[PDF]The Anatomy of SaaS Pricing Strategy

^ Price

Intelligently



The Anatomy of

SaaS

PRICING

STRATEGY




Contents


(03) CHAPTER 1: WHY YOU NEED A PRICING STRATEGY

Every SaaS company is different but almost every single one makes a mistake
that puts the company in jeopardy They don't understand their pricing.


(17) CHAPTER 2: WHY VALUE BASED PRICING IS THE BEST PRICING STRATEGY

How do you decide the price of your product?

(28) CHAPTER 3: THE IMPORTANCE OF QUANTIFIED BUYER PERSONAS

Most companies are sure they know their customers. But the truth is that majority
of businesses have no idea who their customers really are. Even worse, they are
not putting real effort into finding out.

(52) CHAPTER 4: USING QUANTIFIED BUYER PERSONAS AS PART OF YOUR
PRICING PROCESS

If you are already quantifying your buyer personas, or used the previous section
as a jump-off point for learning more about your customers, then you are off to a
great start with your SaaS business.

(73) CHAPTER 5: HOW TO FIND THE RIGHT VALUE METRIC FOR YOUR BUSINESS

In SaaS pricing, you've got to decide not only how much to charge, but what
you're charging for. This is your value metric.

( 91 ) CHAPTER 6: HOW YOUR COMPANY CAN BUILD A PRICING MACHINE

Every company already has access to a ton of data to build the best pricing for
their company. Elowever, implementing a great strategy is another challenge
altogether.

(l05) CHAPTER 7: DESIGNING YOUR PRICING PAGE

In the first chapter of SaaS DNA, we looked at The Anatomy of a SaaS Marketing
Site to help you build the most important page on your SaaS site: the pricing page.


(Q) CHAPTER 8: WHY YOU SHOULDN'T A/B TEST YOUR PRICES

A/B testing your pricing page to figure out the optimum amount to charge for
your product sounds great in theory.


CHAPTER 9: WHY LOCALIZING YOUR PRICING INCREASES YOUR GROWTH


Choosing the right price point is key to appealing to your target customers, but
if you are just reaching out to your local audience you are missing out on one of
the greatest parts of SaaS— the fact that it is global


(m) CHAPTER 10: WHY YOU SHOULD BE SMART ABOUT DISCOUNTING

To get people into their product, many SaaS companies turn to discounts to increase
acquisition. They think that they can raise prices later, once these customers see the
value in the product. But by discounting, you have already hurt that value.


2


CHAPTER ONE


WHY YOU NEED A
PRICING STRATEGY

Every SaaS company is different, but almost every single one makes
a mistake that puts the company in jeopardy.

They don't understand their pricing .


Companies pour blood, sweat, and tears
into making a great product. They spend
countless hours and scarce resources to
bring in new customers. Yet most SaaS
companies don't know what they are
worth to their customers or how to best to
communicate this.

If your company doesn't have a pricing
strategy, you don't understand who your
customers are. You have no idea whether
you're driving them away with poorly framed
pricing and packaging system, or missing the
chance to exponentially grow your revenue


with higher but more accurate prices. You're
leaving huge revenues on the table, which
makes you vulnerable to sudden disruptions
that can sink your business.

In theThe Anatomy of SaaS Pricing Strategy,
we'll walk you through creating a pricing
strategy for your business. If you haven't
put thought into your pricing before, this
first chapter will show you why an effective
pricing process is one of the most efficient
levers of growth to maximize value from
each customer.


3



Pricing is the Untapped Growth Lever

When companies think growth, they think customer acquisition.
Yet, pricing is the crucial part of your business, which has the
highest impact on growth.


We studied 10,342 blog posts across
hundreds of SaaS companies and found that
pricing is the most-often overlooked way to
drive growth.

People in SaaS are writing and thinking
about customer acquisition seven
times as often as monetization.


Growth is more revenue, not more customers.
How you monetize those customers is vital.
Yet, out of every 10 blog posts on growth, 7
are focused on acquisition, 2 are centered
on retention, and only 1 is about pricing.


Topics of Blog Posts About Growth



4




Ironically, the frequency with which people
write about each growth lever is inversely
related to its effectiveness in driving growth.
People writeaboutacquisition, retention, and
monetization in that order, but monetization
has the biggest impact on the bottom line,
followed by retention and then acquisition.


