SaaS Pricing and Packaging: What to Do When Things Go Wrong (And How to Avoid Disaster)
Pricing is a crucial, pivotal element in any SaaS success story. It can be a game-changing growth lever. It can also create major controversy and unrest with customers. Most frustratingly, despite its central role in building and sustaining a company, it’s not a skill that’s taught in business school.
For a lot of companies, especially startups and expansion-stage organizations, figuring out pricing involves a lot of trial and error. It’s also a good idea to learn what you can from others who have already traveled the road you’re on.
I have had the opportunity to learn a great deal, both from others and through my own pricing experiments. As the first marketing hire at Zendesk, I underwent something of a trial by fire that proved to be a very valuable experience. I’ve also advised at Airtable and Outreach.io. In my current role as CCO at Figma—a collaborative design platform—I apply all my knowledge about the things that worked well and the things that went wrong. Both have lessons to teach.
War Story – The Price Change that Went Wrong (And What We Learned from the Experience)
At Zendesk, we made a pricing change every year. Early in my time with the company, we made a change that ended up causing a bit of a customer relations challenge. It was a touchstone moment that made us realize in very concrete terms not only the importance of pricing overall, but also the importance of a clear and detailed communication plan to accompany any pricing change roll out.
The situation was this: our engineering team was constantly innovating and adding new functionality. Month after month, we added new features to our existing packages, but didn’t increase the pricing. Eventually, we hit a kind of tipping point where we felt justified in charging a higher price in order to get a return on all the value we were delivering.
At the time, the decision was based mostly on intuition and conversations with customers and employees. Ultimately, we made the final call to raise prices for new customers. Existing customers could keep their original price with one catch, they had to upgrade to an annual commitment. We had a number of customers that paid month-to-month.
As you might imagine, many of Zendesk’s customers were not thrilled with this offer. Worse, they made their feelings known in a very public way. My job, once the bad feedback started coming in, was to figure out what the less vocal customers were thinking and propose a plan to move forward. I put together a survey and collected a lot of feedback, then we pulled company leadership together and locked ourselves in a room for a couple days.
In the end, we decided to fall on our sword and grandfather existing customers into the old pricing with no caveats. The experience was fairly traumatic internally, but it was also a wonderful learning experience that set the tone for how we thought about future price changes.
That particular pricing “experiment” gifted us with three big takeaways:
- It’s critical to think the rollout all the way through.
The most obvious lesson was that we should have spent a lot more time making sure that the changes we were proposing would fly. We should have talked to many more customers beforehand, collecting valuable data that would likely have pointed us in an alternate direction and saved us (and our customers) a lot of pain and anguish.
- It’s a good idea to document your pricing philosophy and decisions.
We did two forward-thinking things at Zendesk to help us ground our pricing changes. First, we developed and documented a pricing philosophy that helped not only center us as a team, but also made it easier for us to onboard new employees who needed to get up to speed fast. As a complement to this, we kept records about why we made each pricing change. These were some of the most strategic and important decisions we made as a company. It was really beneficial to be able to give new hires a sense of where we’d come from and how we got to where we were.
- Don’t forget about the importance of infrastructure.
Being able to make fast and frequent pricing changes in a scalable way is one of the market advantages a company can have against competitors. In retrospect, I would have spent a lot more time brainstorming with our product and engineering teams to build an even more efficient and flexible billing infrastructure that was intentionally designed to support this kind of pricing evolution.
Big-picture Pricing Strategies – Good Ideas that Work for Everyone
Along the way, I’ve picked up a few additional general pricing insights that can be applied pretty universally.
It’s important to regularly spend time on packages and pricing.
Like any core piece of your business, pricing requires regular, intentional attention. While it’s easy to get caught up in urgent day-to-day matters, it’s critical to the long-term health of your business to schedule quarterly meetings for you and your team to do a deep dive on pricing and packaging. If your pace of innovation is high, you’re likely making some kind of pricing/packaging decision every six to twelve months. There are a variety of triggers for these shifts ranging from customer response (or lack of), competitor adjustments, or changes you’re making to your own product. Taking the time to check in on a quarterly basis will keep you one step ahead of the game.
Pricing accountability isn’t a one-person job.
With pricing and packaging being such an influential part of any SaaS business model, how do you assign responsibility for this aspect of your product? In the early stages, it’s typical for the CEO to want to own pricing; but as the company grows and you learn more about your market, primary responsibility should shift to a partnership between a product leader and someone on the go-to-market side. Ultimately, pricing needs to be a priority across the entire organization. Getting buy-in from cross-functional teams is mandatory for success. To help ensure this kind of cohesion and continuity, we created internal decks to shop a pricing change around internally before we implement. This helps uncover and address the various effects a change will have across your company, which in turn makes it easier for everyone to get aligned around the shift.
Deciding on a price is the easy part. Rolling it out well is the hard part.
As the Zendesk experience made clear, while coming up with pricing is not really a walk in the park, it can seem simple when compared with the delicate and sometimes complicated task of rolling new pricing out to an existing customer base. In general, customers don’t usually have a problem with reasonable price changes. They just don’t like to be forced into a change. Think carefully about making any changes that put your customers in a corner. Instead, consider alternative ways to charge more. If you have new features, you might make them an add-on or offer a new upgrade plan. These kinds of approaches are more customer friendly because they create customer autonomy with more options and control. Bottom line—be respectful of your customers’ feelings and opinions.
