Happy Thursday!
I am very excited to be launching Notes from the Pricing Underground today and frankly, a bit blown away by the support you’ve all given me thus far. Six years of helping SaaS & subscription operators with pricing has left me a) regularly feeling like the dumbest guy in the room with my colleagues and b) with some fascinating takeaways worthy of sharing with the world.
As a refresher, I’ll be using this newsletter to do primarily two things:
Aggregate pricing challenges, questions, & trends from SaaS leaders around the world.
Dive deep into a select set of topics identified in point #1.
Before we get to today’s post, here’s what’s brewing on the pricing underground:
Out of 32 pricing conversations since April 1st, I was asked about…
Freemium ⇒ 5 times
Hybrid Pricing* ⇒ 6 times
Usage-based Pricing ⇒ 3 times
Increasing Prices** ⇒ 12 times
Packaging ⇒ 17 times (!)
Changing value metrics ⇒ 4 times
My barking dog ⇒ 1 time
*Hybrid pricing continues to look like the BAYC (circa July ‘21) of SaaS pricing models. We’re seeing folks across the board (vertical SaaS, creator economy, AI, and B2C) interested in a revenue model that is predictable and also scales with value. More to come on this I’m sure.
**More folks are looking to pricing as one of the first steps to improve margins & increase profitability. Generally, the “we’re undercharging” hypothesis is driven down from the board/investors/etc and falls on product and marketing to nail the price points. I’ll likely write more about this in the coming weeks as well.
Today we’re going to keep it fairly light and cover a topic that only felt right for my editorial debut: the 10 most common SaaS pricing pitfalls (according to me).
All of these pitfalls will get their own deep dive so if the below overview doesn’t scratch the itch, stay tuned for more.
With that, let’s dive in.
Common Pitfall #1: Undercharging.
If you think you can increase your prices, you probably can.
Nice, right?
Yes, there’s value in decreasing prices sometimes as adoption may increase. But keep in mind, price sensitivity exists on a spectrum (see an Inverse Demand Curve below).
If your prices are too high, you’ll likely lose adoption. If your prices are too low, your buyers may question the quality of your product and not sign up.
I call this the Fine Wine Complex (better name pending but you get the gist of it - the uneducated wine drinkers of the world, like me, will bypass an affordable, high-value wine at dinner in favor of its triple-digit counterpart simply because price isn’t just tied to value; sometimes it denotes value).
A large portion of SaaS companies probably should just increase their prices.
Common Pitfall #2: Underutilizing add-ons.
We (Price Intelligently) tend to think about feature packaging on a 2x2 matrix, where the x-axis represents the relative value of features and the y-axis represents willingness to pay.
This matrix helps us determine which features are the tickets to the concert vs. which features are the VIP passes. Some have to be given away upfront to get folks to sign up, others will be used strategically to maximize ARPU & NDR.
But the real kicker: leveraging add-ons often leads to an increase in retention. A successful add-on won’t be used by 65% of your customers. This means if you mistakenly give them away in an entry-level tier, 65% of your users may ask themselves “Why am I subscribing to this package when I’m not even using the full set of features?”
So, think of add-ons as a tool for minimizing churn while also boosting expansionary revenue.
Common Pitfall #3: Choosing the wrong value metric.
It may be a crime to condense this one into less than 100 words but I’ll give it a try.
Your value metric may be the most important pricing decision you make.
If you choose the wrong one, you risk leaving lots of money on the table.
If you’re finding yourself saying “We’ve got 200 employee companies paying the same as 2,000 employee companies”, you may have a value metric problem on your hands.
By simply charging on outcomes rather than something like ‘users’, you’ll likely see a noticeable improvement to NDR.
Common Pitfall #4: Waiting too long to make changes.
I have good news and bad news. I’ll start with the bad news.
B2B willingness to pay for core features in SaaS is declining. Pretty rapidly. That salesforce integration you were able to sell as a $500 add-on 5 years ago? Now it’s a table-stakes feature.
