Our Answers to Frequent Questions for Building a Pricing Strategy
Designing and evaluating a pricing model for a SaaS company can be as critical as developing the product itself. To offer some best practices for the optimization of product pricing, Mainsail’s Vice President of Pricing, Brian Russell, hosted a webinar with Dan Balcauski, Founder and Chief Pricing Officer at Product Tranquility.
The full webinar is available to watch here. Below are Mainsail’s top takeaways.
Question 1: Who owns (or should own) pricing?
In the early stage of a SaaS company, the founders own the product, by necessity. They built it, determined how to package it, and got it to market. As the product scales, the company scales, but all too often founders hold on to pricing longer than they should.
According to Balcauski, founders should delegate pricing responsibilities to a specific person in the organization. Conversations around pricing can be challenging and uncomfortable, so someone needs to be responsible for gathering feedback from stakeholders and driving pricing decision making.
He recommends Marketing own pricing because they manage product positioning, are involved with sales enablement, understand the marketplace, and have a long-term view of strategic operations. Conversely, Balcauski recommends that Sales not be responsible for negotiating customer pricing because their incentives are likely not aligned with long-term profitability. He also points out that at every stage of growth, founders should be involved in reviewing strategic pricing decisions.
Setting up a pricing committee can be useful, as pricing should always be a cross-functional decision. Sales understands customer pain points, while Marketing knows the ICP, and Finance understands the financial impact to the business. All viewpoints should be considered when making strategic pricing decisions.
Question 2: How often should SaaS companies review their pricing?
Setting product pricing is not a one-and-done process. Pricing requires constant monitoring and adjustment which should be done at least quarterly.
- Creating a committee to review pricing that includes cross-functional teams such as Product, Sales, Marketing, and Finance.
- Mapping the pricing review cadence with the pace of your sales cycle— the faster your sales cycle, the more frequent your pricing reviews should be.
During pricing committee reviews, set expectations and goals around any pricing changes you plan to implement. This helps align the organization’s priorities and will help determine the success of your new pricing structure.
Define the KPIs by which you will measure success and then ensure you have the right systems and tools in place to track and measure your data. Pricing KPIs should be measured at the company level, but also at the cohort level (by customer vintage, industry vertical, deal size, or sales rep) so you can better understand common characteristics that may impact price performance.
Question 3: When should SaaS companies increase prices?
SaaS companies are grappling with this question a lot right now, especially as the current macro-environment is rife with inflation.
Look for signals that you should raise your price. Examples of signals that it may be time to raise your price are:
- Your prospect customers don’t push back on pricing
- You have high customer close-win rates
- You haven’t changed pricing in years
- You’ve added significant value to your product
- You are underpriced relative to competition
You can also collect anecdotal data from your customers by listening to their feedback. Ultimately, your goal should be to offer fair and reasonable pricing. If you’re thinking of increasing your prices, make sure you implement a plan, create a timeline, communicate with your customers, and provide a “value” story to share with them.
Question 4: What are signs a company is using the wrong price metric?
When designing your pricing model, one of the most important factors to determine is your pricing metric: the unit of value that customers are charged by, e.g., by seat, storage, or number of contact records.
Often, executives assume that the amount you charge defines your pricing success. Balcauski argues it’s about how you charge, which includes offer bundles and a price metric. Ideally, you should use a price metric that is aligned with the value you create for customers that doesn’t create massive operational friction for you in the future.
Signs that a pricing metric is a problem:
- Exposure to macroeconomic climate
- Causes friction in your sales process / conversation
- Not correlated to value customer is receiving
- Discourages customer product usage
Question 5: Should Sales be allowed to offer discounts?
There is no fundamental problem with discounts, but there should be a set discount policy in place, and it should be enforced. Start with instituting price discount thresholds, and then eliminate unnecessary giveaways.
In any case, never make a negotiation one-dimensional on price or discount. Keep in mind the “gives” and “gets” that are on the table during negotiation. If you need to provide a customer a discount, make sure you are able to negotiate a concession in return, such as more favorable payment terms, longer contract commitments, and customer referrals.
Remember: not every lead is the right customer. Target customers who are excited about the value you provide and use a subscription model to gain long-term commitment.
Question 6: Should pricing be published on a company’s website?
Balcauski estimates that half to three quarters of SaaS companies publish their pricing. Often when companies don’t publish pricing, the reasons tend to be indicative of larger issues in the Sales or GTM function (pricing is too low/high, list pricing is not accurate because it’s always discounted, pricing is convoluted and based on too many factors). Take stock of your reasons not to publish and carefully consider them.
At times, the need to publish will be driven by competition. If your competitors are publishing pricing and you aren’t, it may put you at a disadvantage.
When evaluating the decision to publish your pricing, consider three options:
- Public pricing and packaging listed: This model is best for companies with standardized packaging, horizontal products with homogenous market and high-velocity/PLG models. On average, 50% of SaaS companies use this model.
- Public packaging, no pricing listed: This is best for companies with Good-Better-Best packaging and a high difference in customer willingness-to-pay.
- No public pricing or packaging listed: Use this model only if you have extremely complex packaging, a high difference in customer willingness-to-pay and are focused solely on enterprise sales.
Creating successful pricing models requires a strategic and collaborative mindset across the organization. Before setting your prices, always start by considering the company’s goals. Consider the current environment, your competition, your customers, and then determine to whom and how you’ll deliver value. Remember that pricing success is not only driven by ‘what you charge’, but also ‘how you will charge’, which includes your offer bundles and price metric.
Put in place the proper systems to track your success, then iterate. Review your pricing regularly, especially if your sales cycles are short. If done well, pricing can be the key to helping you align value with your customers’ willingness to pay.
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