Getting SaaS pricing right – Part 2

This episode is a continuation of Getting SaaS pricing Part-1 , where Arvind and Varun bump it up a notch. In Part 1, we talked about how to figure out your pricing model in the early stages of product building and the common pitfalls of failing to get pricing iteratively right.

In Part 2, we discuss key features of a pricing plan like Naming of plans, the ideal number of plans to go with, Add-ons, Discounts, cost-based pricing and value-based pricing.

Listen on as the duo share insights from their own experience of having worked for and mentored other companies and of course getting the price right in their own respective startups. Enjoy the show!

Key Takeaways

0:00 – Coming up

3:40 – Benefits of Decoy pricing plan

6:05 – What’s the ideal number of price plans?

8:30 – Open Vs Hidden pricing

14:00 – Contact us to know the pricing

16:56 – Knowing your target audience while selling

21:40 – Naming the Price Plans

26:10 – Deciding on the value metric

28:05 – Land and expand strategy

29:55 – What is value and value-based pricing?

35:43 – Is there room for Add-ons?

42:12 – How often do we change pricing?

44:23 – Open Vs Closed pricing verdict

46:05 – Dishing out Discounts

49:15 – Importance of pricing in NRR

52:00 – Top 3 ways to increase NRR

56:15 – Importance of revenue recognition

59:15 – Varun and Arvind’s Pricing pet peeves

Key Mentions

5:14 Apple

7:16 Mercedes Benz

9:37 SuperOps

19:50 Girish M

21:00 Zoho

23:05 FreshDesk

23:45 Target

24:15 PipeCandy

24:21 Wingman

26:53 Intercom

31:08 Spot Instances

32:20 Spot.io

43:46 ChargeBee

51:00 Manage Engine 

51:21 Cisco

51:44 Zendesk

52:16 Kayako

53:45 Hubspot

54:30 IKEA

56:30 Sequoia

56:42 Price Waterhouse Coopers

57:22 KPMG

58:33 Deloitte

59:29 Zoho

Key Resources

58:50 For Entrepreneurs 

Key Insights

Picking the Right or Ideal Number of Plans

• Have 3 plans plus a decoy plan: Pricing should be simple. 3-4 plans are ideal. Decoy plan is a dummy plan you add with all the features of the most popular plan, with some added stuff like customer support that people can live without. Then people justify buying most popular plan because they’re not buying the most expensive one.
  • Apple’s decoy plan is actually their cheapest one. Works because iPhone is a premium product and nobody wants to buy the lowest tier.
• 
• If you don’t have much competition, keep it simple, e.g. Service Desk Plus has had the same 3 plans for 20 years now.

How do you choose between Open or Hidden/Closed Pricing?

• Open pricing brings trust and is suitable for low-touch models.
  • SuperOps is completely open. Even for enterprise there’s some kind of pricing anchor. Compare that to the market which doesn’t publish the pricing because they sell to customers based on research.
• The Days of filling forms for enterprise prospects are gone. When you see that form you immediately assume it’s going to be $50k/yr and won’t click on that.
• Tech people don’t like talking to sales — they will research in detail on their own and buy. On the other hand, marketers, customer success, and customer support people love talking sales. And business owners might be more open to talking, but they’re busy and it’ll take multiple efforts to get in touch with them.
• If the competition has transparent pricing and you don’t, you’ll get a lot of drop off on your leads.

User friendly Plan Naming

• Don’t reinvent the wheel. Nobody cares if you have a separate name for your plan. Make it simple and easy to remember: Standard / Pro / Enterprise, or Base / Pro / Enterprise, or Small / Medium / Large.

Chargebee plans

• Names can be designed to reinforce the identity of the buyer. E.g. Individual / Team / Growth / Enterprise.
• Names can also be designed to reinforce the company’s narrative. “I personally believe that the first headline on the homepage should have your anchor word, which then flows through your narrative. With the example of Pipe Candy, where I helped in product marketing, the anchor word was “Encyclopedia of Commerce,” and the highest tier plan was called “Commerce.” With Wingman, a revenue accelerator company, the most popular pricing plan was called “Accelerator.”

Value Metrics to iterate your pricing plans

Key questions

1. What is the value metric (thing you charge for)? Per user? Per GB of data? Per use of resources?
   • Price on value not cost, otherwise you might leave a lot on the table.
   • Israeli company Spot that optimized AWS costs: initially charged per seat, but growth skyrocketed when they changed their model to taking a cut of saved costs.
2. Are they going to land and expand?
3. Does your revenue grow with your customer’s business growth?
   • E.g. most of the time an MSP grows by adding clients. That means more devices, so you can charge per device. But clients also add more technicians as they grow, so you can also charge per technician assuming each technician can only manage a limited number of devices.

• Predictability matters. The helpdesk industry initially charged based on the number of tickets, but that’s not predictable and added stress, so they changed it to number of support agents.

Pricing Add-ons Framing

• Add-ons can be helpful in a few scenarios
  1. When most customers don’t want something but the ones that do value it a lot, e.g. for MSPs, core features might be Android / iOS device management, and an add-on might be IOT device management.
  2. For a niche feature that a competitor charges a lot for, but that you can bundle with your core product.
  3. When you don’t have multiple products to cross-sell.
  

  Add-ons below the fold on Front’s pricing page

• Add-ons complicate pricing so should be avoided if possible. Pricing complexity can be a bigger problem than the price itself.
• On the pricing page, UX design for add-ons should be muted.
• Just like feature bloat, be cautious of add-on bloat.

On Offering Discounts

• Discounts should be designed so as to not compromise future revenue.
  • For example, discounting per seat is not future-proof; giving X free seats is.
  • Because it doesn’t affect future revenue, it also allows allows you to do tit-for-tat discounting when a competitor offers a discount.
• Discounts are a part of the industry now and customers expect it, so it’s not something that must be avoided at all costs.

3 Strategies to Increase Your Net Revenue Retention (NRR)

Note: revenue and bookings are not the same. Revenue has to be recognized over time, for example by recognizing your 1/12th your ARR every month.

• In your pricing design, have forcing functions to move customers up when they hit certain caps.
• Charge overages because some people don’t tend to move on but overages keep extracting value. It should be charged at a premium to the next plan to incentivize an upgrade.
• Features that are not available on the customer’s plan should not be hidden in the product – show your customers what they can get by upgrading.

To go deep into the details and figure out how to nail your pricing strategy, watch the full episode out here.