In our study of 512 SaaS companies, we
found out that monetization had the largest
impact by far on your bottom line. This could
mean targeting better customer channels,
or raising prices to better fit value.


mpact of improving each growth lever
15 %


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IMPACT OF IMPROVING EACH LEVER BY 1%


Data shows that pricing is:


2x as efficient 4x as efficient

as improving retention in improving as acquisition


By concentrating on pricing, and looking for all possible improvements,
you have the chance to use this most effective lever to maximize your profits.







Pricing's Impact on Efficiency

When you don't optimize your pricing, you're throwing off the math,
which powers the fundamental economics of your business. On
the other hand, pricing is such a great growth opportunity because
optimizing pricing makes a company incredibly more efficient.


In our survey of 96 SaaS companies with
annual recurring revenue (ARR) greater than
$5 million, the companies that adjust their
prices continually exhibited extremely robust
unit economics.

In order to understand whether your unit
economics add up to a profitable business
model, you need to look at the ratio between


two numbers: lifetime value per customer
(LTV) and customer acquisition costs (CAC).
The ratio between these two has to be
greater than 1— otherwise, you're losing
money on each and every new customer.

Companies that don't think about their unit
economics tend to hover in the danger
zone, just above break-even:


Impact on efficiency


LTV/CAC VS. PRICING COMMITMENT

15 %



6


Companies who at least had a yearly review had
a solid foundation for growth. But companies
that made price optimization a continual
focus realized far more lifetime value from
their customers than it cost to acquire them.


A lower ratio means it takes longer to achieve
growth. As CAC spending is upfront while
LTV gets paid over time in SaaS, the weaker
your LTV/CAC ratio, the longer it takes for
each customer to pay back their costs.


Looking at the payback period of each of these options, you
can easily see the difference a continually optimized pricing
strategy has on the growth of a company:


Payback periods for different pricing commitments


LU

3

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LU

>

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$ 7,500

$ 5,000

$ 2,500

$0

-$ 2,500



MONTH


With continual price optimization the LTV/CAC
ratio skyrockets and CAC is paid back almost
immediately. Profitability occurs in the second
month, and the growth trajectory shoots up
from there. Almost immediately, a company in
this scenario would be able to finance more
growth (and more efficient growth).


Rather than throwing money at
customer acquisition, iterations to
pricing can produce huge revenue
gains that means the difference
between a failing company and
exponential growth.


7



Pricing is at the Heart of Your
Entire Business

It's counterintuitive, but because pricing touches on every
single part of your business, it’s often ignored. That’s because
it's at the intersection of marketing, sales, and product— so
nobody in the organization owns it.


The problem this creates is that all of your
marketing, sales, and product have to be
developed with the eventual positioning,
packaging, and pricing of your product in
mind. These three aspects are inextricably


linked. If we look at an ideal pricing page,
such as Wistia's, we can see how each of
these come together to demonstrate the
company's core value to each buyer persona.



WISTIA'S PRICING PAGE


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Positioning










Here we can see all three aspects
of a pricing strategy at work:

Positioning

Aligning your product to attract the
right customers. This is along the
horizontal axis. Wistia is positioning
itself to attract a wide range of possible
customers, from small one-person
shops all the way to big enterprises, and
segments them by buyer persona.

Packaging

Having the right feature mix in your plans.
Videos are the value metric for Wistia
and how it separates different packaging
options. This allows companies to start
small, but grow over time.

© Pricing

Finding the right price points that
represent value and customers are willing
to pay. The pricing on the page reflects
the value metric (the number of videos
included in the plan). Wistia offers a free
tier to convert interested customers, but
then the pricing follows a logical pattern
of more videos = more cost.


You can also see a logical transition for users
from one plan to the next. Starting out on
the small plan and moving progressively up
in scale. Changing one alters the others, and
your pricing strategy is a delicate balance of
all three, one that it is imperative that you
get right. Keeping the Premium plan open-
ended leaves room for any customer too big
for the standard pricing.

Fundamentally, this is why your pricing page
is the most important page on your entire
site. Every other page on your site funnels
to this page, which ties it all together-
positioning, packaging, and pricing— and
sets the prospect up to buy


Determining each of these and
the correct pricing strategy
doesn't happen by accident. To
do it right, you need to get input
from all members of your team.


9


Bringing the Different Teams in your Company Together


Because pricing touches on all parts of your
business, all parts of your business have
to touch on pricing. To get pricing right,
you need input from every group in your
company.


