August 5, 2013
Revenue Maximization through a Simple Customer Value Formula

This article is a guest post from Andy Wilson, Co-Founder and CEO of Logik. Here he writes about the lessons learned from collecting customer value data for Logik's B2B SaaS application, Logikcull - a document discovery SaaS for businesses and law firms. 

Your B2B SaaS app is awesome. Your customers love it, but do you know why they love it? If you don’t, then you could be missing out on a huge, fully justifiable revenue opportunity.

Here are some lessons we learned when pricing our B2B, legal market-focused SaaS app, Logikcull. These lessons can help you find hidden value in your app that will lead to better customer retention and higher revenue.

Find the True Value of the Product

You may think you know what features your customers value, but you don’t have a clue until you start asking them. Sure, you can and should monitor what features they are using the most. That’s helpful data because you’ll know which features you should improve and which should be buried (less is more, right?), but clicks and inputs don’t really give you the data points you need to effectively price your product. You want to price your product based on the actual value delivered to the customer, which almost always consists of time saved, money saved, money earned, or some combination of the three.

price optimization

Photo Credit: aquopshilton

You want to be able to confidently say something like, “Our customers are saving 15 hours a week by switching to our software” or “By switching to [your app] our customers were able to boost revenue by 85% per month!” Powerful stuff, but only if you can back it up with real data. In order to increase conversions and maximize revenue, there’s a balance you need to find. Be reasonable. Be realistic.

How Do I Find This Awesome Data?

Call them. Sit down with them. Whatever. Just talk to them and ask the “right” questions. Your goal is to find out what features they like, but more importantly why they like them. In order to truly understand WHY they like your app, you have to find out HOW they were doing things before they were introduced to it. If your customers are switching from something else, find out what that something else was and quantify the hell out of it. And don’t worry about the don’t-likes on this call. You can save that for another call. For now, you want to dig into the do-likes.

Here’s an example conversation:

[initial pleasantries]

You: So what do you like about our app?

Them: Oh, I really like the XYZ feature. That’s a big help to me.

You: Oh great. How were you accomplishing that task before you started using our app?

Them: I was using ABC app/workflow and it was a major PIA.

You: Sounds painful. How long did that take you to do before XYZ?

Them: Ugh. 2 hours every time, if it worked.

You: Awesome. Well, it's awesome that you don’t have to do that anymore. So, how are you spending that extra 2 hours now?

Them: It’s freed up my time to focus on product strategy, which is a much better use of my time.

You: Sweet! Would you mind if I used that quote on our website?

Them: Absolutely! I love your app. And, I think... I think I’m falling for you...

You: [awkward pause] Umm...okie dokie. Well, look at the time. Gotta go. Bye now. [breath]

Now, this example is overly simplistic on purpose. Your conversations will be much more dynamic, but the question and answer flow will essentially remain the same if you follow the formula.

value-based pricing

Photo Credit: Thomas Hawk

WHAT + HOW = WHY

This is the simple formula that uncovers why your customers use your app (note: this formula is also useful when doing initial user research for your yet-to-be-built B2B app).

And if you’re giving a product demo you can easily capture this data by asking:

“How do you currently use [feature you are about to show]?”

Followed up quickly by: “And how much time does that take you to do?”

Boom! And now you have a good metric for why people will switch to your product, because if one person is saving time, then there are thouands more out there just like them that have the same problem and will save roughly the same amount of time. Granted, one phone call isn’t the only data point you’ll need, but it’s enough to get you going in the right direction. The next customer you call will tell you even more valuable data points.

Lessons Learned From the Logikcull.com Launch

When we launched our product we originally started with a volume-based pricing model simply because we had little information on what features our customers truly valued. We had beta data, but it wasn’t enough. We needed data from paying customers to validate our assumptions, and here’s what we found:

Time saved: 43 hours saved per person, per month. Why? We found out that our customers were eliminating a lot of manual steps in their workflow like collecting and FTPing data for discovery.

Money saved: Literally hundreds of thousands of dollars saved by using our culling technology features. Crazy, right? But here’s why: Litigation is expensive. The average cost to review one document is roughly $5/doc. Our technology makes it easy to eliminate tens of thousands of documents in one-click.

Money gained: $2,400 added revenue per person, per month. Why? Attorneys accessing our product remotely are capturing billable time they couldn’t capture before.

Overall, we discovered our customers greatly valued more efficient ways of searching and communicating on their documents, so we built our value based pricing model around this simple concept. The higher the plan, the more search features you get. Thus, the more time you save. This is similar to the way LinkedIn Premium works. LinkedIn locks valuable search facets because those features save their users a ton of time. And time is money.

price optimization software

 Photo Credit: trimmer741

We got lucky. We found the trifecta in our question and answer sessions. You may only find one, but it doesn’t matter. One is all you’ll need. If you find out that your customers are saving 10 hours per person, per month by switching to your software, then you can confidently say just that AND you can reasonably charge for that. Why? Time is money. If you save someone time they can spend that time doing something more valuable, which could mean more revenue for their business. And if you can make people more money you’ll always be in business.

How Long Does This Process Take?

Scheduling phone calls takes time. It took us three months to gather enough phone call data and actual usage data to properly create our value-based pricing model. Your results will vary. You’ll also need competitive pricing and market size data (remember: be reasonable and realistic in your pricing), which should be fairly easy things to find. However, if your competitors offer on-premise, installed software and don’t list their prices online it could be harder to find pricing information. If you can’t find the pricing, just ask them for it or ask your customers that know.

And just because your competitors charge by user/seat or storage doesn’t mean you should too. In our market it’s very common to charge based on monthly data storage needs and user fees (and a bunch of other pesky line items), but we decided that wasn’t for us for two reasons:

1. Storage is a cheap commodity and it’s getting cheaper, and bigger, every year. Fighting Moore’s Law is a losing battle and storage doesn’t convey any value whatsoever. I would advise most B2B SaaS startups to avoid charging for storage or at least have big storage caps in your tiers. 

pricing software

Photo Credit: Beraldo Leal

2. We want users. Lots and lots of users. Everybody does, right? Charging for users means you get less users, which means less data and less word-of-mouth marketing. In our case, it also meant less documents. More often than not users don’t convey the right value metric anyway. We didn’t want to make our customers think about cost before they added another user. It should be a no-brainer.

This was specific to us, so before you follow the leader with pricing think twice about it and do your own research. You may find user pricing is the way to go. It depends.

In Summary: Do the Research and Continue to Test

Once you acquire a new customer continue to do the customer research. Engage them. Find out what features they value most in your app and document them. Why? As a B2B SaaS business you have to earn your customers’ loyalty every single day or they’ll go elsewhere. Put another way, keep the honeymoon going strong and you’ll never get divorced.

And what better way to do that than by providing them with the data you’ve collected? Maybe you’ll send them a monthly value report showing the time saved, money saved, etc. Whatever it is, just do it and continue to do it. Forever. Especially around renewal time, so they don’t forget why they bought your app in the first place. If you don’t do this, good luck, because someone else will. In the world of SaaS, it’s a lot easier for customers to switch services if they're not happy with your offering.

If you do these things your customers will continue to love your app simply because you've uncovered why they're using it and the pain points your product relieves. Good luck out there!

To learn more, check out Price Intelligently's Pricing Strategy ebook, their Pricing Page Bootcamp (it’s free!), or learn more about their price optimization software



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