How to optimize your SaaS pricing in practice
Over the course of the previous four parts of this series, we’ve covered a number of ways in which you can grow your SaaS business, and the implications each has for your revenue delivery requirements.
There’s one particular growth strategy that underpins all of them, and that’s pricing. As talked about a lot by our friends over at ProfitWell and OpenView, the fastest growing SaaS companies constantly experiment with their pricing.
Doing so is shown to be 4 times as effective at driving growth than acquisition, and twice as effective as retention. Two in five companies that alter their pricing report a 25% higher increase in ARR as a result.
Yet despite all the evidence that changing your pricing delivers growth, the vast majority of businesses don’t have a strategy in place around pricing optimization, and most early-stage companies are greatly underpricing their offering.
Hearing you should be adjusting and experimenting with pricing is easy. But testing and changing your pricing – actually putting it into action -- is hard. Really hard. But this is where your revenue delivery strategy comes in.
Let’s run through some of the different areas of pricing you’ll want to be able to experiment with to maximize your revenue growth.
The first is true localization.
We’ve previously talked about the global opportunity that SaaS companies have by default. True localization sees companies adjust their pricing to suit the purchasing power and willingness-to-buy of the local market.
UK buyers, for instance, are comfortable paying a higher price point than in the US. The opposite is true of Australians.
You’ll need to test your way to find out by how much. You’ll also need to be able to support their local currencies in the first place – and preferably without paying through the nose for FX fees. Experimenting with this tactic sees businesses increase growth by 30%, according to ProfitWell's research.
The second area of experimentation is discounts.
What’s the best possible offer that increases acquisition and retention while also maximizing revenue? This will vary by customer segment, and it’ll change over time as your brand and value proposition grows. So it’ll need regular testing. Plus the ability to only reveal it to certain segments of customers.
You’ll need to make sure you have the revenue delivery infrastructure in place to offer a wide array of these discounts. One-time, recurring, % discounts, flat-fee discounts - and all at different times during the user journey.
Related to discounts, is the decision around your monthly vs annual subscription price points. Where’s the sweet spot that nudges people into annual contracts? With those on annual plans statistically much less likely to churn.
Similarly, how do you price upgrades and add-ons just right, so more customers increase their spend over time?
Having experimented with the prices and got those nailed down. You’ll need to ensure you’re technically set up and ready to deliver seamless upgrade paths to users as they adopt these differently priced plans and add-ons.
That brings us to value metrics.
The price people are willing to pay for a product or service is hugely affected by the value perceived by the customer, which again can hugely vary depending on your audience. Can you drive more revenue by connecting your pricing to users or usage? Do you offer licenses or credits? And how do you bundle them up? Your value metric is something you need to continuously revisit, or you will more than likely leave money on the table.
Meanwhile, you’ll need the infrastructure in place to facilitate this experimentation and measure the results. Your pricing needs to evolve right alongside the maturity of your business and product. What’s stopping SaaS leaders from doing this?
A lack of revenue delivery strategy.
You need to put tools and processes in place that enable you to run these kinds of experiments and measure them effectively on a recurring basis. You need a billing and payments stack that lets you easily adapt pricing and track results, and a finance & ops team that can stay on top of the administrative impact of these experiments.
Do you have the capability and resources to do it? And how much revenue is the inability to do this costing the SaaS industry?
If you’re a scaling SaaS business and you’re looking to grow, then you’ll 100% already be thinking about your product and go-to-market strategy. A revenue delivery strategy is crucial to executing those plans. And an aligned go-to-market, product, and revenue delivery strategy is key to success.
It’s never too early to be building revenue delivery into your business strategy. And if you need any help, you know where to find us.