Pricing is the reflection of everything you do as a business, from your product development all the way down to a link to your website, because we live in a world driven by value. Nothing else defines a business and a product more. Let’s explore why pricing is truly the (unbiased) most important aspect of not only Saas businesses but most other types of businesses too. We will start by uncovering its theoretical roots and by illuminating how selecting the right pricing strategy can have a bigger impact on your profits than you may have thought.
photo credit: 401(K) 2013
The importance of pricing
Pricing is important since it defines the value that your product are worth for you to make and for your customers to use. It is the tangible price point to let customers know whether it is worth their time and investment.
1. Everything comes second to pricing
2. Price optimization a huge impact on increasing profits
Below we’ll go into each of these in more detail. Regardless of your product, pricing decisions remain an afterthought for many growing businesses. Your pricing strategies could shape your overall profitability for the future.
Everything in your business should support your pricing model
Depending on who you ask, a business serves hundreds of different purposes and embodies hundreds of definitions. Businesses provide jobs to individuals supporting themselves and families, they produce goods and services for those seeking them, and they even pay taxes to help support public goods. Yet, my favorite definition comes from my Economics advisor back in undergrad, who summed it up simply: businesses exist to provide value.
Duh. I know it seems obvious, but take a look at your business. You’re taking your time and energy, mixing it with creativity, and streamlining everything through the allocation of cash and capital. Even if you’re a one-man band, there are hundreds of moving parts within your business, from the sales and marketing, fulfillment of goods and services, and even down to the staff that empty your garbage can at night. All of these individual parts sum up to providing value in the world that another human being is willing to slap down a dollar bill or a credit card in exchange for the intermingling of parts, time, and ingenuity you’ve cobbled together.
Your resourcefulness and wit have one purpose that we just alluded to: you want to exchange that value for compensation. Yet, you still need to put a price on that package of value you’ve created. How much was your time, energy, and creativity worth? How much is your customer willing to pay for everything that you did, so they don't have to?
Pricing is simply the exchange rate you put on all the tangible and intangible aspects of your business. Perceived value for cash.
Everything else then works to justify that exchange rate. Your product teams build the right features for the right audience that needs them. Sales and marketing reveal how powerful those features are to the right audiences. UX folks drive customers through the purchase process, ensuring they don’t-churn. Support staff hold the business together and make customers happy through reliability. Everything in your business works to translate and justify your value for a price.
Price optimization has a huge impact on increasing profits
Great, we’ve gone through the philosophical justification for why pricing is so important, but a lot of us left philosophy in our freshmen year of college when we were “searching for ourselves.” As such, let’s get into the data.
As we’ve mentioned before, pricing is the lever that has the highest and quickest impact on maximizing profit. We’re not just saying this though. Numerous studies have shown just how powerful price optimization can be for a business. In fact, the landmark study was published in a 1992 Harvard Business Review by Michael Marn and Robert Rosiello, both senior pricing folks at McKinsey and Company. The dynamic pricing duo studied the unit economics of 2,463 companies and found that a 1% price improvement results in an 11.1% increase in operating profit, which compares to 1% improvements in variable cost, volume, and fixed cost only resulting in profit increases of 7.8%, 3.3%, and 2.3% (respectively).
Reviewing your pricing strategy
Now that we have covered the importance of pricing, it may be time to consider reviewing your pricing strategy for your SaaS or other business, when doing this it is important to consider all aspects of the product or service being offered. This includes researching competitors' prices and understanding customer demand for the product or service. Additionally, pricing should be aligned with business goals and objectives while taking into account any external factors such as market trends that may impact price levels. Finally, as we know, organizations must ensure that their chosen pricing model is profitable in order to remain competitive in the marketplace.
Our Price Intelligently sprints provide tailored assistance to help you create a more effective subscription pricing model. Our experienced pricing experts are available for an in-depth chat today, where they can offer guidance on how our services can help your business reach its full potential. With the right strategy and tools, we have helped many businesses increase their revenue through improved subscription models – let us do the same for you!