Optimizing product pricing depends on multiple factors. You have to scope out your market, research your competition, identify your user, and intimately know their needs and preferences. A product hits the right price bracket when it ticks off all these boxes. We asked the SaaS founders how they arrived at the sweet spot of pricing and how they determined the fundamental value of their product.
Pricing the product is a balancing act and something that you need to constantly revisit. Initially, we offered our app at a lifetime pricing model. At $10 per grade, even though it was one of the more pricey programs on iOS, it was nowhere close to what parents usually spent on books. We were limited by the platform and the perception that “apps are supposed to be free or $0.99”.
We knew our app contained ten times as much content as a book, and after looking at the price versus the value we offer, we decided not to restrict ourselves despite the common perception. This was a huge step, but we knew our users loved our products, and our engagement and retention levels were high. So we tested our hypothesis and we moved to a $10 per month pricing model.
After that switch, we’ve seen significant growth in the last three years. We converted to a SaaS model three years ago and it helps us focus on constantly improving the product. If our users are paying us every month, we have to ensure that they continue to use the product. So, it builds a good product as well as a good business.
We don’t want to do enterprise deals that take three months and are just not fun. The sweet spot for a good lifestyle, a bootstrapped business that doesn’t want to become very large, is around $28 per month, maybe $30 for us. With a few more features, we can perhaps increase the price—that actually translates to $40–$45. If you can get to those paying customers, you have actually built a solid business on top of it. If you can keep your churn low, you would have found that proverbial product-market fit. You would have had a few paying customers who like you; you might be going through word of mouth, maybe some organic channel, social media. You haven’t forced the growth, so you know it’s sustainable, and that’s the plan.
In your early days, from 0 to 100, it’s less about testing the value, the exact number. It doesn’t matter if you are charging $100 per user or $300 or $10. That is really a function of the value the customer sees in the product. What is more important in the first stage is the framework: what are you going to price on? There are many different core frameworks that you can price through and getting that framework right is critical. In the early stage, I would not spend too much time overoptimizing on any of these things. Start with the framework and test it out in the market; if it is not working, go back and reiterate. Your customer will have a budget, and you are going to have a product, and it is a function of matching that. Some customers are going to move you forward and some will take you back. If you are building a customer-centric culture, you have to watch out for customers who will take way more out of you than they give back to you. This could be customers calling you at odd hours of the day about a bug that isn’t really your big priority; it could be n number of things or expectations; those could really kill you because you lose a lot of time, focus, and energy. So, I think just being able to believe
BELIEVE THAT YOUR CUSTOMERS ARE AS PRIVILEGED TO BE WORKING WITH YOU AS YOU ARE TO BE WORKING WITH THEM.
– PRUKALPA SANKAR
that your customers are as privileged to be working with you as you are to be working with them and to make it a symbiotic relationship you must pick and partner with the right people in the journey.
Not all SaaS business models are created equal. You cannot just price a product $500k and sell it from India. Similarly, you cannot price a product $10 in a niche market and expect to become a large company. Pricing usually begins with identifying your business model. Are you selling to small businesses, or are you selling to mid-market, or are you selling to enterprises? Having that internal clarity puts you into the right range of what pricing your product should have, but even beyond that, pricing is always driven by some sense of competitive positioning. If you are not the leader, it is incredibly hard for you to price more than the competitors. Given that, in software, there is no such thing as cost-based pricing or even value-based pricing, the only way you can look at things is by having clarity on the position you are in (in the market), which ultimately drives a lot of these pricing decisions.
Here’s one thing we feel strongly about: You should demonstrate confidence in pricing. It’s very appealing to price the product low, and it’s definitely safer to build a cheaper version of a product. That shows a lack of confidence, and it also makes it that much harder to set yourself up for a challenge and build for the premium segment.
the premium segment. I would not like to see “Indian SaaS” being a moniker for products sold to you at a 50 percent discount. I would like it to be just SaaS—something that gets the job done in the best way. That’s how we wanted to position Postman. I think that could be a pitfall, but overall, I just want us to create category-defining products with real value that people are willing to pay for.
After 100–300 customers, we had to determine who we wanted as our next 500–1,000 customers. When you appoint a framework, there is probably only one-third of these customers that you would want as your next 1,000 customers. By the time we were getting to half a million, we had tightened it and increased our prices. We also made a premium version but deliberately priced it in a way that was attractive to only one segment—the other segments realized it was not good for them. By then, the revenue was dipping a little bit because of the premium. This happened because of the high-quality cohort that was being built. We were using the head features, and that took us from half a million to 1 million. And once we narrowed our qualification process, suddenly we went from 1 million to 5 million in five quarters. The leap from 5 million to 10 million happened in four quarters, and so on. This beautiful journey could not have happened if we hadn’t got the Ideal Customer Profile right, some of the product usage matrix right, and not focused on which of our customers was making the best use of our product for its intended purpose.
We literally rewrote our entire product in 2015. We relaunched that product in January 2016 with new pricing. This time we took our pricing up by 10– 20x actually because in this period when we were churning all these numbers and making all these presentations we could clearly see one common thing, that every time VC wanted to get a very big outcome out of this, they had to multiply it by a very large number of restaurants and that was because our pricing was low. I said, “Okay, one thing is very clear from this experiment, that our pricing is low and it is so low that you multiply it by any number and the outcome will remain small.” We probably need to work on the segment or the pricing or the product. I think we worked on all three and that remains one of the major milestones in our journey wherein in 2016 we literally flipped. When we look at the phases of the journey, 2012–16 is one part and 2016–20 is an altogether different part, they are not alike.
PRICING USUALLY BEGINS WITH IDENTIFYING YOUR BUSINESS MODEL.
— PARAS CHOPRA