Initial SaaS pricing models are typically created quickly by founders to get in market using some combination of gut instinct, competitive emulation, and scant research. Even when SaaS investors and executives understand the potential of pricing as a powerful growth lever, current pricing with known problems often gets stuck. Software pricing is hard. The path of least resistance is to do nothing and proceed with suboptimal pricing … leaving money on the table.
The goal of this article is to deconstruct the problem, explain the mechanics of the pricing growth lever, and solve. First we’ll investigate why your current pricing is probably not optimized for growth, and some ways it might be stuck. Next we’ll explore how a skillfully optimized pricing strategy can impact all three principal SaaS growth metrics -- customer acquisition, retention and expansion. Lastly we’ll cover a recipe to get unstuck, and get your SaaS company on a proven path to successful pricing changes that increase revenue growth.
Problematic pricing that won’t change
In designing pricing models and solving pricing problems over the past 20+ years, I’ve seen countless examples of pricing that is suboptimal yet highly resistant to change. Causes and conditions vary widely, but I’ll share some common scenarios below.
Here are possible causes of problematic pricing not optimized for growth:
Pricing was developed before the company had traction and significant revenue
Customer segmentation was not considered in the design of the current pricing model
Key dimensions of customer value are not monetized
Sales is missing needed pricing levers to close opportunities
On renewal, there is an empty or sparse bag of options to drive expansion revenue
Valuable features are in development without a clear path to monetization
And some common reasons that current pricing can be stuck:
CFO concerned that a pricing change will have negative impact on short term revenues
VP of Sales worried that a pricing change will cause sales to miss quarterly and/or annual quotas
Product team focused on delivering a packed roadmap with little bandwidth for pricing and packaging
Customer Success apprehension about downgrades or churn for customers on existing pricing plans
Lack of available internal resources to lead a pricing project
SaaS pricing growth lever mechanics
A SaaS pricing model thoughtfully designed with analytical rigor can positively influence the three principal drivers of recurring revenue growth -- acquisition, retention and expansion.
Improving customer acquisition with pricing
Customer acquisition optimization variables include the number of new customers, and average ACV (annual contract value). A skillfully designed pricing model can lower sales friction, target value to attractive segments, and increase new customer ARR (annual recurring revenue).
Rising retention resulting from pricing
Pricing can improve logo retention by enabling self-selection of better customers. This can be accomplished by analyzing historical data for attributes of customers with high churn, and implementing pricing changes to reduce the numbers of these bad fit customers. Further, the percentage of customers retained can be enhanced with fairly priced add-ons and upgrades that deliver more value to existing customers as they climb adoption and learning curves.
Pricing impact on expansion
Expansion, increased recurring revenue for existing customers, can be positively influenced with consideration of customer value and choice over multiple years. Net revenue retention (NRR) is a key SaaS metric that can be optimized in the design of a pricing model with particular attention to precisely how existing customers increase their recurring revenue spend each year. Monetization is the heart of effective SaaS pricing strategy, with a design goal of simultaneously increasing product usage and value as customers pay more over time.
An in-depth look at a process to optimize SaaS pricing for multi-year revenue growth is described in the article Pricing to win today with growth levers for tomorrow.
Get unstuck with leadership and process
If it seems probable that your current pricing is both impeding growth and resistant to change, what can you do?
My observation in both operating and consulting roles is that the two most important drivers of pricing strategy success are leadership and process.
Pricing leadership: a recipe for success
As kicking the can down the road quarter after quarter with no pricing action is the easiest path, leadership with clear objectives and the highest level of support is often what it takes to get the job done.
A pricing leader with full CEO support is essential
Improving pricing effectiveness should be a top objective of this leader
A C-suite executive sponsor with decision authority improves the probability of success
A pricing committee including senior stakeholders from product, marketing, sales, finance, operations, customer success and the CEO can enable faster & better decisions
The most frequent internal roles for pricing leadership are head of product and head of marketing
A key advantage of an external consultant is they are 100% focused on the success of your pricing project, and won’t be distracted by other job responsibilities and priorities
A proven pricing process
Using a well-defined pricing process has a number of benefits. A structured and phased approach can be used to involve the right people, assign responsibilities, communicate effectively, sequence decisions, and deliver results on a specific timeline to meet business needs. Known dependencies can be used to build a lightweight Gantt chart to see the critical paths for timely success.
As an example, a process I’ve optimized over many years to develop successful SaaS pricing involves the following steps:
Background data - Gather relevant background data for pricing strategy from executive leadership, product, sales, marketing, operations, customer success and finance
TAM - Clarify and quantify the addressable market
Customer value - Identify the domains of customer value creation and potential value metrics for monetization
Competition and alternatives - Analyze both competitors and other substitutes for your product
Market research - Conduct market research to inform the pricing and packaging process with feature value, segmentation, willingness to pay, and market simulation
Pricing model option development - Develop a consideration set of viable pricing models to monetize the value delivered to customers
Monetization model - Build a multi-year growth model that forecasts revenue as a function of individual product volumes and pricing model decisions
Final pricing model, product SKU and price level decisions - Make all final pricing and packaging decisions with a committee of stakeholders
Implementation and continuous optimization - Develop a new pricing implementation plan and an ongoing process to refresh pricing
It is possible and perhaps probable that your current SaaS pricing model is both suboptimal and stuck. An optimized pricing model is an untapped growth lever that can be pulled to positively impact customer acquisition, retention and expansion. Finding the right leader and following a proven pricing process can systematically accelerate revenue growth.
Is now the time to tackle pricing and reap the rewards?