Patrick Campbell, SaaS founder, strategic-value connoisseur, and cofounder of Profitwell joined up with the SaaS Mag team to explain the SaaS pricing pitfalls you need to avoid.
Poor pricing doesn’t affect just your MRR and ARR. It affects how many people you can hire and how quickly you can bring them on board. It also affects how fast you can scale and whether or not you can keep up with your competitors.
So why does the average SaaS company spend more time deciding what brand of toilet paper to put in their office bathroom than how to appropriately price their subscriptions?
You need to think critically about your pricing. To do that, you need to be aware of a few common traps you run the risk of falling into. If you can do that, you’ll be on the right path to healthy, sustainable growth.
Let’s look at five of the most common SaaS pricing mistakes and how to fix them.
1. Not Spending Enough Time on Your Pricing
When we looked at the pricing strategies of SaaS companies that had between $5 million and $100 million in annual revenue, we found that the average Executive spends just 11.5 hours over the lifetime of their business defining, testing, and adjusting their pricing. But in the course of just one year, that same Executive spends 15 hours choosing custodial supplies, including toilet paper:
After all of the hard work you’ve put into building a business, it’s mind-boggling to think that most SaaS companies spend so little time thinking about the most important aspect of their product.
How can you avoid this mistake? Try this:
• Create a “pricing committee.” This committee should be comprised of employees from Marketing, Sales, Product, and Management, plus a main decision-maker (e.g., the CEO).
• Every six months, review what you’re charging, what your competitors are charging, and what your customers are telling you. Your pricing committee should be in charge of reviewing this data, recommending changes, and explaining why they’ll have an impact.
• Do customer research. Send surveys and ask for feedback from customers. Find out what they’d be willing to pay for features they’re not using. You might be surprised by how valuable your product is to them.
SaaS companies are thinking and writing about customer acquisition seven times as much as monetization. Blog posts about growth take up 70% of the online landscape, but posts about monetization tactics only show up 10% of the time.
But our data shows that if you grow each “lever” of a SaaS pricing strategy — acquisition, monetization, and retention — by 1%, monetization will make the biggest impact on your bottom line.
Pricing determines what kind of customer you’re able to acquire, how you’re able to acquire them, and most importantly, how much they’ll pay you. If you’re not thinking critically about your pricing on an ongoing basis, your entire business is suffering.
2. Setting Your Pricing Without a Value Metric
Our research shows that SaaS companies using value metrics to set their pricing are growing at twice the rate of companies that aren’t:
The price of anything should be rooted in its value. In SaaS, this is called Value-Based Pricing, and it lets you charge customers exactly what they are willing to pay for the exact amount of product they are getting. Here’s a scenario to help you understand why Value-Based Pricing matters:
Imagine that you’re at the grocery store and you notice that the price for two apples is exactly the same as the price for eight You’d probably buy eight apples, even if you knew you weren’t going to eat all of them. Why not? It’s the same price.
This sounds implausible — and it is, because grocery stores would lose money if they priced their fruit this way. But this is the exact same mistake that SaaS businesses make all the time. Grocery stores use Value-Based Pricing when they charge you per apple: With each piece, you’re getting more value, so you pay more. And successful SaaS businesses should use this model of pricing to charge customers the right amounts as they add more users, request more space, and so on.
If you aren’t already using a Value-Based Pricing strategy, here’s how to start:
• Define the functional or outcome-based value metrics you’ll use. Functional metrics are rooted in usage — per 100 users or per GBs of data. Outcome-based metrics are rooted in what you do for a customer — how many customers they acquire or how many views their videos get.
• Pay close attention to a customer’s perceived value of your metrics. If you charge a customer $10 per month for something they think is worth $5 — maybe because they can get it elsewhere for $5, or because you don’t have 24/7 support — they’re more likely to churn. You can find out what a customer’s perception of your value is by following this final tip:
• Talk to your customers throughout this process. Ask them what they’re willing to pay or what features they do and don’t use. Most importantly, ask for candid feedback about how you’re doing. Price changes are hard, and you need to listen and act on the feedback you receive.
3. Not Localizing Your Pricing
Trust is a huge motivator behind purchases. If someone doesn’t trust your copywriting, your payment processor, or even your site’s design, they won’t sign up. Potential customers need to trust your pricing, too. And it’s hard to do that if it’s in an unfamiliar currency. We’ve seen so many SaaS companies experience faster growth — at a rate of 30% or more — after implementing localized pricing:
Case in point: Litmus saw a 5x increase in conversions by showing dollar-based prices to U.S. customers, and Euro-based prices to European ones.
