You’ve done your homework. You’ve segmented your market using customer value, buying process, and cost to serve. You know how much value you bring to customers compared to their real alternatives. You have a pricing strategy. You are ready to make a price change and since you’ve studied your competitors you know how they will likely respond, What questions do you still need to ask?
If you are running a B2B SaaS company you will want to think about your critical SaaS metrics. These are the metrics popularized by David Skok in two now classic blog posts: SaaS Metrics – A Guide to Measuring and Improving What Matters (2010) and SaaS Metris 2.0 – A Guide to Measuring and Improving What Matters (2013).
These metrics are often referred to as your unit economics. The most important are:
- Customer Acquisition Costs (CAC): How much money you spend on average to close a customer (this includes all of your sales and marketing costs).
- Lifetime Value of a Customer (LTV): How much money you can expect to receive from a customer over the period you can expect to keep the customer (for many SaaS businesses, it makes sense to cap this at three years given the pace of technology change — I have seen other businesses in which a much longer period is used, 40 years for one parts manufacturer serving large chemical plants).
Another metric (not unit economics) that gets tracked closely is monthly recurring revenue (MRR) and just how fast this is growing month to month.
Before you make any SaaS pricing change — whether it’s up, down, or a change to your pricing metric or pricing architecture — you should test what impact you think the price change will have on your key metrics. To do this you have to ask a series of questions:
1) How will the price change impact unit volume?
Generally, an increase will lead to lower volume or slower growth. But not always. In some cases, a price increase can change how customers frame your product and what they compare it to, and that can lead to higher unit volumes. This happens more often than you might think, especially in early-stage companies, where establishing the right framing is an important part of product strategy.
2) What will the price change do to gross margin?
The general assumption is that gross margins will go up with the price increase. But you still need to ask the question. You may make other changes that will impact your cost to serve. As you change your pricing your support policy or blend of services may also change, and this can affect your gross margin. The price change may also alter your customer mix, and different types of customer can have different costs to serve. It is a good idea to think through this.
3) Will the price change impact churn?
Churn is one of the most important variables for B2B SaaS companies to manage (see this great piece by Tomasz Tunguz on how to calculate churn). Will a price change increase or decrease churn? How will this play out over time? I’ve laid out a few things to think about along with some common patterns in the table below:
|Price Decrease||Price Increase|
|Short-Term||Lower churn as you relieve price competition||Higher churn as you lose price-sensitive customers|
|Long-Term||Higher churn as you are attracting the more price-sensitive customers||Lower churn as you focus on customers that get the most value and can pay the higher prices|
4) How will it affect customer acquisition costs?
A change in pricing can also impact customer acquisition costs. Think through your revenue generation process. Will a higher price increase your CAC? How and why? Keep in mind, it is even possible that a higher price, with its implication of higher value to the customer, will lead to lower CAC!
5) How will discounting come into play?
Discounting is the dirty secret of B2B SaaS. No one likes to talk about it. But you see all those pricing pages where it says, “For more than XXX users, call us”? Those are invitations to discounting. I have often seen well thought-out price changes get undermined when sales discounts the price increase away. Before you execute on a price increase, make sure that sales is onboard and that everyone is committed to the same discounting strategy.
Free Pricing Impact Calculator
How often should you be adjusting your pricing? Research from Patrick Campbell’s Pricing Intelligently group says every six months. So asking these questions is not a one time thing but part of an ongoing process.
To help you with this here is a very simple model you can use to think through the impact of pricing changes on your key SaaS metrics:
That was a lot of questions and formulas. To make it real in my next post, I will look at how price changes at three B2B SaaS companies played out in the real world. It is always good to learn from other people’s experiences!
Photo by: An&