Insights from 100 SaaS Companies: Why It’s Time to Rethink Your Packaging Strategy
Packaging redesign consistently drives large revenue gains for expansion stage SaaS companies. By the time a company hits the expansion stage, they have spent hefty sums of money to improve the product and scale their go-to-market function, and now have a hodge-podge of customers at varying stages in lifecycle and product maturity. Yet, their packaging strategy likely still reflects the legacy way of doing things rather than the current reality.
Sidebar – By packaging, I am referring to how companies assemble their features, functionality and services into different editions that customers can purchase. (Not this kind of packaging!).
When done correctly, a packaging redesign both accelerates a land-and-expand business strategy and improves the customer experience. Meanwhile, it helps the sales team speak to the needs of different customer segments and helps the product team prioritize investments in new features and services.
2016 SaaS Packaging Benchmarking Study
To start your packaging redesign, first you’ll need to choose the right packaging model. You can select from five main options, which vary in degree of complexity: All-in bundling, Category bundles, Segment / role / use case, Good / Better / Best and Modules / build your own.
We investigated how popular these packaging models are at leading software companies, and when and why each approach is most successful. The benchmarking study covered 104 of the largest and fastest growing SaaS companies in the US that publish their packaging and pricing online.
Good/Better/Best packaging appears most frequently at SaaS companies that publish their pricing. 72 of the 104 SaaS companies in the study, including Slack, DocuSign, Lesson.ly and InsideSales.com, employ some type of Good/Better/Best strategy, and for good reason. This strategy keeps things simple while creating a natural upsell path for customers. Plus it allows companies to reach a variety of potential customers wherever they are in their product maturity, from those who just needs the basics to those who want it all.
Slack, the communication platform for teams, exemplifies a Good / Better/ Best strategy and puts increasingly more features, functionality and services in higher tier packages. The entry package (Free) includes core features that any user would need, such as messaging on desktop and native apps, two-person calling and limited message archiving. By placing a limit on message archiving, Slack has a natural fence or trigger point to entice heavy users to make the lead from Free to Standard. Meanwhile, they reserve advanced, enterprise-focused features for their Plus and Enterprise tiers such as single sign-on, compliance exports, SLA and 24/7 support.
All-in bundling, the second most popular strategy, works best in situations when a company leads the market in its breadth of products, but not necessarily depth within specific applications; when they can credibly claim to give a fully integrated solution; and when customers value the solution but are unclear about separate components.
Microsoft Office, the classic example of all-in bundling, was not always the leading desktop application software. As recently as 1995, they fell behind Wordperfect in market share for word processing software and Lotus 1-2-3 for spreadsheets. While Microsoft did not have best-of-breed point solutions, they hypothesized that they could win by offering an integrated suite of ‘good enough’ products at a cost-effective bundled price. Their decision paid off handsomely of course, and by 1998 they had dominant market share across the entire suite including email, word processing, spreadsheets and presentations.
Category bundles, a close third in popularity, comes into play when products align with a mix of different budget holders and compete against different alternatives, and therefore selling an all-in solution becomes impractical. It’s also employed when a company has deep functionality within specific categories, and can credibly offer multiple best-in-breed solutions rather than a full suite.
Salesforce.com, the cloud software provider, exemplifies category bundling. They offer separate packages to compete in a wide array of product categories, including CRM, Customer Service, Email Marketing, Community, Analytics and Mobile App Development. Within each of these categories, though, Salesforce typically offers Good/Better/Best packages to create an upsell path and reach a wider variety of potential customers than they could serve with a single offering.
A segment / role / use case strategy is slightly rarer to find. It is most effective when a company offers a platform that, with slight modifications, can serve a diverse assortment of use cases that have a very different willingness to pay. For instance, a product that serves both business and consumer or both internal and external facing business needs. It typically coincides with a strong product marketing function, which has deep knowledge of how different audiences derive value and can message appropriately to each audience.
LinkedIn, the professional social network, has pursued a segment / role / use case strategy. They build off the same foundation (i.e. access to their network of professionals), but have created separate packages and product marketing that speaks to how different audiences can benefit from it. Those audiences include recruiters, sales teams, marketers, business leaders and individuals looking for a new job.
The modular / build your own approach was the least common in the study, which was not surprising. This approach too often feels like nickel-and-diming to the customer, lengthens the sales cycle and puts a huge burden on the sales force. It normally is a fall back plan when, for instance, a portfolio was built through acquisitions that don’t fully fit together or a sales team is hell-bent on upselling existing customers rather than going after new customers. Success requires customers and sales knowing enough about the product to handle complexity, or a customer base having very specialized needs.
Twilio, the cloud communications company valued at over $1 billion, represents one of the few successful examples of a modular approach. They emphasize a simple pay-as-you-go approach to their pricing with separate fees for voice, client, messaging, International, SIP trunking, Network Traversal, Support and more. This works for Twilio’s business because it aligns well with their overarching brand and it allows them to seamlessly scale pricing to service everyone from small startups to very large global companies. It also feeds into Twilio’s recently announced add-ons marketplace, which allows customers to access pre-integrated partner technologies that are billed through Twilio and all charged on a pay-as-you-go basis. These include IBM Watson Message Insights, Whitepages Pro Caller Identification, Payfone TCPA Compliance and more.
Building Good / Better / Best Packages
Once you’ve settled on a packaging strategy – and in all likelihood have selected a Good/Better/Best approach – you’ll then need to decide what functionality should be included in each tier. Doing so requires product research into the value of your different features and services, and how that value differs by customer segment.
When I work with companies, I help them categorize features into “leaders”, “fillers” and “bundle killers” for each customer segment, a best practice preached by consultancy Simon-Kucher & Partners.
The “leaders” are the hamburger in your McDonald’s value meal; they are what everyone wants and comes to you to buy. These must be included in all packages.
The “fillers”, meanwhile, are the fries and coke. They are seen as nice-to-have and sweeten the deal. Customers will cherry pick fillers when sold a la carte, and so a bundle helps drive uptake and a higher average revenue per user (ARPU).
The “bundle killers”, on the other hand, are the coffee of your value meal. Few people want a value meal with a burger, fries, coke AND a coffee, and adding coffee to the value meal might even turn people off from buying entirely because they’d end up with more than they need. There will be a handful of caffeine-starved customers who do want the coffee, though, and they can purchase it a la carte outside of the value meal.
It is critical to do this leader/filler/killer categorization by segment, especially for companies that sell into the SMB, Midmarket and Enterprise. Advanced features like integrations, SSO and advanced security may be mission-critical for the Enterprise buyer looking for a corporate-wide solution, but would be a “bundle killer” for the mom-and-pop buyer who needs only the core functionality.
While it takes time and research to get right, a SaaS packaging redesign consistently leads to revenue growth and more satisfied customers. The expansion stage is the perfect time to pull the trigger on it. You’ve built the product, scaled the go-to-market function… isn’t it time to revisit the packaging?
Have you recently redesigned your SaaS packaging strategy? Which approach did you choose? Let us know in the comments, we’d love to hear from you!