SaaS pricing primer

Last week, I wrote about the need to talk more about value, not just price.

I hate to say it, but there is neither art nor science to pricing. Just elbow grease and arithmetic.

I had some interesting reactions, let me tell you. I had some lovely ‘louder for the people at the back’ messages. I had a few hilarious stories of outlandish cost structures provided by vendors with shameless swagger – ranging from the one-line figure with no justification to the multi-page pricing manual with equations and calculations galore, both boiling down to an arbitrary number they feel they can get away with and enough obfuscation to flex as needed.

I also had a bunch of requests to write a pricing guide, a this is how you don’t do it piece. And I am tempted to oblige next week: trilogies are all the rage after all, right?

And I got some slightly defensive messages, if you don’t mind me saying so, friends. And this week we are going to stay with that defensiveness and discomfort.

I was expecting messages that tell me at great length how ‘we already do the thing you say we do not do’ and how I am being unfair. Surprisingly, those were very thin on the ground. What I got a lot of was ‘you don’t understand: this is hard’.

Why, yes.

Yes it is hard. It is meant to be hard. Nobody said it was easy.

But it is hard in the way that learning a language or a new skill is hard. It takes work. Dedication. Practice. Determination. It takes time and patience and effort. But it is imminently doable.

It is not hard in the way that winning an Olympic gold medal or an Oscar is hard: unavailable and unattainable but by the very few.

Pricing your SaaS product properly is hard in that it entails work.

It is achievable. It is within reach for us all. It takes no particular talent or skill. It just needs you to do the work. Go through each step and work your way to an answer. Without skipping any bits or ignoring data that you wish was different.

I hate to say it, but there is neither art nor science to pricing. Just elbow grease and arithmetic. And this is what it looks like:

First, work out your cost to serve. I know. Crazy idea. If you are an established entity, chances are that number is known… sort of. Familiar, albeit opaque. You know what goes out of your coffers every year but not what goes into making that number.

As a start-up, you know what you spend but not in a definitive way as the magic word ‘growth’ hides all manner of sins.

But the reality is, to run a business, to value a business and to price a product, you need to know the answer to the simple and essentially existential question: what does it cost you to exist? What do you spend making and running the thing that you make, sell and run?

You need to know what that number is and what goes into that number because it’s one of your few levers for adjusting your price down if you need to. In fact, it is your only lever.

So: work it out.

Be honest with yourself. Be exact. Be meticulous about updating this number if your cost base inflates or shrinks. There will never be a time when this number isn’t important.

Once you’ve done that or, if you are that way inclined, while you are working that out… you need to benchmark.

What is the competition charging? What is your client paying right now? What’s ‘normal’ as far as your market is concerned and what do they get for their price tag?

How do you rank compared to that?

Are you a budget solution, cheap and cheerful? No frills in functionality or price?

Are you reassuringly expensive? Premium?

Where do you fit into the mental landscape your clients have when they look at your solution? How does your product fit? Not just the price tag. The service too. Are you charging the price of a Bentley for a fixie bike? Are you undercutting? Are you competitive?

Work out where your product sits in terms of functionality and service and what those around you charge because you need to be aware of how you will play in-market.

In the meantime, like a TV chef, you will have worked out your cost to serve. And now you know where it plays in the market.

Do you need to flex? Are you way off the scale of what others are charging and clients are paying?

If yes, you may need to think and work on your cost base before you go any further.

If your number isn’t off the page, then you can proceed. Because of course you are not done.

You take that number and bake in margin: that needs to reflect market volatility, sales cycle length and conversion rates for your vertical (if it’s enterprise sales you will be losing mostly, so allow for how long that takes).

Then add your profit margin. Because that’s how business works. You work out your percentage profit margin at this stage of the process. You don’t start there.

Did you hear that tech founders? You. Do. Not. Start. There.

Then you road-test.

