SaaS pricing is difficult to master, and just a few tweaks to your strategy can have a huge impact on your revenue.
Today, I’m looking at how you can determine the most appropriate value metric for pricing your SaaS product.
What is a Value Metric?
A value metric is the metric that best correlates with where your buyer perceives value from your service. (Note: I said buyer, not user). Your value metric determines how you charge for your service, and how you limit each pricing tier.
When determining the best value metric for your SaaS product, it’s vital that you base it on the buyer's perception of the value your software provides – not the value you think it provides. This requires you to have an understanding of how your buyers use your software, and the problem they want to solve with it.
The ‘Per User’ Problem
The most common value metric mistake we see in SaaS is companies fixating on the ‘per user’ pricing model – regardless of whether or not it makes sense for their service. This is because per user pricing is easy to understand and measure. But it’s not always right for your customers, or your business.
As Patrick Campbell, CEO of Price Intelligently, says:
“8 out of 10 companies using per user pricing should be using a different value metric.”
The biggest problem is that per user pricing actually disincentivises adoption of your service:
Consider accountancy software that charges on a per-user basis. Sure, you can get a 20 user licence so that all members of your accounting team have access, but what about the rest of your company?
If, instead, the software was priced based on annual revenue accounted for, or profit, you could make the software available company-wide. This would mean that the accounting team could have full access as before, but additionally, non-accounting employees could use it to file their expense reports or raise purchase orders directly.
Company-wide adoption makes it harder for your customers to switch to another platform or service, and increases the customer's perceived value of your product as it's being utilised across all departments.
If you’re pricing your service on a per user basis, ask yourself: does adding a new user add value for my customer? Or is there a different pricing model you could use that is more in line with where your customers find value from your product?
Improve your pricing to boost revenue
Improving your value metric so that your pricing more closely correlates with your customers' perception of the value of your product is good for your customers, and great for your business.
HBR's study claims that improving price by 1% increases operating profit by 11.1%, making it the most effective thing you can change to improve business performance.
How to Identify Your Real Value Metric
Too often we see SaaS companies pricing based on a value metric their customers don’t understand, or that isn’t relevant to them. While per user pricing will work for some companies, it shouldn’t be your default option.
In order to identify the best value metric for pricing your SaaS product, you need to consider two questions:
1) What does your customer need from your service?
This is the most important thing to consider. You need to understand what your customers require from your product – that is, where they get value from it.
Consider Dropbox. They’ve identified amount of storage as their key value metric. But imagine instead if they charged based on the number of files you stored with them.
Customer 1 is a video production agency; they upload ten video files per month. Customer 2 is a recruitment agency who uploads hundreds of CVs every month – one or two-page documents.
If Dropbox charged per file, the recruitment agency would pay way more than the video production agency, and would quickly realise that they’d be better off sending these files as email attachments – because they’re not getting value from the number of files they’re uploading.
Key takeaway: Figure out what your customers value about your product, and then work out a way to charge based on that.
2) Is it easy to understand?
When a prospective user is looking at the pricing page on your website, they need to be able to understand what they’re looking at.
That’s one of the reasons per user pricing is so popular: everyone can understand it, and can calculate how much they’d end up paying if they used your service, if their whole team used it, or if the whole company used it.
Once you’ve identified where your customer gets value from your product, and worked out how to charge based on that, you’ve reached the second test.
Will someone “get” your pricing just from looking on your website – or will they need to contact someone at your company for support?
Key takeaway: if a customer needs to contact you for clarification about your pricing, then it’s too complicated. If they need to send an email, log a call-back request or contact you via social media, chances are they’ll just go elsewhere – to one of your competitors who’ve kept things simple.