Three things to consider when pricing and packaging your SaaS solution

This is the time many companies start thinking about redoing their product packaging and/or pricing for next fiscal year. I shared some thoughts on key considerations for pricing and packaging in a previous blog post.  Last week, I had a good discussion with a previous client on pricing and packaging, and decided to build on top of that blog and share the gist of that conversation in three key points.

• Go into the process with a hypothesis on a pricing model: Decide what pricing model you want at a conceptual level – ala carte, tiered, value-based, freemium etc. as you go into a project to redo your pricing model.  After you analyze the previous 3 years of sales history, you may change your mind, but it’s good to go into the process with a hypothesis.  If you are just doing a pricing refresh, your overall model would not change, but you may want to review entitlements, pricing bands, transparency, and simplicity to see if anything also needs to change in your pricing other than the $$ values.  A previous blog post goes into further details on these topics as well.

• Find the right packaging: Ensure your pricing model has the right packaging. For example, a combination of package tiers (think basic, premier and enterprise for a website content management system or CMS), primary entitlement bands (think # monthly user visits for CMS) and other entitlements for tiered pricing model (think storage for content for CMS).  Now you have an opportunity to up-sell to higher bands as usage grows (more monthly users), or higher secondary entitlements (as marketing creates more content for the website and needs additional storage) or to other tiers as use cases grow (think advanced features such as use of template library and customization capability etc..). Ensure that the packaging fits into the start/grow patterns of your target buyers, so you can sell with low friction, as well as have ample up-sell opportunities. Also ensure you have triggers built into the system to identify upsell opportunities.

• Realized value vs. captured value:  This is always a major discussion when putting numbers into your pricing model.  What is the value your customers are realizing and what % of that value you want to capture through pricing. Here are a few thoughts.  The value that any customer realizes from your solution is subject to interpretation, so if you talk to five stakeholders at a customer, you will get five different answers. The reason is success has many fathers, but failure is an orphan.  So what % of revenue increase can be directly attributed to your product vs. to the overall process improvements beyond your solution vs. better collaboration between teams or strategy etc. is subject to some facts and some opinion. My recommendation is a simple five step process to make it easy.
  • Take a large enough sample size of customers for each of the tiers you have defined in your pricing model.
  • Remove the outliers
  • Calculate the perceived annual (normalized) value for each of your customers in the sample for that tier. (Calculation is 3 year value/3 year spend with your product) on a % basis
  • Take a median of that number
  • Then put your target for captured value from pricing for that tier at 1/2 to 1/5^th of that median number.  The former (at 1/2) would be premier pricing and the latter (at 1/5th) would be aggressive pricing.

This allows you to demonstrate to a prospect that your solution can reach 100% ROI in one year and it is better to purchase your solution than use ad-hoc methods they may have in use today. Of course the ROI numbers will be lower if the solution also needs services to go live. In today’s economic environment, an attractive ROI is critical to getting the sale, so these numbers are a good starting point.  Even with discounts, you should still be able to extract a healthy percentage of realized value, with an opportunity to grow that account over time.

If you have more questions or need some help with pricing, please reach out to me via LinkedIn at https://www.linkedin.com/in/applicationsmarketing/