“We don’t make movies to make money, we make money to make more movies.”
– Walt Disney, co-founder of Disney
Look, I get it – there’s a big goal and deep meaning to why you are actually building a SaaS product. Whether it’s “to make the world a better place” or “boost productivity at work”, the bracing reality is simple – your startup won’t last long without monetization. This explains why everyone is so obsessed with finding plug and play growth hacks nowadays. Are you the one running after the skyrocket growth too?
Well, growth comes in different shapes. Marketers are so absorbed into the customer acquisition process that sometimes they completely forget about an essential pillar of every business – pricing. Meanwhile, an effective pricing strategy can make or break your business. In fact, it may bring you the long-awaited growth without even expanding the customer base.
How do you come up with the numbers to put on your pricing page? More often than not, companies that are just starting out take their price figures out of thin air. This is not an approach you want to follow, not if you want to see your business up and running. Therefore, let’s take a look at the fundamentals – things you must consider when coming up with a pricing strategy for your SaaS.
Cost-plus vs competitive-based vs value-based pricing
Remember the “three little pigs” story? Each built a house, but with a different material. The three most popular (in SaaS world at least) methods for setting prices follow the similar pattern.
- Cost-plus pricing is the house of straw. It’s as simple as it can be. You make something, then sell it for more than you spent making it. It neither takes into account competitors’ pricing strategies, nor does it consider any market research. What’s more important, this method lacks the main component of your business – customer.
- Competitive-based pricing is a house made of sticks. This approach is more solid, as it’s based on the market competition and the pricing strategy your rivals stick to. Check the prices of your competitors and come up with your own that’s close enough to their numbers. Cons? It still doesn’t take into accountyour customers.
- Value-based pricing is a house made of bricks. As the name suggests, this method is based on the product value along with a customer willingness to pay. Customers don’t care how much you’ve spent to build your product or what it takes to promote it. They pay for the value they get. This approach takes time, effort and dedication, but it pays off.
Since I totally subscribe to a “practical pig” philosophy, I believe in doing things as well as you can. Follow me as we dive deeper into the value-based pricing.
How do you determine (and quantify) the product value?
Let’s face it; with a SaaS product, we don’t satisfy basic needs. People won’t be left hungry or barefoot if they don’t buy from you. People might not even know they have a problem. This makes articulating the product value even more important.
Smart SaaS companies don’t sell features. They sell a specific result, the benefit their product delivers. Does your software tool increase productivity? Reduces frustration? Eliminates travel? Maybe it saves time or money? Figure out what value it delivers to your customer. By figuring out, I don’t mean having a brainstorm session with your team. What you’ll need is real feedback from your target audience.
Interview your potential or existing users and find out what it is about your tool that is (or might be) valuable to them. It’s pretty easy with existing customers – send out an email with a link to Google Form asking about your product value. The tricky part is determining value at the pre-launch stage where you don’t have active or paying customers.
Who do you send out your form to? Which questions do you ask them? We’ve been there with our Chanty team chat and here’s the path we’ve taken; by the way, if your SaaS is more than just a wishful plan, you’ll find benefit in our advice as well.
1. Survey the beta testers
Surveying potential customers will help understand your buyer personas, their challenges and therefore, the value your product may hold for them. If you are at a stage where you need to attract early adopters, read our advice first. A few dozens of beta testers is enough for you to go ahead with surveys. The more the better, of course.
When Chanty was just starting off, we reached out to our target audience on LinkedIn asking for help with a survey. Many of those who completed it have become our first beta testers. The survey answers helped us determine the value of a team communication tool we were building. Here’s the exact list of questions we asked that you can adapt to your business as well:
1) How big is your company?
2) What is your company’s field of business?
3) Which departments tend to experience the most communication challenges in your company?
4) What kind of communication challenges do you typically face in your company?
5) What do you use team messengers for?
6) What platforms do you use to access team messengers at work?
7) What characteristics should a perfect team communication platform deliver for you?
8) How much would you be willing to pay for a tool that solves your team communication challenges?
9) Would you like to learn more on how to improve communication in your company with a simple AI-powered business messenger – Chanty?
Specifying the size and business industry helped us better understand each segment of our target audience. Naturally, different businesses have different communication challenges. The survey helped us get into the skin of our potential customers and paint a picture of the product value for various business segments.
