The 5 SaaS Pricing Mistakes You’re Probably Making (And How to Avoid Them)
August 31, 2023
Pricing can make or break your business. Price too low and you’re losing out on valuable revenue. Price too high and customers might turn to a cheaper competitor or build their own solution.
But pricing doesn’t just impact your bottom line, it can also impact your ability to attract investors. According to First Round’s State of Startups report, founders who struggle to raise capital are:
- 3x more likely to say they monetized too late
- 2x more likely to say they picked the wrong business model
- 40% more likely to say their burn rate was too high
So while getting pricing right might be one of the hardest problems facing your business, it’s extremely important to get right – especially in today’s economic climate. And while there’s no such thing as one-size-fits-all pricing, there are five SaaS pricing mistakes we see time and time again.
If you can fix these, you can unlock faster and more profitable growth.
1️⃣ You’re too cheap.
(This is especially true for innovative Seed & Series A companies.)
B2B buyers are not as price sensitive as startups or consumers. They care about the 3 R’s: ROI, risk, and reputation. You can price accordingly. This doesn’t mean that you should immediately go and raise prices on everyone. But you should collect the data, test with new cohorts, and then develop a plan for existing customers.
Raising prices without losing customers can be a daunting task and one that’s hard to pull off. Follow these tips to retain your customers while you grow your price point:
- Validate your course of action
- Communicate why you’re raising prices
- Use the pricing change as a marketing tactic
- Give customers a choice
- Have a plan for existing loyal customers
2️⃣ You picked the wrong value metric for your pricing.
SaaS companies can price based on a long list of metrics – user seats, company size, GB of data, compute, contacts, SMS messages, the list goes on.
Don’t assume your competitors got it right. Copying competitors indicates to the market that your product does the same thing – which might not be true.
We recommend generating a long list of potential value metric ideas for your product and then evaluating those ideas against five criteria: value-based, flexible, scalable, predictable, and feasible. Remember that you don’t need to aim for perfection – it’s extremely rare for a value metric to check each box – but you’re looking for the best option for your customers and for your business. (Some companies will use multiple value metrics in their pricing to account for this.)
The right value metric can help you differentiate against the competition and generate more revenue.
3️⃣ You make it hard to buy.
Software buying has evolved. More and more, end users are discovering products and then advocating from the bottom-up. They expect to start free, see real value, and then pay as usage grows.
This doesn’t just mean freemium, free trial, or reverse trial. You might look at a low-price entry package for a team/department that flies under the radar of procurement. Or a pay-as-you-go offering to give customers more flexibility.
Design pricing that fits with how your customer wants to buy.
4️⃣ Your upsell path is broken.
The gold standard in SaaS used to be net-negative churn. In other words, you could theoretically stop all sales and marketing and still grow with existing customers. The expectations are higher today (aim for 110%+ net retention).
How do you do that? Great SaaS companies tend to have two or more levers for expanding customers. I’m a big fan of usage-based expansion.
Packaging or bundling different products, features, and services can also help drive upsell. Below are some common options that vary in complexity and flexibility for customers. “Good-Better-Best” packages are the most common among SaaS companies because they tend to strike the right balance.
5️⃣ Your pricing is static.
Your product and company evolve dramatically from Seed to Series A/B and beyond. Pricing needs to evolve as well.
Most folks don’t take it seriously enough. Assign a pricing owner, assemble a cross-functional team, and collect the data and research you need to guide pricing decisions.
It’s worth it.
Who Should Own Pricing
Now that you’ve pinpointed the issues with your pricing, it’s time to do something about it. First things first – who should own the pricing initiative? Depending on the structure of your company, pricing might fall to a variety of teams whether it comes down to finance, sales, product, or another group is primarily up to you and the unique needs of your business.
Here are a few reasons in favor of various departments, but remember your business is unique and you’ll know which department makes the most sense to lead any pricing changes. Putting someone in charge of pricing tends to be more important than what title that person has or who they report to.
- Great for positioning and messaging
- Already owns TOFU and website
- Best grasp of product and roadmap
- Already doing customer development
- May overly focus on features versus. value
- Analytical and data-driven
- Best handle on costs and profit
- Tend to take a cost plus versus value-based approach
- Closest to the customer
- Constantly hearing about needs and pain points
- May be too close or seek out too many customer opinions
- Best grasp of the data
- Great at processes and technology
- Less customer-focused
Getting Started: Running a Pricing Project with a Lean Team
You might have an inkling that it’s time to update your pricing, but you’re not exactly sure if now is the right time, especially when your team is likely focused on dozens of other important tasks.
Here are signals to look out for that indicate now is the right time to get started:
- Customers buy too quickly and without enough scrutiny
- Usage is growing much faster than spend within your customer base
- You’ve added significant value, but haven’t touched pricing in six to 12 months
- You’re going after a new ICP and haven’t identified the best pricing and packaging for your go-to-market strategy
If you do decide that now is the time to start, you’ll want to ensure that the pay off is there and you’re tracking your progress. So be sure to consider the following:
- Goals: What KPIs are you focused on & how does pricing fit in your broader goals?
- Business value: How much value are you creating for your customers?
- Alternatives: What’s the alternative to buying your product from the customer’s POV?
- Piloting: How can you test/pilot pricing changes to fully rolling it out?
Undertaking a pricing project isn’t for the faint of heart. But with an experienced partner guiding you through the process, you should expect to see a boost to your bottom line without churning customers. During this process, remember:
- Launch pricing changes with new cohorts before migrating existing customers
- Run a retrospective on your pricing changes
- Avoid long contracts (more than two years) that cap a customer’s potential value
- Monitor your go-to-market KPIs from a pricing lens
- Treat pricing as an ongoing process rather than a one-off project
Looking for more pricing tips like the ones you read in this post? Check out more pricing content from OpenView here.