Q&A: How to Set List Pricing for SaaS

Question:  How to set list pricing for SaaS/HaaS when the first payment/signing a deal usually represents less than 10% of a clients lifetime value accounting for scheduled price increases, upselling and cross-selling opportunities.  Ulises

Answer:  Thanks for the question Ulises.  People are going to think I wrote this question myself and put a different name on it.  :-). Turns out we are about to release a 2-day training course covering this topic.  Although I can’t be comprehensive in answering this question in the blog, here are a few insights.

 

First, if the first payment is for a month, I hope it’s way less than 10%.  Typical subscription prices are 1/36th of the price of a perpetual license.  That means it takes 3 years to make in revenue from one customer what a traditional business would make on day 1.  However, as you rightly point out, the lifetime value (LTV) can and should be much higher in subscriptions.

There is no one way to answer to “How to set list pricing” because the price has many impacts.  To answer that question well you must think about three different revenue buckets, acquisition, retention, and expansion.  In other more common words, win, keep, and grow.


Win:
 To win a new customer you need to know how those buyers make the initial purchase decision.  Do you have competition?  Are they uncertain about your value?  Some companies use freemium or free trials to demonstrate value.  Other companies have inexpensive entry-level prices.  Some companies know that customers know their value and charge a lot anyway.  Pricing to win a new customer is a lot like traditional pricing, but you might want to be a little bit more aggressive to bring people into your platform.

Keep:  The biggest pricing concern in retention is when you raise prices.  Customers will rethink their purchase decision if you raise their price.  You better be certain those customers are receiving much more value than the price.

Grow:  This is the tricky, fun, new area of pricing.  How to get a customer who signed up at one price to pay you more over time. There are four ways to make this happen:

  1. Raise prices
  2. Grow usage and price based on usage
  3. Upsell to more features.  (E.g. good, better, best packaging)
  4. Cross-sell to other related products

 

The only one of these you might think of as traditional pricing is to raise prices.  But here at Impact Pricing, we think of pricing as creating, communicating and capturing value.  You must understand pricing well to be effective.  That applies to all of these (especially the first 3).

 

I wrote a relatively long article on subscription pricing that you can read here.  If you’re interested in learning more about the workshop, please go here.

 

Please share your thoughts on this topic.  Do you agree or disagree?  What was insightful?  What is missing?  I’d be happy to dive deeper into more specific topics.

 

Oh, and thanks for the fantastic question Ulises!  🙂

 

**Note: Mark Stiving has an active LinkedIn community, where he participates in conversations and answers questions. Each week, he creates a blog post for the top question. If you have a question, head over to LinkedIn to communicate directly with Mark. 

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