How did your business decide on your product’s current prices? Hopefully it wasn’t like most SaaS companies, where the founder simply plucks price points out of thin air, guided by nothing more than his or her gut feeling.
Think that’s too crazy to be true? Well it isn’t. We surveyed over 270 SaaS businesses and found that nearly half of them priced solely based on their founder’s intuition. Contrast that with the embarrassingly low 17% of companies that defined their pricing strategy as a team, and you quickly realize that there is a major problem.
Your pricing strategy, which includes your positioning, packaging, and price points, represents the total value your product delivers and encompasses all aspects of your business, from engineering and marketing to sales and customer support. Therefore, your pricing decisions should be made collectively by all of the key stakeholders in each of the different areas of your business, not just by your founder or marketing department. Here’s the case for why all the different parts of your company should get involved in developing your pricing strategy.
Sales and your pricing strategy are inherently linked, yet only 3% of SaaS companies we studied involved the sales team in pricing decisions. Your sales reps are on the frontlines interacting with your customers and prospects on a daily basis, so their insight into customer value perceptions is essential to a comprehensive pricing strategy. Turning it around, they’re also responsible for communicating your product’s value and justifying your prices to potential customers, which means that they need to understand the logic behind the pricing decisions to be more effective at their jobs (click here for more on the intrinsic relationship between your sales team and proper pricing).
Your sales team should also be familiar with your pricing strategy to create accurate sales forecasts, which in turn drives the rest of your business’ financial forecasts because most companies project their expenses as a percentage of sales. From a broader company perspective, this means excluding your sales team from your pricing strategy discussions could derail the rest of your company’s finances for the year. Pricing is then clearly an integral part of the sales process, which means that sales should be an integral part of your pricing process.
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Only 1 out of 10 SaaS companies determine their prices with help from the marketing squad, which is an alarmingly low ratio. An essential part of marketing is understanding your customers, which makes this department an incredibly valuable asset to your pricing process. Your pricing strategy should rely heavily on the features and price points that are most attractive to your customers, which obviously requires your marketing team’s thorough understanding of your buyer persona profiles.
On the flipside, your marketing team is also responsible for communicating and demonstrating the value in your product to your target market. They need to participate in pricing strategy discussions so they can establish a strong awareness of where the true value lies in your product and use that understanding to strengthen your positioning and packaging strategy.
Your product team built your product from the ground up, which means that they probably possess the deepest understanding of your product’s features and limitations. Engineering needs to be included in your pricing process so that your team doesn’t position your product in a way that overpromises on it’s capabilities or undersells its features. Their input is also critical when deciding whether or not to offer a custom plan as their bandwidth is the most important factor in that decision.
From a broader perspective, your product team has poured their blood, sweat, and tears into building your product, so including them in your pricing discussions will ensure the rest of your team puts forth their best effort in the process. This is especially critical when you consider that most teams only spend 6 hours pricing a product that your engineering team spent hundreds of hours building.
Management’s ultimate responsibility in a company is to serve the various stakeholders involved with the business, which means it would be irresponsible for management to divorce themselves from the pricing decisions that are so critical to a company’s ultimate success. This is especially important because Harvard Business School studies have demonstrated a 1% improvement in pricing can generate up to an 11% increase in profits. Not to sound like a broken record, but pricing is the culmination of all the individual facets of your business, so the top executives responsible for coordinating the different branches of your company should also be involved in the pricing process.
Include more people in the pricing process!
You should be collecting input from all of the departments in your business, as well as your customers, to determine your optimal price points, packaging, and positioning. With something as important as pricing, you really can’t afford to delegate the responsibility to just one person, especially a founder who, without a background in pricing strategy or market research, prices based on a gut feeling or a haphazard guess at value.
As we mentioned in the beginning of this post, barely 1 out of 5 companies use teams to price their product, which means you’ll have a leg up over 80% of your competition if you take the simple step of expanding your pricing team.
If you enjoyed the data we presented in this post and are interested in seeing more, be sure to check out our latest eBook, the SaaS Pricing Page Blueprint, which offers in depth data and analysis on building the optimal pricing page.