February 23, 2015
Move to tiers for your SaaS pricing strategy

If you’re selling a SaaS product, chances are good that you offer a number of pricing tiers. But how do you figure out which features should go into each tier? How are your value metrics going to vary from one to another? And how can you make sure you’re doing it right? The process of coming up with the right tiers can seem downright scary!

 

But never fear! The solution is just to make sure that you’re building your pricing tiers in a way that makes your service appealing to as many potential customers as possible. After all, building tiers is all about making your product accessible—in terms of both usefulness and finances—to maximize how much of the market you’re able to engage with.

In this post, we’ll walk you through some of the most important things to keep in mind when building pricing tiers, and how some of the major players in tech are using these lessons to maximize market penetration.

Don’t use crocodile tiers!

It’s sometimes tempting to design your tiers based around the features that make sense for you, but this is backwards and should be avoided at all costs. Consider this: let’s say that your product’s social sharing tool took your dev team a whole year to fully flesh out (although if it did, we might suggest you start looking to build a new dev team before worrying too much more about pricing tiers). This should surely go into the most expensive tier, right? It took tons of time and resources to build!

But here’s the hard truth—your customers don’t care how much effort it takes you to build features. They only care if the feature provides value for them as they use your product.

Crocodile_tiers

So, should social sharing only be found in your most expensive tier? Maybe, if it’s an advanced feature that only bigger customers are going to need. But if social sharing is a core function of your product and all of your customers could derive value from it, it should probably go in every tier, regardless of your cost in developing it.


“Build your product tiers in a way that makes sense to your customers, not to you!”
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Start with personas, end in tiers

It’s easy to say that your tiers should align carefully with how your customers value your product and its features, but how do you you make sure that you’re really doing this and not subconsciously basing things on your own ideas about usefulness or cost?

Simple(-ish): you need to build your tiers around personas—abstract ideal customers. You need to understand what they’re looking for and how your service can help, and then build your tiers based on that knowledge, ensuring you have a tier that meets the needs of each persona.

Now, you’re probably familiar with the idea of personas as they relate to marketing. However, the personas you use to build your pricing tiers might not be the same as your marketing personas. Why? Because marketing personas are about attracting potential customers, while pricing personas are about figuring out how customers differentially assign value to your product and it’s various features.

For example, say your product helps sales teams coordinate who responds to leads. You’ve almost certainly got a marketing persona that’s a director or VP of sales. But sales teams come in all sizes—some potential customers might need to manage thousands of leads a week with a large team, while others will only need to split a handful of leads between two users. Having tiers to match each of these situations is critical to making sure that your pricing tiers are meeting customer needs.


“Pricing personas ≠ marketing personas!”
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Alright, you’re a pricing tier pro now, right? Ready to head out into the world and price based on value, with optimized personas for each potential tier?

… Maybe not quite yet?

If you understand the concepts, but you’re still not totally clear on execution, you’re not alone. Pricing based on customer value is not only a relatively new way of thinking about pricing (as compared to the cost-plus strategy prevalent in most industries), but it also involves careful study and consideration, with just a touch of customer mind-reading.

Let’s take a look at two examples of tier feature differentiation based on some current tech gadgets, and see how these can help you get ready to price based on value.

Blood, sweat, and tiers: the Watch

Apple’s latest gadget, the Watch, is the company’s first real foray into wearables. We still don’t have all the details about the Watch, but we do know that it will come in three “distinctive collections.”

Apple_watches

Watch is a general, everyday watch, Watch Sport comes with a plastic band, and Watch Edition comes in precious metals.

Looking at these three options, it’s clear that Apple didn’t just randomly decide which features would be included in which watches. For one thing, the watches are all functionally the same—all have Apple Pay, all feature push notifications, etc. It’s design and materials that differentiate here, but they’re features as much as anything else.

So how did Apple come up with these three options? Why have some watches made in precious metals and others with plastic? If you said “personas”, you’re absolutely right—the three watch models clearly appeal to a Daily Dan, a Sporty Cindy, and a Boardroom Bryan.

But why did Apple differentiate based on design rather than functionality? If all the functionality is the same, how is this an example of differentiating based on value? Because the value here comes from use scenarios—when someone might wear them. You can’t wear a sports watch into the boardroom, and who would want to wear a clunky metal watch while going for a run?

So Apple’s differentiation here is in wanting as many people as possible to derive value from their product in as many situations as possible. Smart, eh?

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Reduce to tiers: drones

Remote-controlled aerial drones are incredibly popular, with everyone from professional photographers to amateur techies toying around with them—the FAA even went so far as to ban them at this year’s Super Bowl.

If you’ve done any research at all into purchasing a drone, you know that they come with a whole range of offerings and price points, appealing to a range of markets, from hobbyists to professionals. What you might not have realized, depending on how in-depth your research was, is that a lot of drones differentiate themselves into two tiers.

Are you a casual hobbyist who’s just looking to take some cool shots and show off for the neighbors? Well, you can just control your drone using your phone or tablet. But what if you’re a serious tech hound who wants fine control of the drone while it’s in the air? In that case, you can shell out an extra $1000 for an advanced controller.

Drone_tiers

In addition to being a great example of how you can differentiate your product based on the value that customers assign to your product (in this case, that “value” being controllability), the drone model is also another great example of how marketing personas and pricing personas don’t necessarily match. Entire drone companies exists that solely target hobbyists—that’s their market. But even at these companies, you see two distinct pricing tiers to appeal to as many potential customers as possible.

Conclusion: Break into tiers

So, there you have it—why you should be pricing based on customer value, how to think about your pricing personas, and some nitty-gritty examples of companies doing it right. Hopefully you’ve been brought to (reconsider how you think about pricing) tiers.*

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*I’m sorry.


Chris is the Director of Content at Price Intelligently. He enjoys CrossFit, airplanes, and cephalopods. He holds a PhD in Linguistics from the University of Oregon.
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