The good news: most of your competitors aren’t updating their pricing strategies to account for this. If you simply make some sort of adjustment to your monetization strategy every 3-6 months (ideally based on your buyers’ ascription of value) — e.g. changing value metrics, value metric levels, packages, localizing, etc — you will likely see an increase in ARPU over time.
If you don’t touch your pricing/packaging strategy, ARPU will likely remain stagnant.
Common Pitfall #5: Not localizing.
We’ll keep this one short and sweet. Consumers in different regions have a wide variance of willingness to pay:
Because of that, localizing is an important tool to keep in your back pocket. When you localize effectively, ARPU grows pretty significantly:
Common Pitfall #6: Not having a pricing committee.
Pricing can be… how should we put this.. political, at times.
Almost like your VP of Product is building a wall around every new feature and your VP of Sales wants to open the borders to everyone. You are not alone.
Few great decisions came about via consensus. Most start as debate. Because of this, you should have a committee that meets at least once per quarter (more to come on this topic in a few weeks). Try using this framework to structure your committee:
Common Pitfall #7: Giving away too much of the house upfront.
We hear a common hypothesis from SaaS leaders: “If we showcase most of the value in our entry-level tiers, we’ll maximize user adoption.”
This may be true! But it has consequences down the road.
First, most of your buyers don’t need all of your bells & whistles.
Second, if you give away too much upfront, you’ll likely find it tricky to further monetize existing customers (unless you have a near-perfect pricing model and/or value metric).
The best SaaS companies have roughly 30% of revenue coming from expansions. This is a nearly impossible metric to hit if you’re giving away most of your prized features in entry-level plans.
Common Pitfall #8: Not defining a success metric.
If you’re still thinking about pricing solely as a revenue-generating strategy in 2023, you may be missing the mark.
Effective pricing allows you to decrease costs & risk, increase NDR, retention, etc. Too many companies run pricing experiments and either don’t define their target outcomes/success metrics or look only at the top-line revenue implications to judge the success or failure.
There are likely three things your board cares about right now:
Decreasing costs
Decreasing risk
Increasing revenue
Pricing lives at the center of all three.
Common Pitfall #9: Pricing based on competitors.
Competitive-based pricing has two primary flaws:
It assumes you’ve built the same product as your competitors. This is probably (and hopefully) not true.
It assumes your competitors have done their pricing homework. From what I’ve seen over the years, this is almost certainly not true.
You’re better off taking a value-based approach and using current customer & target buyer data to influence your monetization strategy in the long run while, of course, being competitive-cognizant throughout.
Common Pitfall #10: Not migrating existing customers after pricing changes.
Let’s look at two sides of this equation: you and your buyer.
Depending on the size of your target audience, if you aren’t migrating customers to new prices, the law of compounding returns will be working against you. Think about all of the work that led you to $1m ARR. And $10m ARR. Going to $100m ARR and beyond relies on the idea of volume and compounding returns given the beauty of the recurring revenue model. Small tweaks to pricing have a major impact on growth. And you’re grossly limiting your growth potential by only allowing those changes to be reflected in net new customers.
Now, from your buyer’s perspective. If you are constantly adding value to your product without adjusting prices, what you’re really doing is training your buyer to expect more and more for less. This is problematic, mostly because these types of users are more likely to churn in the long run as they're not seeing (or understanding) the value realized in this two-sided relationship.
See you in 2 weeks!
-Evan
Great first issue. The add-on part made me think. We don't have enough ICPs available to run a survey. And our product also already exists for some time now. There are two interesting cases now
1. We have a feature as part of all plans today which we are considering making an add-on
2. We have a new set of features launched that is an add-on right now
For 1 I guess it's rather straight-forward, right? We measure usage, map it to existing customer segments. And if it's only used by a certain segment or in a certain plan, we only include it there.
But how do we approach 2? Include it in every plan, measure it and then decide then on packaging?
Because we could
- re-package the features that are currently bundled as add-on, include some on higher plans, some on all plans
- or make only some of the features an actual add-on
But how do we know?