right as possible first.
Focus on Margins
When we see margin-driven pricing it is generally for one of two reasons. 1) Trying to match what was in your investor pitch or 2) to meet what you think is a "good margin" (based on the net margin of publicly traded SaaS companies, perhaps?). If you consider "Pricing is Marketing" for even a second, you can understand that those two reasons as a driver of Pricing Strategy will lead to failure. Besides, backing into a price based on an investor pitch is a great way to make that entire pitch a wasted effort... investors aren't as dumb as you think. That is good to remember, too.
Inside-out or Bottom-Up pricing, where you take what it costs you to land and support a client plus some type of margin, is irrelevant. If your costs are high (support, infrastructure, customer acquisition, etc.) your market doesn't care. There is a price range they will support based on the current value proposition and if you can't cover your costs within that price range, too bad. You either need to figure out a way to lower your costs, figure out a way to get them to pay more, or accept that the market opportunity you thought was there, and your ability to capitalize on it, isn't. Of course, the best way to deal with this is to figure out a way to improve the value perception of the market ("What's In It For Them?") so that they will pay more for the product or service.
But wait... doesn't pricing have something to do with finance? Something to do with accounting? Aren't profit margins kind of important? Of course, but once you've covered your costs, everything above that is marketing. If you can't cover your costs with the price that the market is willing to pay, and you can't position your product or service so that the market will pay more, then you have not found a product / market fit. The market doesn't care what margin you want or what your cost of doing business is; they only know what they'll pay for the perceived value that your product or service delivers.
Pricing is so much more than just some numbers in a spreadsheet or on a Pricing Page. This is the basis of our Pricing Page Tune-Up™ service - many times its more about the presentation and structure of the marketing around pricing than the pricing itself. Here is a great example of that idea related to fruit for sale in a cafeteria - it wasn't the price, it was the presentation!
Just Guess
Ask 100 startups to answer honestly how they came up with their pricing and you are likely to find a statistically significant number that will say they just guessed. And not an educated guess, either. For many SaaS and Web startups, thin-air is the second most popular place to pull pricing from. The problem with freshly minted startups is that they lack time in the market so they don't understand customer behavior, buying patterns, etc.
Of course, time in the market is of little use, though, if there is not data to go along with it. SaaS & Web Apps that leverage an automated sales process have the ability to capture a great deal of the information associated with sales, churn, and usage unlike other businesses that require secondary systems to and processes to "capture" that data. This doesn't happen magically, though, so it is up to the company to ensure that they actually build-in the ability to capture that data - something to consider when architecting your SaaS & Web Apps, for sure.
But even when there isn't time in market, and where there aren't many competitors to look at, or when the competitors are not leveraging the same revenue model, you still shouldn't guess! When we help startups in this position with pricing, we use proxies or analogs (sometimes called benchmarks) which are companies that aren't in the same market or don't do the same thing but have a similar model. We apply a great deal of scientific as well as experience-driven processes to that data in an effort to try to get it as right as possible out of the gate.
But... none of this matters - analysis of historical sales data, proxies, etc. - if there is not a Pricing Strategy in place first. It is critical that SaaS & Web App companies come up with a pricing strategy that is part of their marketing strategy if they want to develop pricing that is aligned with their goals and the market's value perception. Collect data, analyze it along with other market information, and make sure you have a Pricing Strategy in place and you'll be much closer to getting it right out of the gate.
Copy Others
For those that didn't guess, under value, or focus on margins, copying another company's pricing is the logical option, right? No! I've written about this a couple of times before. Whether it is another company's Pricing Page or the pricing itself, don't copy. Do the work required to ensure your pricing comes from a pricing strategy that is part of your overall marketing strategy. (Is there a theme here?). But we have seen companies, startups and later stage alike, that copy competitors pricing exactly. This makes more sense, I guess, than those who copy companies who aren't even in the same business!
You absolutely should know how the competition charges (what revenue metrics they use, billing cycles, etc.) and what their pricing is - but only so you know how you are different. If they are the market leader and have set the tone for years, and you come in with a different model because you have a deeper understanding of the market, you will need to know how to position that different pricing in the eyes of your market. Even if you know this is how the market really wants to pay, what they want to pay, etc.
But let's look at the topic of "copying others pricing" from a differentiate angle. Did you copy everything else your competitors do? Probably not. In fact, you are in business because you thought you could do it better, more innovative, more aligned with what the market wants, right? So why would you copy their pricing? Oh, because you think they got the pricing right? That could be a seriously costly assumption!
Avoid Pricing Altogether
Finally, the other big mistake we see are companies who want to avoid pricing altogether. Whether this is by offering the product for free or using Ads, this happens. Of course, Freemium isn't used to avoid pricing since the premium portion of the service requires a price. We often see companies launching their product with absolutely no revenue model at first just to "get traction" to gauge interest. First, this is no indicator of "interest" in a paid service - only a free one. Next, without a very well-thought-out plan for how to move from Free to a paid service, this could seriously backfire - this includes more than just a Pricing Strategy, but a strategy for ensuring you don't alienate the free user base.
Further, for companies that have a free service but use advertising as the primary revenue stream, here is an interesting insight - even ads have prices! Look at a company like Spiceworks, a B2B SaaS company that just recently hit 1M users and who's primary revenue stream is ads. They really only have ~150 customers - their advertisers - and you better believe they have a strong pricing strategy around those ads. You cannot avoid pricing unless you avoid doing business altogether.
Pricing is a critical piece of doing business - whatever the business. For SaaS & Web Apps that leverage an automated sales process, where the customer goes to the marketing website, to the pricing page, through the buying process, and then uses the product - without any human intervention - pricing is critical. There is no sales person or consultant there to answer objections or read body language. No one to offer discounts rather than lose the sale. For this reason alone, it is critical to get your pricing as right as possible out of the gate. To do this requires work and avoiding the 5 mistakes above.
Have a pricing page with a high bounce or exit rate and aren't sure why? Sign-up for a Pricing Page Tune-Up™ today. Need help avoiding those 5 mistakes and developing a Pricing Strategy for your SaaS or Web App company? Get started with Sixteen ventures today!
Author: Lincoln Murphy (@lincolnmurphy on Twitter)