If you aren’t localizing your SaaS website already, here are a few tips to help you start:
• Learn where most of your potential users are located. You can get visitor location data from Google Analytics for free. The vast majority of your visitors should be able to see prices in their local currency unless your product is unavailable there.
• Start building trust by localizing other aspects of your site. Along with local currencies, you can show content in the local language or change images to be more relevant to foreign audiences.
• Consider running some price-sensitivity studies. Sometimes a simple conversion from USD to Euro won’t cut it: If Europeans value your product less than Americans, you could still see higher churn among these customers. A sensitivity study can help you find the pricing “sweet spot” for each region, ensuring you’re not charging too much — or too little.
“Prospects just didn’t feel comfortable paying for a product in a different currency; they didn’t necessarily trust us.”
Paul Farnell, CEO of Litmus
4. Discounting Too Much
In a 2018 survey on discounts, we found that almost 80% of SaaS companies are willing to discount their product prices by 25% or more to acquire a new customer:
Major discounts may seem like an easy way to acquire customers quickly and reliably. But is customer acquisition via discounting worth it in the long term?
Nope. In this same study, we found that customers acquired via discounts are more prone to churn. In fact, the higher their discount, the more likely they are to eventually leave.
These customers are more price-sensitive and less willing to renew their subscriptions. All this adds up and presents your company with a short-term gain in revenue but a long-term loss in the total number of active customers. Large discounts bring in the wrong kind of customer. These users can only see the value of your product at that discounted rate, not the full value. So when they’re asked to pay more, they’re much more likely to ask “why,” complain, and walk away.
You can use discounts to acquire customers. But there are some key rules you should follow to ensure that price cuts don’t cheapen your business:
• Make the discounts discreet. Don’t plaster banners all over your homepage or send emails to your entire list. Think instead about time-based pop-ups or small offers in drip campaigns.
• Use segmentation. Showing a “new customers only” discount to your current customers makes them feel unappreciated. Target your ads, emails, or website behavior at potential customers who may need a small discount to finish their purchase and won’t have access to it forever due to this last tip:
• Set a time limit. If someone knows they can sign up at any time and get 10% off, they’ll put it off until they really need you (or until their subscription with your competitor runs out). Making a discount accessible for a short time drives a sense of urgency, and the lower price reduces the “activation energy” they need to come aboard.
• Reach out to churned customers. You can sometimes win back price-sensitive customers by highlighting new features or offering a small, targeted discount.
5. Not Continually Optimizing
If you’ve read over all these mistakes so far and confidently declared that your pricing is rooted in value, you’ve determined that your discounts are reasonable, and you’ve spent tons of time thinking everything over, that’s great. You’re ahead of the game, and your customers probably love you for it. But there’s still one crucial mistake that even the smartest entrepreneurs make, and it’s setting their pricing once and then never touching it again. This can leave a ton of money on the table. Pricing isn’t something you can “set and forget.”
What if the demand for your product suddenly increases? Or a competitor shuts their doors? Or you add a new feature that’s way more useful than you expected? You can’t give away something that’s now worth $100 for $20 just because that’s what you’ve “always done.” You need to think about pricing as a process. And like any process, it’s something that you should monitor, re-evaluate, and change over time.
The key to this is smart, continuous optimization. Here’s how you can do it right:
• Keep a close eye on demand. Are you getting a sudden uptick in new subscriptions? Have more people than usual contacted you about a specific feature or asked how to move away from a competitor? These are all things that might hint at an increase in your perceived value — and what people are willing to pay.
• Tweak your pricing page. You can’t underestimate the power of how you explain pricing to a customer. Highlight new or different features, try creative plan names, or update your design to make your prices look more appealing.
• Constantly track your MRR and ARR. We call these values the “purest measure of revenue” for a SaaS business, and any big changes will be the first sign that it’s time to revisit your pricing.
• Do research, not A/B testing. SaaS companies often find A/B tests unhelpful: our research shows you need a sample size of over 30,000 to get a conversion lift of just 10%. Customers find these tests disingenuous, too. Ask your customers how much they are willing to pay and what features they value most.
Stop making mistakes and start making money.
If you can stay away from these five common SaaS pricing mistakes, you’ll be able to positively impact your business in a big way. Avoiding these pricing traps will help you establish monthly revenue you can count on so you can hire the best people to further grow your business. And with the right pricing in place, you’ll be bringing on more long-term customers who understand and appreciate the value you offer. All it takes is a little more time and focus. And maybe a little less shopping for toilet paper.
Looking for more SaaS tools and advice? Head over to ProfitWell to get everything you need to grow smarter and put your business on the path to profitability.