Pricing Strategy For New Products — A Complete guide for founders
The why and how of pricing a new product
“26% of high intent users visit B2B Pricing page on a website.”
Most founders create their first pricing model based on guesswork or replicating their competitor’s pricing.
Since there is no clear pricing strategy and distinction between the pricing segments, their customers buy one of the plans based on their respective budgets, which leaves room for broader improvement.
While some enterprise customers might perceive the pricing extremely cheap, the other end of the spectrum tends to find it extremely expensive.
With no analytical study or data to back, this pricing strategy usually never gives the team a clear path for expansion.
Which brings us to our next section
Why is SaaS pricing important?
SaaS pricing isn’t just a number; it’s a strategic cornerstone that can make or break your business’s growth potential.
Unlocking the true potential of your business involves a multi-faceted approach, with SaaS pricing playing a pivotal role. Consider these essential growth drivers:
Expanding Your Customer Base: The key to growth is attracting more customers. Your pricing strategy should be a compelling invitation, showcasing the undeniable value customers receive when they choose your product.
Mitigating Customer Churn: Reducing churn rates is vital for long-term success. Craft a pricing model that ensures customers continuously experience value.
Enhancing Customer Lifetime Value (CLV): Elevating CLV requires a nuanced pricing strategy. It begins with customers recognizing the value proposition when they step into your ecosystem, ensuring their product journey is rewarding and satisfying.
Every one of these factors intertwines with your long-term pricing strategy. Your pricing should tell a story of unparalleled value to enroll more customers effectively.
When customers perceive this value from the first touchpoint, churn naturally decreases, and CLV inevitably rises.
It’s a journey to growth that starts with the right pricing strategy.
3 Types of Pricing Strategies
1. Competitor-Based Pricing/Market-Based Pricing —
As the name suggests, a competitor-based pricing strategy depends on your competitor. You can price your product higher, lower, or at par with your competitors. This pricing is usually based on publicly available information and does not consider the expenses occurring at the backend.
The most commonly used pricing strategy can help you survive the market. It also leaves a lot of possibilities for making revenue on the table open.
2. Cost-Based Pricing —
This is the easiest to calculate pricing strategy. Cost-based pricing is simply the Cost of development and Margin on top of that.
Cost of your product = Cost of development + Cost of Infrastructure, Overhead, Marketing, etc + Margin
Cost-based pricing is usually implemented when there is minimal information about the customer and their willingness to pay for a product.
This strategy can often turn disastrous in the long run, as it never considers the user and relative purchasing power.
3. Value-Based Pricing —
This is an ideal pricing model for any SaaS Business. Value-based pricing is the strategy to price your customers based on the value that they perceive from the product.
The higher the value, the higher could be the price. Suppose the User-Persona understanding of the product is good.
In that case, you will understand a customer’s requirements points effectively, which will help you offer absolute value at the correct price to the customer.
If you are looking to read about pricing models (PAYG, Flat pricing, Freemium, etc.) -> Read — Top Eight Examples of Successful SaaS Pricing Models
Continue below if you want to learn about how to price your SaaS Product.
How to Price your SaaS product?
1. Clearly define your customer.
Before you start pricing your product, the most important thing is understanding your customers and their needs.
The crucial role of understanding the user persona is that you won’t address or price a solopreneur like you would address a CXO or director of a larger organization.
By creating the Ideal Customer Profile, you can tailor your product — and pricing to what they need. You can reach out to them with a more meaningful solution that would give them the most value for the Cost.
2. Create clear boundaries between different types of customers.
Before you price your product, it is essential to define the target segment. Are you targeting Individuals? Or Small business? Or mid-Segment? Or Universities. Will you be targeting Universities, Individuals, and enterprises?
Segmenting users helps successfully price your product based on individual requirements and needs. For example, a university requirement would not be similar to a freelancer, which would completely differ from an enterprise use case.
Hence, it is crucial to clearly define your product’s boundaries and associated features for each, which helps differentiate between the customer.
Here is an example of how Zendesk has segmented its users into two categories. One which targets smaller teams or businesses.
And the other targets the enterprise. Precise segmentation helps position and list features and value each segment would get from the respective pricing model.
3. Price your customer, not the product.
One major mistake most SaaS founders make is creating a pricing structure that resonates with their product rather than their customers. It is essential to price your product based on your customer rather than its perceived value.
For any B2B SaaS product, there are a bunch of customer profiles that have different requirements, needs, and budgets. While as a founder, you would expect all customers to use your product to its full potential by using all the features, most of the time, that’s different.
“90% of the customers use limited sets of features on a product, which defines the intrinsic value of your product to them. “
Hence, it’s essential to look at the product’s pricing from the customer’s point of view (Cost, decision-making ability, etc.) and then add product value to it.
4. Choose the right Value Metric.
Per user, per view, per subscriber, per contact, and per API calls are different examples of Value metrics.
“A value metric is something that a user or prospect associates value with.”
Value metrics are how you would charge your customer.