Some of the responses we got to our survey at Chanty
2. The “Why did you sign up for our product?” email
Once we built solid ground for our lead generation with content marketing, people started coming to our blog and signing up to beta test Chanty. We thought it would be great to ask them about their goals and communication issues right after sign-up. It’s when we came across Groove’s blog article where Alex, the CEO, shared how they’ve done it with one simple question, “Why did you sign up for %tool%?” We’ve followed this technique and, as it turned out, it was the right step to take. Here’s an email our customers receive right after sign-up:
The feedback we’ve received from our new sign-ups is priceless. Not only it helped us to once again take a peek at team communication tools with the eyes of our target audience, it also let us establish a connection and start a conversation with our potential customers.
One of the replies to Chanty after sign-up email
3. The “Why do you pay for competitors?” quiz
Analyzing competitors is great, but what if you could have your rival’s customers’ feedback on why they actually pay for the tool? We have a popular blog section at Chanty – Team Chat Wars. Most of the people visiting it are those comparing team communication tools or looking for certain team chat alternatives. It’s where we decided to step in the game and ask our visitors if they pay for a tool they currently use. In case they answer “Yes”, the next (and last) question is “Why do you pay for your team chat?”
The “Why do you pay for competitors?” quiz on Chanty blog
The replies we’ve received so far have been of great value.
One of the replies to our “Why do you pay for your current communication tool?”
What’s cool about this approach is it lets you engage with the readers – a far broader audience than your email subscribers (based on our experience at least). Moreover, you can ask your customers any kind of question through this quick-quiz channel. As for the tools, this was our custom implementation; however, I’ve seen that Hotjar lets you put up similar on-site quizzes.
Connect the dots: value in terms of pricing
Now that you found the biggest challenges of your customers and realized the main value points of your product, it’s time to break them according to the buyer personas. The truth is, different people may get different value from your product which is totally OK. Your task is to understand the trend and segment your audience accordingly.
Inspired by this pricing guide, we put together another survey where we’ve aligned our top five features that hold the most value to our customers (according to the earlier customer feedback). Then we asked two very important questions:
1. What feature is least valuable for you in terms of Chanty pricing?
2. What feature is most valuable for you in terms of Chanty pricing?
Note how we didn’t ask our customers to rate the features on a scale from 1 to 10. Instead, we’ve asked them to make a decision – pick only one feature that is least valuable and only one feature that is most valuable. This approach helps to separate what your customers care about from what they really value.
When we saw the answers, we spotted the trend right away – our respondents got naturally segmented into four buyer personas according to the company size. It turned out people with 1-10 employees found task manager feature super valuable, while they had no interest in audio or video calls. On the contrary, companies with 50+ employees highlighted that audio and video calls functionality is an absolute game changer for them.
Based on the answers, we were able to put this graph together:
It shows how valuable a certain feature is for a particular segment. As you see, the data is tremendously different for different segments. This analysis should help you focus on the right features as you develop your roadmap. Moreover, the natural segmentation should pave the way for product packaging
Consider customer willingness to pay
Learning more about your customers through surveys, quizzes, interviews and further conversations will also give you an idea of how much they are ready to pay for the product that solves their issues. In fact, you might even receive specific numbers in the reply, e.g. our beta testers often mention a price they are ready to pay in their feedback:
Chanty customer is sharing the price he’s willing to pay
Further on, thanks to Price Intelligently insights, we’ve learned that asking your potential clients directly, “How much would you be willing to pay for a tool that solves your challenge?” (like we’ve done earlier in Chanty survey) isn’t the best way to go.
Turns out, it’s quite hard for people to give a reasonable number in a reply. This is when we’ve decided to tackle the issue from a different angle. This time, we’ve asked the following four questions:
1. What price do you find too expensive to pay for Chanty?
2. What price do you find too cheap and raises concerns about team messenger quality?
3. What price do you find a bit expensive, but ready to consider a value for price?
4. What is a great deal for the price for you?
Next, we’ve calculated the percentage of our respondents who consider the particular price:
- too expensive,
- too cheap,
- a bit expensive, and
- great deal for money
When we put the numbers to the grid, the pricing became pretty clear, lying in the range of $2-4 per user per month.
I’ve shown you everything we’ve done at Chanty to determine the value of a team communication tool we are building at the early stage of our product. The research we’ve gone through helped us settle on the price range for our SaaS. The main insights we received on our pricing journey:
- Nobody cares how much money you’ve spent building your product. People buy products only because of the clear and tangible value they receive out of it.
- Pricing your product based on the competition might work, but it doesn’t take your customer into account.
- Defining product value is the most difficult part of the value-based pricing strategy. We’ve taken different approaches to this issue: email surveys and questions, as well as on-site quizzes. First, we discovered what communication challenges our potential customers face. Then, we found out how our software can help solve those pains. Finally, we asked our target audience about their willingness to pay.
What is your experience with a value-based pricing? Feel free to share in the comments!