Saturday, August 30, 2014

How to Price a SaaS Product




Our free BuzzSumo product has received a lot of positive feedback and encouraged us to spend the last 6 months developing a Pro version for content marketers. We are now fast approaching the time to launch our Pro product and that means we need to decide on pricing. We are conscious pricing is arguably one of the most important decisions facing new businesses. Pricing can make or break a company. In the spirit of openness I have shared here some of our thinking on pricing and some of the considerations facing all SaaS products.

Should you have a free version?

Many SaaS entrepreneurs argue that offering freemium or low-cost subscription plans is the best way to go for new products. A free version is arguably the easiest way for a SaaS business to get customers to test a product and share with their friends. What can be easier than free, right?

The thinking is that customers need to experience the product before they will pay and that once they see how wonderful your product is they will choose a full paid version. Much the same philosophy is behind free trial periods and this is a commonly accepted strategy.

However, Josh Pigford of PopSurvey has written about how dropping his company’s freemium plan and doubling its prices helped them grow revenues by 40 percent in just one month. Josh believes that this forced prospective customers to do more research before they signed up which allowed them to attract a higher quality batch of educated customers whose expectations better align with what PopSurvey’s product delivers. This worked for PopSurvey as they were not a mass survey tool like SurveyMonkey, they target a market which has higher expectations from a survey tool. In this case you can see that a free version may not work as well.

For BuzzSumo we have different target segments we believe that being able to quickly and easily search for the most shared content by topic, domain or author has value to almost everyone. We also know that professional content marketers and agencies have more sophisticated requirements in terms of analysis, outreach and monitoring. The focus of our work has been to go beyond search results to provide real data driven insights and tools that will help content marketers improve the reach and impact of their content.

Price on Value

Many people price on the basis of costs plus a margin. However, whilst costs are relevant the key is to determine the value of your product to your different customers. The buyer is not interested in your costs so whether your costs are above or below the value to the customer is not relevant to them, albeit very relevant to you as a business.

The key is determining value and once you start to do this you may quickly see that value varies by customer groups.

Tien Anh Nguyen of Open View argues the price of a product needs to be consistent with its value in the following aspects:
  • the value that your target customers will realize by using the product or service in the intended use case, compared to the case where they do not have a similar product or service 
  • the value that your target customers can perceive and are used to measuring or (even better) quantifying 
  • the value is represented in measures or metrics that the customers are familiar with and that they believe are important 
In the case of BuzzSumo the customer may realize value may from:
  • the more efficient use of time in researching content that resonates with audiences 
  • the value of the content insights in planning more effective content strategies 
  • ease of monitoring new content through alerts by domain, topic or author 
  • speeding up content curation by finding popular content 
  • saving time in finding influencers and amplification opportunities 
  • producing content insights reports for their clients 
  • analysing competitor content performance 
Different customers may perceive the value these benefits to be higher or lower depending upon their circumstances. If you are an individual you may value the ability to stay on top of popular content and curate such content. In a small business the value may be the content insights that allow you to improve the performance of your content. In a large agency the saving across the content team may be much more significant.

Once you have determined the elements that drive value can these be represented by metrics that align to the value. In the case of BuzzSumo, the number of users, alerts, searches and results may all represent elements that align to value. Thus a larger agency may derive more value from BuzzSumo since they simply have more users and undertake more activity. Hence, we could for example charge a higher fee for say more users or alerts which would align with the value gained and perceived by a larger agency.

The key to all pricing in my view is to start by understanding the value your product delivers.

One interesting approach to value pricing is Jira which charges more per user as the number of users goes up, not less. This based on the principle that larger organizations will derive more value the more users they have.

Nguyen says “Establishing the value of the product is important because it adds clarity to the pricing model and makes communicating it to the customers a lot easier.... The pricing model needs to speak to the values that customers are familiar with, and ultimately, it needs to be consistent with how the success of the product is measured.”

Having said that prices must be aligned with value, if there are certain activities or elements drive costs then the price must also align with these costs. For example, if say alert monitoring drives costs then you will need a pricing element that is variable and links to the number of alerts a user undertakes. Providing unlimited alerts could mean you make a loss on the product if a customer sets up a high number of alerts. This brings us to pricing structures.

Pricing Structures

A pricing structure uses metrics that align to value and costs and determines how these are used. For example:

Flat rate fees - you may have a flat rate fee which covers all user activity up to say a capped limit such as number of users, alerts or exports

Stepped flat rates - you have flat rates which step up for example level 1 may allow up to 5 users, level 2 may allow up to 10 users, etc., but each fee is a flat rate. These are classically designed to cater for different sizes of customer.

Variable rates - the fee varies according to activity such as say $x per alert or user

Flat and variable - the is a flat rate but an additional variable element fro certain activities

Your pricing structure will be determined by the value and cost drivers and the customer segmentation.

Pricing levels

As we set out at the start your costs are not relevant to the customer, they will be judging the price of a product based on its value. However, of course your pricing needs to ensure your costs are covered.

In order to set pricing levels you need to understand customer reference points, for example competitor products or the costs of doing the task in an alternative way. A customer can position your product and judge its value by comparison to reference points.

Because we have a free product, the reality is that ‘free’ is a reference point i.e. a customer will compare the free product to the price of the paid product and want to be clear it adds sufficient value to warrant paying. Thus it is essential in a freemium model to ensure that many of the drivers of value to larger organizations in particular, are priced in the paid for version.

A key task in all of this pricing consideration is to talk to as many customers as you can to understand what drives value, how else a customer might undertake a task without your tool, and which other products they might use as an alternative.


Further Reading

http://blog.filepicker.io/post/31472601361/how-to-price-lessons-learned-from-our-first-attempt

http://blog.priceintelligently.com/blog/?BBPage=2&Tag=SaaS%20pricing

http://labs.openviewpartners.com/saas-pricing-strategy-raising-prices-key-to-success/

http://www.slideshare.net/kissmetrics/ultimate-guide-to-saas-pricing