How pricing strategy helps shape your entire business model
Main illustration: Daye Kim
The SaaS industry is constantly evolving, and for many companies in the space, that means having to evolve their business model.
However, that doesn’t necessarily mean a “pivot”, but more often the evolution is a shifting business model as the company scales and the user base grows and changes. The classic example sees a company move from niche startup to mainstream scale-up, but it can also see companies hone their product-market fit by focusing on a more specialized, and yet more lucrative, user base.
No matter the specifics of how your company adapts and grows, it’s crucial to be aware of how your pricing strategy relates to other aspects of your business. It’s all too easy to make the mistake of adopting a pricing model that is ill-suited to other aspects of your company, such as the go-to-market strategy or sales strategy.
“Think of pricing along a continuum with self-service pricing at one end and enterprise at the other”
As you scale and evolve your business, there are a few key questions to ask as you determine your pricing strategy:
- Do you anchor off competitors (if any exist) or substitutes?
- How intense and frequent is the pain your application addresses?
- How much value does the application offer?
- Is the value ongoing or ad hoc?
- How long is the likely sales cycle (is it a complex sale)?
- Do you have a pricing page on your site or do you make it up on the fly?
- Can one person buy via a credit card or will multiple stakeholders need to be involved?
One approach to price setting is to think of pricing along a continuum with self-service pricing at one end of the spectrum (such as applications costing under $50/month, allowing customers to purchase with a credit card) through to enterprise pricing (such as applications costing $50-100,000 a year) at the other end.
Determining where you are on the spectrum leads to the sort of customers you plan to target, your route to market and the most effective sales process.
Here, we examine the pricing strategy continuum, and how the different price points relate to all aspects of your business model.
Entry level application (<$5,000 p.a.)
Gaining new customers
If your average order value is less than $5,000 a year, your application ideally needs to be a “self-service” model, where your customer signs up themselves with “zero touch” from the company. At this level, your customer acquisition strategy needs to primarily be an organic one, based on inbound marketing, such as creating quality content that educates the market and attracts prospects to your site.
The key here is to keep the cost of customer acquisition down. If possible, incentivize visitors to pay up front for the year given the positive cash flow implications and churn reduction benefits. You also need to encourage word-of-mouth virality based on the strength of your product.
Goal of website
At this level, you want to encourage users to experience the application themselves and to see the benefits first-hand. You also need to ensure you have a smooth onboarding process where users obtain value early.
“Avoid very low price points, as the cost to acquire and serve will likely make your business model uneconomic in the short term”
Many of these users will likely be small and medium-sized businesses (SMBs) and thus will be numerous in terms of the addressable market, and relatively easy to market to. They will be time-pressed, but at this price point, decision making will often be swift and they will be less worried about your brand equity (or lack of it) at this stage.
Purchase process
You’ll want to support a “buy now” option ensuring you can capture credit cards on the site. However, you will want to avoid very low price points, as the cost to acquire and serve will likely make your business model uneconomic in the short term. You need to ensure enough value is being delivered to enable you to push the price up to a level that also provides sufficient margin even if a customer churns after a year.
Post-purchase, you will want to incentivize reviews, as review sites play a key part in purchase decision making as markets mature.
Managing your support
Minimizing in-person support is crucial given the tight margins, so detailed online support will be paramount as it enables people to self-serve without needing to actually contact support.
Examples of companies that do this well include Squarespace and Intercom, who offer extensive online help material in order to address as many queries as possible (and Intercom Articles is a leading tool for building such a knowledge base or help center.)
“Make sure your onboarding is straightforward and that the application is as intuitive as possible”
Any factors driving support queries need to be eradicated quickly as you scale-up, otherwise your churn rate will increase and the margin erosion on handling in-person support will hurt your unit economics hard.