Once you’ve worked out a number – not plucked out of thin air, but worked out – you take that number and the homework behind it and go out to actual buyers and potential customers and run your pricing by them. First friendlies. Then focus groups. Then early sales efforts.

You road-test and listen to the feedback and reactions. You can road-test at any and every stage of this process, by the way. You need to make sure you don’t exhaust and annoy your potential buyers, but if you have people willing to give feedback, take it as early in the process as humanly possible and keep seeking it.

If you are lucky, you may even score an actual sale through this process, and that feels great, although (take it from me as it happened to me in a past life) it may be a very misleading data point: the fact that someone was willing to pay what you originally thought to ask doesn’t mean anyone else will be willing to do the same. So, road-test with enough customers to have a meaningful sense of whether your pricing shocks, outrages or startles them.

Are you too expensive, too cheap, just right like the bear’s porridge?

Listen to the feedback and reflect. Do you need to adjust? Is there room to play around, charge more, tweak a service?

Do you need to look at operating costs to reduce your price or do you need to work on your value prop articulation?

Listen. Reflect. Determine what you need to do in order to get it right then do that.

We are almost there. But you are not done. And if you are thinking, “I have worked in this space before, I know instinctively what to charge, I don’t need to do all this work,” then all I am going to say is… come back next week when we will talk about how not to do it and tell me if you see yourself in those stories. For now, if you’ve done the work, there is one last step to take.

Make sure your salespeople understand your pricing: that they understand how the number works, why it is what it is and where the flex is. Where the value is. Where they can play with it and where they can’t.

Make it easy for your clients to understand, also.

Adjust if needed. People are less willing than ever to just accept a number the way we used to in the past.

I remember receiving a 16-page document from a vendor once that showed how volume-based pricing worked. Did I even read it? Did I just.

Did I learn anything from reading it? Not on your life.

But it was acceptable then. It is less acceptable with every passing day.

So. Make sure your salespeople understand your pricing, so they can explain it when challenged by clients.

In fact, practice explaining and defending your pricing the way you practice your demos and sales pitches.

Practice your answers: what goes into the price, what you get for it, how it compares to your competitors and above all, why your client should pay it.

That’s it. These are the steps. No art. No science. Some methodical work and you are done.

Or maybe not. There is one last thing, if you care to go all the way.

You see, I have been in more sales processes than I care to remember. On both sides of the table. And the unspoken truth of it all is that salespeople who know their product is overpriced can’t hide that knowledge fully. Not really.

It’s there in their awkward answers, the willingness to throw in sweeteners. The silent plea of ‘give me a longer contract and I will flex all the things to give you greater value, customer dear’.

So.

Spare yourselves: when you have done the work and come up with a price and a pitch and a narrative on why your service is worth all this and not just costs all this… pause and think. In your heart of hearts: do you believe your product is worth what you are asking for, or are you hoping to get lucky? Lucky in that someone will agree to pay the inflated price tag or lucky in that an investor will fund your unsustainable price point. It almost doesn’t matter which, they both end up in the same place. Unsustainability.

Because if fake it till you make it and getting away with it are part of the pricing strategy, then… you may fool some of the people for some of the time, but before long, you will have to go back and do this work. When your funding or your luck runs out.

You will need to work out your cost to serve and market comparatives and value drivers.

You will need to get market feedback and explain your value drivers.

You will need to do this eventually.

And maybe you can get away with not doing it for a while and that seems appealing. But just remember that by the time you get it wrong, go back, work it out and return, the clients may no longer be listening. Not to you, anyway.

#LedaWrites

Leda Glyptis is FinTech Futures’ resident thought provocateur – she leads, writes on, lives and breathes transformation and digital disruption.

She is a recovering banker, lapsed academic and long-term resident of the banking ecosystem. 

Leda is also a published author – her first book, Bankers Like Us: Dispatches from an Industry in Transition, is available to order here.

All opinions are her own. You can’t have them – but you are welcome to debate and comment!

Follow Leda on X @LedaGlyptis and LinkedIn.