In our survey of over 270 SaaS
businesses, we found that only
17 % defined their pricing strategy
as a team, with input from four
key departments.


Building a pricing committee from these core departments
helps make sure that people are always working on pricing.


Marketing

The marketing department understands
the buyer personas you are targeting,
so they should be particularly involved
with positioning. In turn, this helps
them identify the messaging that
resonates with the target market, and
communicate any pricing changes.

Management

It should be the job of the executives at
the company, from the CEO down, to
coordinate the pricing strategy, bringing
in knowledge and information from
each of these departments to arrive at a
pricing decision.


Sales

Your pricing needs to convert
customers and close sales. The sales
team can help you walk through
common questions and objections.
Being familiar with your pricing helps
them develop better pitches and more
accurate sales forecasts, which deeply
impact your revenue and final profits.

Product

Your product developers are the people
that build the features based on their
deep knowledge of what users need.
This contributes to the packaging of
your product.


10


Here , each of the departments can own
one of the three aspects of pricing. As
you grow and take on Finance and Ops
roles within your company these also
need to be included to make sure that the
pricing strategy is optimized for profit and
growth.

One of these departmental leaders should
act as coordinator. In particular, marketing is
constantly aware of the coordinated efforts
of product, sales, and marketing to attract just
the right customers, so they are going to be
the most absorbed in this process.

Finally, the main decision maker should be
the CEO. She should be working in tandem
with the coordinator to continually optimize
pricing, as is needed for exceptional growth.

You need allot these people involved because
your company exists solely to make money.
It is fundamental that everyone understands
this and is interested in getting the most value
to the customer, but also the most value
to the company. Pricing is vital to the unit
economics that underpin a company and
support its growth.

And because of the way pricing feeds back into
and invigorates every department, you'll build
and sell better, and that's a huge competitive
advantage.


Your Pricing
Committee







Pricing is the Foundation of
Your Unit Economics


Pricing optimizes for growth and is so intrinsic to
your business because of its ability to drastically
improve the foundational numbers of your
business: your unit economics.


Increasing your customer lifetime value (LTV)
and decreasing your customer acquisition
costs (CAC) are fundamental to achieving
high growth as a business, and the ratio
of these, LTV/CAC, is the math your entire
business is based upon.

CAC is the cost of your sales and
marketing efforts to acquire a new

customer.



CAC LTV

(CUSTOMER (LIFETIME

AQUISITION VALUE)

COST)


12




Your CAC is the sum of your
marketing and sales spending across
all channels divided by the number
of new customers acquired.

You can see how CAC is affected by an
efficient pricing strategy. An optimized pricing
strategy leads to an optimized funnel If you
position, package and price effectively, then a
significant part of your sales and marketing job


LTV is how much you will earn
from each customer over the time
they spend with your product.

At a basic level, that means dividing your
monthly average revenue per user (ARPU)
by the rate of customer churn for that same
time. Dividing your ARPU by the rate of chum
gives you their lifetime value.

With good pricing you can both raise
ARPU and reduce churn. Raising ARPU


Based on the experiences of successful
(and unsuccessful) SaaS companies, you
need an LTV/CAC ratio of at least 3:1 to run
a successful business. But with continual
pricing optimization, you can push that
ratio to 11:1 and beyond. This is because


Equation for

Customer Acquisition Cost (CAC)

TOTAL COST
OF SALES & MARKETING

CAC =

# OF CUSTOMERS
ACQUIRED

is already done. Without this pricing strategy
it's more expensive to acquire customers as
you will be attracting the wrong prospects
that don't fit with your value.


Equation for Lifetime Value (LTV)

ARPU

LTV =

CHURN RATE

comes through upselling and cross-selling
customers as they scale up with your value
metric. Reducing churn comes from giving
customers true value, which they will get if
the positioning is precise. Achieving an LTV/
CAC ratio of >1 is good, but not enough. You
need a substantially higher LTV than CAC,
because otherwise you're not going to grow.


with effective pricing, you can reduce
your CAC through better positioning and
packaging targeting ideal customers, and
increase LTV through higher prices and
better retention. This leads to increased
growth and increased revenues.


13


CASE STUDY


^StatusPage.io


Here is how StatusPage, the service status communication
platform, optimized pricing and improved their unit economics
and growth altogether.


They initially had just two plans,
but as they got to know their
customers better, they realized that
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