Summary
If your application is a self-service one, focus on content and inbound marketing as your primary source of leads. On the whole, minimize time-intensive interactions as much as possible, so make sure your onboarding is straightforward and that the application is as intuitive as possible. You’ll also want to ensure your online support is of a high enough standard to address the most common issues that come up.
The middle ground ($5,000 p.a. – $100,000 p.a.)
Gaining new customers
Many SaaS businesses occupy this zone, but a key danger of this price range is that the cost of customer acquisition can easily exceed the lifetime value, and thus the business model may not be viable in the long run.
On the flip side, these deer (as leading US VC Mark Suster refers to them) are more plentiful and easier to land than enterprise clients, and are thus likely to represent fertile grounds for prospecting into in the early days.
At this price point, social proof will be important (in the guise of logos, case studies and testimonials). If you need face-to-face meetings to sell, have long sales cycles, and have limited upselling opportunities, you will need to keep a close eye on the unit economics to ensure you can scale profitably.
Goal of website
A primary goal of your website will be to generate good quality marketing qualified leads (MQLs). Consider adopting live chat and automated custom bots to identify, qualify and nurture these MQLs to the point where they are willing to have a conversation. Initially, this is likely to be a discovery call as a means to validate their pain points and to assess whether your application can meet their needs.
“You need to have a clear strategy on how to capture these visitors as leads”
In the early days, paid acquisition is likely to form a large part of the lead generation process. Once on your site, you need to have a clear strategy on how to capture these visitors as leads (often via the provision of valuable gated content).
Keeping the customer acquisition cost low is crucial, which means minimal marketing spend and the removal of people/touchpoints from the sales process. Visitors just beginning their buyer journey also need to be catered for with getting started guides and case studies which outline the key benefits of your application. It is thus worth thinking carefully about the primary and secondary calls-to-action that you want to optimize for.
Derisking the purchase decision will be key, with social proof such as logos, testimonials and case studies being particularly important. Review sites such as Capterra, G2, Reviews.io and the ToolTester Network are becoming increasingly important for SaaS companies in this price range, so baking in a strong review loop is important (in some situations adding a review into a price negotiation is a good approach to take).
Purchase process
The price point is likely to be above the sign-off threshold of most decision makers. A “buy-now” credit card option is also unlikely, apart for some price points at the lower end of the spectrum. Perhaps you will need to rely on purchase orders and invoices, which adds friction to the process and will also introduce credit risk. Given most SaaS businesses cater for international clients, currency fluctuations and foreign exchange risk will also need to be managed carefully.
Managing your support
There is quite a span between $5,000 a year and $100,000 a year, but there are still some common requirements. You are unlikely to get away with self-service support, so live chat is likely to be an important component of your support set-up.
“The growing use of automation in supporting your customers is also an important consideration.”
The goal is to ensure the time spent on in-person support is kept to a minimum while investing heavily in customer success so you can look to reduce churn through stronger adaption.
The growing use of automation in supporting your customers is also an important consideration. Solutions such as Intercom’s Resolution Bot are transforming this space and the economics of providing quality support at scale is changing fast.
At this price point, the need for live support means you must consider geographic support coverage, as trying to serve a US customer base from the UK or Ireland, say, is likely to prove problematic.
Summary
The middle ground is an attractive area for SaaS companies to focus on. The size of the prize and the number of prospects is sufficiently large to warrant attention.
However, at the lower end of the tier in particular, the danger is that the unit economics can easily get out of kilter and costs can spiral when set against the lifetime value of the application.
3. Enterprise Level ($100,000 +)
Gaining new customers
For those applications priced at more than $100,000 a year, You are essentially “elephant hunting”, as Suster describes these larger targets. That means you are in field sales territory, where high-touch sales are needed, long sales cycles are the norm, and a customer success manager is needed to ensure the product is adopted and that ongoing value is obtained.
Ideally, initial engagement is a hybrid model of inbound marketing and communication over email and phone. At this level, margins can be high enough to justify any face-to-face sales efforts (and given the price point, remote sales are unlikely). Paid marketing activity will be important here, as will brand equity.
