How do you price a subscription product? SurveyMonkey’s Brent Chudoba provides tips on developing the best SaaS pricing structure for you.
Pricing and packaging can be a interesting and intellectually challenging topic. Essentially all businesses and product stakeholders have strong opinions on it, which inevitably makes for a tough path toward consensus. Creating initial pricing and packaging, and especially changing pricing and packaging for a subscription business can seem relatively simple at the outset, but it often quickly evolves to become a very large and complex exercise.
Since recurring customers (whether they are consumer, prosumer or B2B) can become grounded to certain price expectations, there is quite a lot to consider, and in fact the process of creating effective pricing and packaging can be as incredibly difficult as it is important.
What are the most important steps in developing the groundwork for a SaaS pricing structure that works?
Unfortunately, there isn’t a golden rule or silver bullet when it comes to establishing price and packaging for subscription and subscription-like models, but there are several universal steps that can help guide and inform your decisions.
Create a goal framework
Depending on your business or product stage, it is critical to keep the following in mind as good starting points:
- the goals that sales, marketing and product teams are trying to achieve
- the intended customer profile
Goals and customer profiles can and likely should change over time as a product and company grows, but finding consensus on what pricing and packaging should be optimized for is a key component to reaching an efficient decision.
Identify your target customers
Selling to enterprise customers?
Typically these will fall into one or multiple segments:
- Prosumers (e.g., those using the product for work-related purposes but transacting like a consumer)
- Business users (which may need to be differentiated as end users, managers with purchase influence or authority over small groups, and senior decision makers who have broader or company-wide authority)
The target customer influences a variety of sales and marketing decisions, with the pricing model and price point being one key decision.
Prioritize your business goals
There are a few basic components of pricing and packaging for typical subscription models:
- Price point
- Subscription term (e.g., monthly, annually)
- Pricing model (e.g., freemium, free trial, paid only)
Your business goals are important in determining which model, term, and price points are appropriate. Prioritizing some of the common business goals for a subscription business can quickly help determine which models, terms, and price points will be most effective. Some common business goals which will have varied degrees of prioritization may include:
- Conversion (e.g., new customer or user growth)
- Market share (e.g., establishing share or driving share gains)
- Profitability (e.g., sustainable margins to support the business model)
- Long-term value creation (e.g., optimizing for expected LTV over conversion or first term cash)
- Cash in hand (e.g., maximizing up front cash to fund the business)
- Supply or inventory balancing (e.g., discounting to maximize inventory sell-through)
If a group of stakeholders can reach consensus on who the target customer is, what the business goals are, and the priorities, pricing and packaging decisions — while still not simple —can be made much more efficiently and lead to a result with higher chances for success and stronger team buy in.
Priced to Please: 4 Factors of Successful SaaS Pricing
It’s entirely possible to create a theoretically perfect pricing model that doesn’t sell a single subscription. To avoid setting up a pricing model that doesn’t resonate with your customers, putting yourself in your target customer’s shoes and striving to understand his or her motivations is crucial.
There are several key factors that can help you discover what will resonate with a customer and ensure that your model doesn’t break the way they typically interact with your offering. Some helpful areas to consider include:
Learn how raising prices can actually result in more profitable customers and higher retention rates.
- Competition: If you have competition, you need to be very aware of how they price. You may not need to recreate the wheel* unless you know the wheel is broken (which may often be the case in markets that are ripe for disruption). Competitors or peers can be a good baseline of how to price and what pricing levels customers are comfortable with (where they believe value meets or exceeds cost). If you are a new market entrant, it’s also important to be aware of what potential customers are benchmarking you against.
- Simplicity: Depending on your product and business model, making pricing easy to understand and compare is very important. If your pricing model is really complex (which is sometimes unavoidable), it may require additional content to explain and additional expertise to sell. If your model is simple and/or non-negotiable, e-commerce models may be successful and pricing may be one less thing sales reps need to negotiate for.
- Customer friendliness: If your customer is accustomed to buying on a per-project basis, or needs to bill your product/service through to end clients, they may not be as comfortable buying into an annual subscription. That is yet another example of why it is so important to understand how customers will consume your product and to make purchasing and making payments as easy and intuitive as possible (either by pricing in a way they are accustomed to or properly educating them on the advantages of your model).
- Customer Lifetime Value (LTV): Having a sense of the LTV of your offering, and the goals of your business relative to LTV, is very helpful towards appropriately pricing a product. Customer LTV is (or eventually should be) a critical factor in essentially all of your sales and marketing decisions. Pricing is one of the few variables in LTV calculations, and the one that businesses exert the most control over. If your product is priced too low, you may end up limiting the marketing channels and sales models available to sell your product. You may also be saddling yourself with the difficult task of having to raise prices significantly further down the line in order to sustain your business model.
* Note: It’s always okay to break the mold with your pricing model — in fact, sometimes doing so can be a key business goal or point of differentiation — but it is also important to determine whether doing so will require you to make buyer education a big part of your marketing and sales efforts.
An Art and a Science
As businesses grow and evolve and add additional products and services, pricing and pricing models will often change to reflect market demands and opportunities. Beginning with an educated and well thought-out model that anticipates some potential evolution of your business will always help drive success in pricing and packaging.
Subscription pricing and packaging is not a new concept. Businesses have been doing it for decades. But with the proliferation of business models that seek subscription-like economics, finding the right model that enables predictability and growth without sacrificing customer experience is an ever-changing science and art.
In addition to the information in this article, for those who are interested I have also included a presentation “$X.99 per Month” I recently presented to introductory marketing class at Lehigh University. It takes a look into how subscription pricing interacts with business goals and LTV.
Photo by: Sharpstick’s Photos