Editor’s Note: The following is the Foreword of OpenView’s eBook Mastering SaaS Pricing: How to Price Your Product from the Seed Stage through IPO. You can access your free copy here.
Determining the right pricing model for your SaaS product is never easy. But working for a company like Zuora, that serves the needs of the Subscription Economy, has given me a ringside view into the creative ways in which hundreds of business leaders monetize their products and services.
Discussing and sharing these pricing and packaging observations with others in the software community has always been a great passion of mine as well as Zuora and OpenView. Over the years, the single most valuable lesson I’ve learned is that you have to be ready to constantly iterate on both your packaging and pricing. Successful companies are those that think of pricing and packaging in the same way that they think about product development – their pricing is in a constant state of evolution. It’s never 100% done.
The elements that go into pricing design, the trade-offs you make, and the objectives and outcomes that any pricing and packaging decisions must meet should evolve as your company grows. What worked well when you were a $5 million ARR business may not serve you well as you become a $20 million ARR business. But this is easier said than done.
Many companies are unable to optimize their monetization models for multiple reasons, some of which include:
- Their systems hold them back from getting creative with pricing. Pricing and packaging innovation isn’t just about upfront analysis and strategic decision making. In order to succeed, companies also need systems that enable them to maintain a healthy pace of pricing and packaging innovation. Since all pricing and packaging decisions have downstream impacts in billing and revenue recognition, putting your best pricing ideas into practice is difficult if you’re not armed with the right technology. Just as you wouldn’t take a SaaS product to market without thinking through the infrastructure that the product will be deployed on, never underestimate the importance of putting in place the right technology and systems to enable your pricing strategy.
- There is no real cadence or process for ongoing pricing innovation. Once you overcome your systems challenges, you’ll find that you also need to overcome the “organizational inertia” that often gets in the way of making the right pricing decisions. Think through how you might want to align corporate revenue and retention goals with pricing design, who your stakeholder and decision makers will be and who should be tasked with driving the internal alignment process.
- Packaging design doesn’t encourage ARPA/ ARPU growth. In early stages of growth, you’ll likely steer your pricing and packaging design to optimize for market capture and demonstrate YoY bookings growth. However, as your company matures, you’ll need to show growth in net dollar retention. That is, you’ll want to ensure that existing customers spend more with you over time. To do that, you’ll need to build the right tipping points and growth levers into your pricing and packaging.
- Companies shy away from price testing. Building a process and methodology for testing different pricing models as well as evaluating a market’s “willingness-to-pay” are not easy tasks. The good news is that there are a number of industry experts and new technologies that can guide you through this process or even do it for you. The even better news is that in the early stages of growth, this does not always need to be a complex exercise. A number of companies I’ve spoken with tend to overthink the rigor and process they need to put in place to conduct an effective test. Never underestimate the value of speaking to your existing customers or target buyers. A well thought-out interview conducted across key buyer personas can provide great insights to help you develop early pricing and packaging design assumptions.
- They choose the wrong value metric. Decide early on what metric you want to use in order to align the price you will charge with the value your product provides. There are many studies which indicate that more and more companies are pricing by parameters outside of seats and users. But before you go down the path of choosing a metric, ensure you think through the implications. Keep in mind that any metric you use to assign value and ultimately drive price for your product should be easy to understand and easy to map to value for your buyers. Furthermore, you’ll want to ensure that it’s easy for you to measure and track this value within your own system – afterall, you can’t monetize what you can’t measure.
The pages that follow provide valuable lessons on pricing and packaging decisions and further illuminate the ways in which price can be optimized both to deliver value to your company and your end user. In this guide, you’ll find actionable advice on how to design and innovate your monetization models as you grow your company from just an idea to a sustainable business. And if you’re someone like me who learns from real world examples and not just theoretical advice, this is a great resource. You’ll get an inside look into how the most successful startups price their products with examples from x.ai, Meetup and BigPanda, as well as survey findings from over 1,000 SaaS companies.
We hope you enjoy the content herein and most importantly, gain valuable information on how to best price your product from seed stage all the way to IPO.