“The enterprise client may look to shape product development with bespoke feature requests”
However, prospecting in this pool is a high-risk strategy for SaaS startups, not least because the sales cycle is likely to be long and the “elephant” will often have significant leverage if they chose to exercise it. The enterprise client may look to shape product development with bespoke feature requests, or require SLA’s which go over and above your typical coverage. Targeting customers of this size too early in your company’s journey runs the risk of “overfitting” your product and its features to the very specific needs of a single customer, leaving you beholden to their demands and ill-suited to the needs of other prospective customers.
Goal of website
If you do decide to target these elephants, your website will ideally need to focus on the following:
- Provide evidence of similar clients from the same industry vertical in the guise of social proof (everything from logos to testimonials to case studies).
- Cater for the different buyer personas – some will be focused on ROI (finance), others on security, yet others on the feature set.
- Ensure you offer a mix of content that addresses the needs of these different groups so as to ensure that all the participants in the purchase decision have the information they need to proceed.
Of course, the content burden is significant and thus is more appropriate for well-funded startups. Generating brand awareness will also be important so exhibiting at industry events which your target personas or ideal customer profiles are likely to be in attendance is a sensible strategy.
Purchase process
The key characteristic of elephants is that multiple stakeholders will probably be involved in the purchase decision, so the sales team will need to obtain real clarity on how the internal purchase process works at the target client.
“A primary role of the sales manager will be to understand how the prospect buys, and to help the prospect navigate the internal hurdles to get to a successful outcome”
A primary role of the sales manager will be to understand how the prospect buys, and to help the prospect navigate the internal hurdles to get to a successful outcome. Be prepared to deal with a procurement team, and they are likely to want to negotiate some elements of the deal, such as the overall amount or the terms of payment.
Managing your support
If these elephants bring the numbers, the expectation will be that support will be first class, and you will need to ensure your customer support team is sufficiently large and well-trained. Similarly, depending on geographies you may have to extend your support coverage hours to ensure real-time coverage.
Summary
Chasing elephants is a highly risky strategy for SaaS startups. Unless you are particularly well funded, the cost of acquisition can be excessive. They may have deep pockets but they are difficult to land, and once landed their requirements will impact all areas of the business.
A better strategy is often to focus on the more bountiful prospects at a lower part the price continuum, and move upstream once your feature set is more mature and your sales model is well established.
Understand the complex interrelationships
This overview of the pricing continuum should make clear that your pricing strategy cannot be decided in isolation, as the knock-on consequences of each price point are considerable. Pricing needs to be tightly aligned with the value generated, but also considered within a wider context of decisions about customers to be served and the routes to market to access them.
Recognizing the inherent risks at the different tiers will help ensure that you position every part of your organization as you navigate the different steps of the pricing continuum.
“The constant evolution of the SaaS marketplace means you are likely to be regularly reassessing your place on the price continuum”
For instance, for many startups the journey needs to start at the entry-level end of the spectrum, moving upmarket over a period of years. If you try and start with enterprise pricing right off the bat, be aware that long sales cycles and expenses associated with field sales can really stress cash, so unless you have deep pockets you should look to move upstream over a period of time.
Getting some early wins, so you can add some logos to your site, learn from usage and add more compelling features over time, will enable you to move upstream as your solution, the company and indeed the market matures.
Finally, determining where you belong on that continuum is rarely “final” – the constant evolution of the SaaS marketplace means you are likely to be regularly reassessing your place on the price continuum – after all, a natural pricing point in the early days of your company is unlikely to stay that way as you grow.
That’s why it’s so important to be aware of the complex interrelationship between all the different elements of your business – successfully navigating the journey along the pricing spectrum depends on thoroughly understanding how your pricing strategy relates to your sales, marketing and support strategies as well as your product roadmap.
