As you move into 2015 and begin taking stock of your business and planning out for the rest of the year, it’s important to make sure you’re considering all areas where you might improve. An important part of this reflection process is looking for opportunities for improvement. Ask yourself one question: how often did you think about your pricing in 2014?
If you answered a little bit or not at all, I have both good and bad news. The bad news first: you probably underperformed last year by leaving money on the table. But don’t worry, there’s still that good news: pricing is a huge lever for your business, and even small improvements will pay dividends quickly.
If you're looking to improve your pricing strategy, we've identified six of the most common errors we see B2B SaaS companies make when it comes to their pricing, and what you can do to correct those errors.
Mistake #1: Using a “set it and forget it” pricing strategy
Pricing is an influential aspect of any SaaS business, yet most companies focus their efforts on product development and marketing while treating pricing as an afterthought. Marketing, pricing, and product development must work together for any B2B SaaS business to succeed; if one of the three links is weak, the entire chain won’t live up to its full potential. Developing a great product and increasing market awareness is undoubtedly important, but one could argue that pricing has an even larger impact on the success of your SaaS business—nothing impacts customer purchasing decisions more, and no other area of your business can be changed and produce positive results as fast as pricing.
Are you using “set and forget” pricing? Try this instead: Don't treat pricing as an afterthought, but instead as a core competency of your business. Pricing is a process that must be continually tested and re-evaluated to determine the proper mix of packages and prices that appeal to your customers.
Mistake #2: Not experimenting with your pricing
We've established that constantly testing and evaluating your pricing strategy is important, but many companies are unaware of how to go about doing this. A/B testing allows you to test the performance of multiple strategies to see which aspects of each perform well. This can help your business understand the optimal mix of product features and prices that appeal to your customers, allowing you to optimize. Even companies that regularly check in on their pricing often don't experiment to figure out what their customers want, and what they're willing to pay, in order to make changes.
Are you failing to experiment with your pricing? Try this instead: A/B Testing should be a part of every B2B SaaS company’s pricing arsenal. It allows a company to evaluate multiple pricing options before settling on a final strategy that combines the best aspects of each tested option.
Mistake #3: Having incomplete persona analyses
A lot of SaaS companies make the mistake of assigning pricing tiers to the buyer personas they develop for marketing. While this is better than simply guessing, it still leaves you with an incomplete picture of who your potential customers are, what they want, and, most importantly, what they’re willing to pay.
Are your personas lacking? Try this: Your best bet is to develop new personas for pricing purposes that take into consideration feature preferences and willingness to pay. This product-specific information will allow you to develop multiple, feature differentiated pricing tiers that appeal to the different types of customers interested in your product.
Mistake #4: Charging based on the wrong criteria
In simple terms, a value metric is what and how you are charging. In the B2B SaaS market, the importance of using a correct value metric cannot be overstated. The best value metrics ensure that your customers are paying for your product according to the benefits they receive from it. For example, most CRM providers such as Salesforce charge along the value metric of users—the customer pays more as the amount of users increases. Theoretically, an increase in Salesforce users should translate to an increase in revenue for the customer. This benefit of increased revenue is what justifies Salesforce charging for each additional user.
Are you pricing based on the wrong value metric? Try this: Make sure you’re pricing based on the value metrics that your customers truly care about and that make sense to them.
Mistake #5: Providing too many (or too few) pricing options
Every company should strive to simplify its pricing page in a way that balances informing the customer with making the information on the page transparent and easy to understand. Some businesses make the mistake of providing too many pricing tiers, while others make the mistake of providing too few. The correct amount of pricing tiers for your business will align with your unique buyer personas.
Charging one price for your product is almost always inadvisable as it leaves no room for your customers to upgrade and captures revenue at only one point along the demand curve. Having said that, a single price point is easier for potential buyers to understand and makes the customer buying decision much easier.
Do you have the wrong number of pricing tears? Try this: Realign the number of tiers you have to be right in the Goldilocks zone—not too many, not too few. How do you know how many? Take a look at #3 above about personas. Ideally, you want one tier per pricing persona.
Mistake #6: Offering unnecessary discounts
We see a lot of SaaS companies giving their customers unnecessary discounts to incentivize renewal subscriptions. We’re all about increasing customer satisfaction, but discounting for renewals is a dangerous practice that sets a bad precedent for your customers. You condition your customers to expect discounts, and this conditioning is very difficult to reverse.
Are you offering unwarranted discounts? Try this instead: Improve customer satisfaction by providing excellent customer support and listening to your customers.
We should note that we do see the value in offering discounts for annual or long term commitments that are paid upfront. This is a mutually beneficial arrangement in which your customer receives a discount and you receive cash up front. In addition, your customer will interact with your product more often and for a longer period of time. This improves customer loyalty and customer lifetime value.
These common mistakes are costing B2B SaaS companies millions, if not billions, of dollars in recurring revenue each year. Set yourself and your company up for success by fixing these pricing mistakes sooner rather than later. Remember: there is no holy grail of pricing strategy that will fix all of your problems. Recognize mistakes and meet them head on by collecting data from customers, utilizing A/B testing, and pooling the most successful aspects of tested strategies to build the final strategy that is right for your business, and then revisit that strategy often to fine-tune it as your business and your customers grow and evolve.