How to price your SaaS product
Emailed on November 6th, 2020 in The Friday Forward
Patrick Campbell penned a fantastic guest post on Lenny Rachitsky's blog on pricing SaaS products you can find here, but here's the skinny.
No matter the business you're in — non-profit, retail, SaaS, DTC, B2B, whatever — you've created some sort of value. You attach a unit of measurement to the value you created: your price. Put simply, your price is the exchange rate on the value you're creating in the world.
The two things that matter for your price are:
Your value metric
Your ideal customer profiles and segments
The Value Metric
A “value metric” is essentially what you charge for. For example: per seat, per 1,000 visits, per CPA, per GB used, per transaction, etc. If you get everything else wrong in pricing, but you get your value metric right, you'll do ok.
Pricing based on a value metric (vs. a tiered monthly fee) is important because it allows you to make sure you're not charging a large customer the same as you'd charge a small customer.
To determine your value metric, think about the ideal essence of value for your product — what value are you directly providing your customer?
In B2B, it's likely going to be money saved, revenue gained, time saved, etc. In DTC, it may be the joy you bring them, fitness achieved, increased efficiency, etc. Obviously, we can't measure all of these, but if you can, and your customer trusts your measurement (meaning you say you saved them $100 and they agree you saved them $100), that’s your value metric.
Most of you won't have a pure value metric, so the next step is to find a proxy for that metric. Take for example HubSpot’s marketing product. Their pure value metric is the amount of revenue their tool drives for your business. This is hard to measure and hard for the customer to agree to in terms of what percentage of credit HubSpot deserves for revenue from a blog post. Proxies for HubSpot are things like the number of contacts, number of visits, number of users, etc.
Determining your customer profiles and segments
When used properly, quantified personas and segments are beautiful tools. The information needs to go beyond just cute names like “Startup Steve," with a cute avatar, and cute meetings where people tell you their targeting "developers".
You need to quantify segments by:
Customer profiles
Based on size of company or their role
Characteristics of each profile
Most valued features
Least valued features
Willingness to pay
Lifetime value (LTV)
Customer acquisition costs (CAC)
…and any other metric or category you think could be useful
If you don't know who your key roles/segments are, there's no way in hell you’ll set up an efficient growth flywheel, let alone an optimized pricing strategy. Personas act as a constitution within your business to centralize your focus and arguments about direction.