Most startups spend more time thinking about the color of their logo than how to price their product.
This might sound harsh, but here’s the truth: The color of your logo will not save you if you price your product wrong.
Pricing is one of the most important parts of a startup’s sales strategy, but it’s often overlooked. According to ProfitWell’s guide “The Anatomy of SaaS Pricing Strategy”, the average SaaS company spends only six hours on pricing over their whole life cycle.
Six hours. That’s absolutely ridiculous.
The best organizations recognize the importance of understanding their audience and establishing a price point that resonates. You need to understand the value of your product, the perception of your product, the price sensitivity of your buyer and other factors that will influence the price—and that takes time.
Let’s start with an example that everyone can relate to:
If you walked into McDonald’s and ordered medium fries, and the cashier said, “That’ll be $30,” how would you react? You’d assume they made a mistake, right? That’s because your perception of the product, the experience and the brand would not match a $30 price tag.
Now let’s say you walked into a Michelin-starred restaurant and ordered rosemary potato crisps with spicy aioli, and the bill came to $30. You might not think twice when you saw the price. Your perception of the brand, and the value of your experience, would be different.
The same is true for pricing SaaS products. Every brand is different, and that’s why copying and pasting your competitor’s pricing page is a bad idea. Alright, you might say, I’ll do my research. I’ll look at more than one other brand.
Not so fast—it’s also a bad idea to just take the average of multiple competitors’ price points.
Sure, you’ll get a decent price.
But that approach has nothing to do with your product and the value it brings to your audience. Instead, you’ll get a price based on other brands’ equity, other brands’ customers, people’s perception of other brands, and the problems that other brands are trying to solve. If you’re not looking to add anything new to the market, then this pricing strategy might work for you—and pricing will probably be the least of your problems.
Here are five simple reasons why your price is the backbone of your sales strategy:
- It communicates the value of what you’re offering.
- It positions you against your competitors.
- It determines how you acquire customers.
- It determines how much you can spend to acquire customers.
- It has the most impact on whether you turn a profit.
The first mistake that many startups make is relying on a CEO’s gut decision on price and never evaluating it again. In a 2017 pricing survey, OpenView found that 68% of expansion-stage SaaS companies let the CEO own the price:
If it’s happening in a silo, that’s a problem.
If the CEO isn’t talking to customers, talking to sales, or talking to finance experts, then pricing could be responsible for the company’s most heart-wrenching challenges—challenges that the team doesn’t even realize are related to pricing because it’s never a point of discussion, research or reconsideration.
Here are three simple techniques that will help any organization nail their pricing strategy:
1. Analyze & Research Your Customers
One of the first ways to get your pricing strategy—and your business as a whole—on the right track is to develop a target persona. Understanding exactly who you’re trying to sell to ensures that everything from your pricing to your messaging will resonate.
If you’re an early-stage startup and have yet to go to market, start by analyzing the customers of companies you’ll compete with. These people might not be easy to track down, but taking the time to chat with at least 10 people who actually spend money on a competitor’s product could result in valuable insights about your audience.
As you define your target persona, ask these questions:
What industry are they in? Where do they live? What’s their job title? Do they prefer annual pricing or monthly pricing? What’s their role in the decision-making process? How big is their company? What’s the estimated annual revenue?
The answers to these questions should help you understand how to price your product.
2. Create Pricing & Sales Models
Now that you understand your potential customers, you need to understand the cost of acquiring them. Customer acquisition cost and lifetime value per customer are two of the most important metrics when it comes to setting your price.
The goal should always be to increase your customer lifetime value and decrease your customer acquisition cost. If you’re not familiar with CAC, it’s the sum of your marketing and sales efforts divided by the number of customers you’ve acquired in that period of time. You need to know this figure because it should be baked directly into your price.
According to Profitwell, the best SaaS companies have an LTV (Lifetime Value) to CAC (Customer Acquisition Cost) ratio of at least 3:1 and the ability through optimization and new features to get to a ratio of 11:1. This is only feasible by investing in proactive data, monitoring sales efforts and optimizing your pricing options based on real insights.
3. Understand Your Product’s True Value
The final step in creating a great pricing structure is more qualitative. First, you need to define the features and benefits that you’re offering to each of your target personas. Then survey your customers to understand which elements of the product they actually find most valuable.
You might be surprised.
People may not even touch the features you thought they’d love, and appreciate other features you didn’t expect. This research will help you evaluate whether your pricing structure is communicating value correctly, and you’ll be able to compare the features that each persona finds most valuable with their buying power.
Then you can ask concrete questions about the price:
- Which feature would you be willing to pay more for?
- Is there a feature you’re paying for that you don’t actually need?
- At what price point would our product become too expensive?
- If you were grandfathered into this price for three years and then we doubled the price, would you leave?
This is just a sample of what could work—you may have other questions that are specific to your product.
Pricing goes much deeper than the number at the bottom of a contract.
It impacts the way your sales team is perceived by potential customers. It impacts the way your brand is perceived in the market. It impacts your place in the ecosystem. And it impacts what you can do as a company for years to come.
Follow the suggestions above, and take the time to create a pricing structure that works. A smarter price point is one step toward a more effective sales strategy.