Finding the right value metric is one of the most essential aspects of product pricing. The correct value metric helps you to scale with your customers. If your customer resonates with the value metric, they will continue using the product and upgrading as they scale.
Even if the usage drops, they tend to downgrade their subscription to a lower perceived value metric, thereby mitigating churn.
An excellent way to find the correct pricing for your SaaS is to put all your features in the chart below and think what value metric would make sense to land in the top left corner.
The top left of the chart gives the customer a high value at a fair price.
It is also essential to keep a few things in mind while defining the value metric for your business.
Keep it Simple — Value metrics should be simple to understand. If done correctly, a prospect would quickly understand the pricing and bundle that would meet their requirements.
Aligned with Outcome — A value metric should be measurable on the outcome. It is essential to understand the needs of your customers and the result they are rooting for. If your value metric echos the output, it lands in the first quadrant.
Grows with Customer — A value metric should increase as the customer scales. The higher the usage, the higher the usage of value metric.
5. Determine the right price point.
If you can track the value your product adds to your customer business, it becomes easy to define your value metric.
But to an early-stage startup, having that data is a daunting task.
Hence, we will discuss two standard methodologies to determine the price point for a SaaS Business.
a. The 10X Value model
The rule is simple: whether you are pricing your product at $30 or $1000 per month, can you tell your customer that the product would return 10X value to them?
This means it is crucial for customers to feel that they are getting 10X the value they are paying. If it’s lesser, they might not convert.
Having data helps to define the 10X value clearly. Reach out to your customers, talk to them, and measure the actual results of your product.
Is it saving 40% of the time? Or Save 3X Fuel consumption? Have the success value on the website, while you can increase the price by clearly explaining the significance.
2. Van Westendorp Model
Van Westendorp’s data-driven model uses customer/prospects survey questions to determine the pricing they are willing to pay. Rather than asking users for a single price point, the model might be comfortable paying. Asks the set of these four questions to its user -
At what price would you consider the product so expensive that you would not consider buying it? (Too Expensive)
At what price would the product start to get expensive so that it is not out of the question but you would have to consider buying it? (Expensive/High Side)
At what price would you consider the product a bargain — an excellent buy for the money? (Cheap/Good Value)
At what price would the product be so low that you would feel the quality couldn’t be outstanding? (Too Cheap)
Once the survey is done, it is plotted on a line graph with the Price on the X-axis and the Number of respondents on the Y-axis.
Based on the common intersection points of the lines, you can find the pricing range that most customers would be willing to pay.
In the above graph, that range is $500 — $1200. This shows that the pricing tier can start well above $500 but must be within $1200.
Van Westendorp’s pricing model works better with businesses in a slightly evolved stage, where many customers or prospects can go through the survey and produce the desired result.
Case Study - How this company reduced 30% of bad leads by transforming from Pay As You Go to Bundle Pricing
6. Creating Tiers and Add-Ons
Let’s break it down with an example of marketing CRM.
Think of creating a value metric structure for a CRM platform (customer relationship management) for marketing folks. A typical problem and solution journey for a marketer would look something like this.
Design a value metric tier to address at least one problem entirely for its user. While also expanding along with their customer as they move from one task to another in their journey.
“I always look at pricing from a customer’s perspective and the size of the organization they are vs. how they’re using my product as the bigger they are, the more resources (and needs) they might have, so the pricing usually goes up as segment grows.”
Hubspot pricing is a good example that reflects the value metric journey in their pricing strategy. While Hubspot prices increase for each segment, they tend to solve one problem from the image above entirely in each tier.
7. Discounting
As for discounting, determine what would entice them to pre-buy or use the product more.
If that’s not a factor in your business model, don’t discount on the per unit, but you could add a support level and discount that.
Discounting depends a lot on the stage of the business; at an early stage, you might have to offer some significant discounts, which would help you onboard more customers.
Or you can offer discounts on annual contracts for large enterprises.
8. Testing Higher Prices
The 10x rule suggests that you should charge a higher price if your product brings a lot of value to your customers. This makes sense both for your customers and for your business.
It would help if you calculated how much real profit you make from each customer each month and how much you’ll earn from them over their lifetime as your customers.
Then, use this information to test different prices based on how many customers you convert.
For example, if you make $15 per month profit from a customer at a $39 price point and $25 per month at a $49 price point, you can use these numbers to see which price gives you the most profit when considering conversion rates.
Let’s say you convert 30% of leads at $39 but only 24% at $49. With the math, you’ll find that at $39, you make $450 in total monthly profit from 100 leads, and at $49, you make $600 in total monthly profit from the same number of leads.
So, even though you lose some customers with the higher price, it still makes sense because you’re making more profit overall.
You can keep increasing the price until you lose many customers and your profit decreases. This approach can be good if you rely on your business for income because a little more profit from each customer is often worth having a lower conversion rate.
The key takeaway is that testing higher prices can be a good strategy, especially if you need profits to sustain your living expenses.
Conclusion
B2B SaaS pricing is not as complex as most people perceive. But, it is essential to understand your Ideal customer profile, the value metric that resonates with their targets, and then price accordingly.
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