SaaS Pricing: The True Cost of Short-Sighted Decisions
SaaS pricing is complicated. Before you make a decision you need to consider all the angles and keep in mind it’s perhaps the single most important decision a young company can make (no pressure).
Pricing out a B2B SaaS product is a complicated decision. For starters, it involves a larger number of moving parts than traditional software pricing (perpetual licenses). You have to take into consideration expected customer tenure and churn, and the impact that they can have on your profitability. You also have to put a lot more thought into price structure, price level, and billing decisions, because they now affect a recurring revenue stream.
To top it off, determining price is also one of the most crucial and impactful decisions that a young company has to make. Because pricing decisions affect all sides of a business either directly or indirectly — from product to customer support to finance to sales and marketing decisions, you name it — they have the very real potential of making or breaking a business.
What is interesting is that despite all this, 41% of the time pricing is determined by the founder(s) and only 17% of the time is it a team based decision. The reason I highlight this is that founders may be taking a real risk by not incorporating the perspectives of other members of the management team when it comes to pricing decisions.
SaaS Pricing Considerations: Taking into Account More than One Perspective
Just take for example the question of which billing options to offer and whether you should offer upfront, advanced term, or on-account billing. These are both questions that different functional experts will look at differently. No one perspective will provide the full picture of the true costs and benefits of each option. The executive opinions on the matter might break down something like this:
- From the eyes of the head of sales, upfront and advanced billing will increase the minimum hurdle that a prospect has to overcome to purchase your product. This is because they see paying a term commitment in advance as a larger capital outlay than paying a small amount on a more regular basis.
- From the eyes of the head of marketing, upfront and advanced billing can drive up customer acquisition costs as well as lengthen a sales process and decrease win rates. Keep in mind these are expectations based on how they believe customers will perceive pricing, not what actually will happen. They neglect to see that many successful companies in the SaaS space like ExactTarget and Salesforce.com use advanced billing practices.
- From the eyes of the CFO, many may not realize this, but choosing on-account or shorter upfront billing periods actually has a negative effect on your cash flow and can force a company to be more dependent on outside capital or less aggressive in its growth plans.
- The CFO will likely also highlight that delinquent billings and unfulfilled billings are a reality. He/she may want to know how they are going to account for this risk if they do not used advanced term or upfront billing with a longer billing cycle. They may offer ACH requirements as a way to help resolve this potential risk. These are factors other functional areas will likely not even think about, and both are major factors that many founders will not see when initially thinking about this question.
- The head of product may have a vision for where he/she hopes to take the product, and limiting the capital available as well as setting low price expectations in the market may make it difficult to develop functionality that has higher expected costs.
- The head of customer success/experience will be looking to develop higher quality customers and may see a longer billing period as a way to see that these customers are not just trying to kick the tires of several products and are actually committed to giving the product their all to create a mutually beneficial experience.
It is common to lose sight of the big picture and forget about how these decisions affect other sides of the business. Many founders will neglect the CFO perspective and put the company in a rough capital position. Others will lack the understanding as to what this means for the product road map and possibilities. By asking for feedback from each of these perspectives, founders can make much more balanced and well-informed decisions.
Image courtesy of Brittney Bush Bollay
What started out as an adaptive move to help Logz.io align with buyer behavior turned out to be a powerful way for them to open up the market and take advantage of incremental opportunities.