Two Common Questions – Freemium and the Self-serve/Enterprise Combo
Apart from understanding how to set your prices, change them without alienating your customer base and assign pricing accountability within your organization, there are a couple other questions that come up again and again:
1. When does freemium make sense?
Freemium is a very effective strategy in a lot of instances, but you shouldn’t do it just because Slack is doing it. There are, in fact, a few clear indicators that can help you assess the situation. You might be a freemium-ready company if:
- Adoption of your product can start with an individual or a team rather than requiring an entire department or even the whole company to sign up
- Your product doesn’t require a lot of upfront set up
- Your buyer is also your product’s user
- You’re not trying to be a luxury brand
- You can provide enough value in a free version of your product to attract usage while still holding something back that’s worth a premium
- You want to foster faster adoption
- You’re willing—and have the resources—to sort out how to keep your marketing and supports costs in line
If enough of these indicators point to a strong potential for freemium success, your next step is to consider the two essential things you need to master in order to make a freemium strategy work:
Get your packaging right. If you give away too much and have nothing left of value to charge for, your whole plan will fall apart. And, if you don’t give away enough, you won’t be able to achieve the adoption you need. It’s a delicate balance that requires careful thought.
Get your upgrade paths right. With a freemium element in the mix, your marketing team will have to manage two distinct tasks: getting people in the door and converting them to paying customers. This dual path will also have implications for your product and engineering teams who will need to build for those upgrade paths.
One final note on freemium—be aware that your measurement metrics will be wildly different than for a paid product. You will need to orient yourself around a different set of benchmarks in order to accurately gauge progress and performance.
2. How do you manage pricing with a model that combines self-serve and enterprise products?
Another question that comes up is how to navigate the intersection between your go-to-market strategy and pricing and packaging, especially in situations where your business model combines a self-service option and a sales-enabled enterprise offering.
First rule is that your go-to-market strategy should drive your pricing and packaging, not the other way around. This is in large part because the cost of your go-to-market strategy and the price your customers are willing to pay will be two key data points that will inform where you set your prices. For example, if you have a complex selling process that requires salespeople to convert prospects, you need to make sure your pricing structure covers that expense.
The key difference between self-service and sales-enabled pricing is the flexibility you have when it comes to transparency. At the self-service end of the spectrum, you’ll need to present your pricing in a very transparent way so that buyers can easily understand and evaluate it. At the other end of the spectrum with sales-enabled enterprise sales you have more leeway to work with sales teams and prospects on case-by-case pricing that is less transparent. This gives you the opportunity to test various pricing scenarios to help you figure out what works best.
On a related note, another common question is when to add sales or customer success to a self-service business. At Figma, I was intentional about being responsible for both marketing and sales so that I would have the ability to see the full picture across both business models. One of the insights I’ve gleaned from having this perspective is that it’s time to bring in a sales team when you’re seeing deals come across the table that have the potential to be bigger if you had a sales rep talking with the prospect.
We identify these kinds of deals for Figma by overlaying data about the prospect so we can see where our biggest opportunities lie—not just self-serve customers who are paying the most, but individuals within certain organizations where we know there’s a serious land-and-expand opportunity. In certain cases where we see that potential, it can be to our benefit to get a sales person involved even if there’s only one user who is paying with a credit card. Self-service is going to be a lot slower to infiltrate an entire enterprise company without a sales rep.
Ensuring efficiency in your sales efforts requires reserving your sales team to work only on deals that you know you wouldn’t be able to win or maximize without sales support. Beyond that, there’s no special sales person profile you need to hire for; but there are some organizational considerations. Once you are combining self-service and sales-enabled models, all your operational teams need to straddle those two worlds. Your onboarding needs to be effective for the self-service buyer (e.g. Can I do my job better with this product?) while also being able to distill the product demands of big, sales-nurtured customers (e.g. When will we see ROI if we make a move to this product?). Your roadmap needs to accommodate two very different models with very different requirements. Your product marketing team has to be able to speak to two different kinds of buyers. And, of course, you need to develop two different cost structures.
It’s really a cultural shift that has to happen across your entire company to work well.
Final Word – A Fast-food Analogy and a Call for Collaboration
The last bit of advice I’ll share is something we picked up from the team at Simon-Kucher. They recommend that pricing packages should have three things: leaders, fillers, and NO killers.
The concept can be easy to understand through a fast-food value meal metaphor. In the value meal, the burger is the leader (the thing most people want in the bundle) and the fries and drink are the fillers (features most people want, but which aren’t the main driver for purchase). “Killers” are any features that devalue the bundle. So, in the value meal example, a killer might be a cup of coffee because most people ordering a burger meal do not want it with a cup of joe. Adding the coffee would make customers feel like they were being forced to pay for something they didn’t want in the first place.
With a SaaS product, figuring out which of your bundle’s features are leaders, fillers and killers is all about talking to your customers and looking at usage data to see how they are actually engaging with various features.
A lot of companies make the mistake of presuming that their product team should define the value of each feature, but this can put you way off base. A product team might value a feature based on how complex it is on the back end or how long it took to develop. None of that figures into how a user values a feature. If you want to understand how users value various features, it’s best to go straight to the source. After all, customers are the ones who will be responding to the packages you offer, so why wouldn’t you want to ask them upfront about what they’d like to see? At the end of the day, developing pricing and packaging is a collaborative effort, not only with all your internal teams, but also with your customers. And when you get everyone on board up front, you greatly reduce the risk of making major pricing mistakes.
Check out examples from Slack, Keap, Calendly and more that you can steal to better onboard, convert and retain new users.