In some ways, this can be the most difficult aspect of pricing and monetisation. Knowing at what point customers will stop purchasing your product because of the price is tough to predict. It will also depend on your commercial objectives, packaging, metric and model decisions and who the customer is; resulting in a particularly complex picture to navigate.
There are a number of factors which will impact the prices you can charge. Different data sources should be used to triangulate the price level which will drive the optimal outcome in terms of profitability. Fundamental to this is developing a detailed understanding of customer perceptions of your business and the value it provides, how users actually deploy your products, and what key decision makers in those customer organisations view as successful outcomes.
Economic value: You will want to gain an understanding of the economic value your proposition can drive for the customer:
In some cases this will be straightforward. For example, revenue automation software such as ProfitWell can directly demonstrate revenue impact. Conversely, a business such as Udemy (an online learning platform) will face a greater challenge in identifying the right metrics to track and then demonstrating an impact on outcomes.
But it’s worth the effort: gaining a deep understanding of this ‘economic value’ will not only be useful in identifying the right price level, it will also help your sales and marketing team to demonstrate impact during their pre-sales activities, and then to track and demonstrate the value the customer is receiving post-sale.
Alternatives: The price or cost of alternatives is fundamental. This includes:
In many cases, for SaaS businesses focusing on the SMB market, pricing is published on their website, and discounts are more limited. In other cases where the average deal size is larger, pricing will be more opaque and discounts perhaps more prevalent; and hence the price of competitive offerings will be harder to establish with certainty.
Buyer psychology: Asking customers directly through a survey or interview often yields significant insight into perceptions of price, value and willingness to pay. Here, are a couple of the many available scientifically-validated approaches; these should not be considered a comprehensive guide to this hugely complex area. Links for further reading can be found at the bottom of this section.
Switching costs: Switching costs are a double edged sword when it comes to pricing. If you are the incumbent supplier, it provides an opportunity to increase prices over time due to the lower risk of churn during the transition. On the other hand, if you are attempting to displace an alternative solution with high switching costs, you may need to be more aggressive with pricing initially to land the account and then expand over time.
Cost dynamics: You should, of course, have a good handle on your cost dynamics; understanding how costs scale across customers based on the scope of their purchases, their behaviour, and the level of service you provide for each tier of customer.
Transaction data: In cases where there is a high level of negotiation between sales teams and customers, and a history of transaction data to analyse, it is possible to identify patterns in the data which can be exploited. You may, for example, find that customers with certain characteristics tend to pay higher prices; this type of insight can then be systematised and exploited. Transaction analysis also provides a window into what the best negotiators do vs. the rest. Those learnings can then be applied systematically to improve the outcomes of all salespeople, e.g. through automated segment and deal-specific price guidance.
Usage data: Understanding how customers use your proposition is critical to evaluating what aspects of it are most valuable and to whom. The insights you gain from usage analytics won’t tell you the ‘right price’ to charge but they will help you to identify customer types which are gaining more value than others, and hence allow you to create different price levels or engineer price increases based on traction with customers.
Objectives: The price you charge is a decision; your decision. You should therefore consider your commercial objectives when setting your prices. Depending on the maturity of the product, its role in your portfolio, whether there are network effects you’d like to exploit etc. All of these will have an impact on the prices you charge. (The supermarket ‘loss leader’ is a great example of objectives in action: the loss leader is sold at a rate below profitability because it encourages other more profitable purchases).
There is no such thing as a ‘market price’. Customers all vary in terms of what they are truly willing to pay for your proposition, as:
Through the right packaging strategy, metric and model design, you can effectively tap into these differences in willingness to pay, allowing you to better maximise both volume and price.
There is also, however, a significant opportunity to differentiate prices directly based on the customer and the specific context of an individual deal, especially at the enterprise level.
The limiting factors are:
The more opaque prices are between customers and the more defensible pricing differences are, the more opportunity you will have to differentiate deal values individually.
The customer dimensions which correlate well with willingness to pay will be specific to your business; however, there are a number of categories which can frequently be leveraged effectively.
You will need to strike a balance between the simplicity of your pricing guidance and the potential to optimise prices. Just because you can differentiate prices and generate more revenue doesn’t mean you should. Businesses are increasingly global and work to centralise procurement. Having different price points which are not defensible can be confusing and may slow down the sales cycle (or shut you out completely).