How Should We Package And Price Our Saas Software?
This question is pondered by SaaS leaders the world over, and the methods they use to find answers may surprise you. Ranging from highly quantified market research, to competitive comparisons, to simple guesswork, a wide variety of techniques are deployed to price SaaS products. But which method is the best? Where does the pricing journey begin?
Regardless of the product or industry, an understanding of competing offers can provide useful information about common price points, features, and willingness to pay. Although this time-tested technique is logically sound, the competitive landscape is just one component of a much larger picture. To illustrate this point, let’s take a look at entry prices in the highly competitive streaming services industry (depicted below).
By juxtaposing the entry package monthly prices alongside one another, the competitive landscape begins to materialize.
- The Price: The first thing to note is that the price range for all offerings is $6.99 – $9.99 per month. Any price point outside of this range may be perceived as either too low for quality, or too high for the value provided.
- Segmentation: Secondly, these offerings are not apples-to-apples comparisons. Netflix is very different from Disney+, and for a few dollars extra per month users can access Amazon prime’s 2-day shipping e-marketplace.
- Differentiation: Thirdly, each of these services varies greatly in terms of quality licensed content, functionality, and customer service.
Simply put, although they appear to have comparable price points, they vary greatly in value.
As famously stated by Warren Buffet, “Price is what you pay, value is what you buy.” The value of B2B SaaS software is much more complex than that of streaming services, given their necessity in day-to-day operations. Factors like ease-of-use and customer service are always important facets in determining SaaS value, but they vary in importance by industry and target segments.
Price is what you pay, value is what you buy.
For instance, ease-of-use becomes increasingly important in medical/blue collar industries because of end-user age or disparities in technological prowess. Feature depth and customer service become increasingly important in enterprise markets where a minor software glitch can impede the overall operations of a company. Innovation, particularly in regards to AI/ML, is also baked into the value assessment, especially in industries such as cyber security and financial asset management.
Basically, pricing is best calculated based upon the value the software provides, and value is contingent upon a multitude of unique factors that must be carefully considered.
We are often told by clients that, “We discount heavily because our competitors are undercutting us in price.” Discounting is a common and acceptable action, but we must be careful not to give away value, thus diminishing MRR and the overall integrity of the product.
Excessive discounting can close deals and give a company a temporary victory in their ongoing quest for market share. It also has unintended side effects as shown in the table below.
|Aggresive discounting to close deals
|Reduces stickiness and encourages churn
|Client negotiates heavy discounts
|Experiences sticker-shock upon renewal
|Sales team given leeway in discount rates
|Less control over price
Given the proliferation of software solutions and the ever-increasing number of new entrants, once faced with the reality of cost, these customers may look elsewhere for rates akin to what they are accustomed to paying. Industries often have a standard discount rate, but due to misperceptions about competitors and a focus on increasing win-rates, discounting can have long term deleterious effects. Like every other facet of a pricing and packaging strategy, discounting must be employed thoughtfully and strategically.
It is important to understand the competitive landscape when pricing and packaging B2B SaaS, but it is even more important to understand the relation of price to value. Regardless of industry, SaaS is a highly competitive space, and with each passing year the number of solutions and/or competitors grows. Understanding value is a key component when evaluating your pricing in relation to your competitors. You must safeguard that value by mitigating weaknesses, enhancing strengths, and not giving value away.