In 2022, we’re possibly at the pinnacle of technology’s penetration into human culture. As undoubtedly the generation whose lives are most shaped by technology, we’re brewing a melting pot of disruptive leaders and life-changing products. We have smart glasses that can caption live speech for the deaf and machine learning models that can generate images from human text. There is no shortage of startup ideas, enterprising teams, and innovative products. So why do many startups fail to live up to their glorious visions?
Pricing. That’s the secret sauce of building a business.
Most businesses fail to give pricing the scrutiny it deserves and typically take a set-it-and-forget-it approach. This costly mistake has a tangible impact on a company’s bottom line and accounts for 15% of all startup failures.
Pricing remains an inscrutable art in many businesses. It involves market research, product positioning, and customer insights. Deciding your initial set of price points can be challenging enough, so it’s only natural that businesses don’t want to repeat this process.
That makes sense, right? No.
The opportunity cost of not optimally monetizing your customers is too high for you to ignore. Optimizing your pricing strategy can help you maximize revenue from your users and improve profit generation.
How did SaaS disrupt software pricing?
The SaaS pricing model exploded in popularity because of its inherent simplicity and functionality. With the pay-as-you-go subscription-based billing mode, users can pay only for the licenses they consume and cancel anytime they wish to. A monthly plan also lowers the barrier to entry and opens up your product to new customer segments. Everybody wins.
The SaaS model works because it has a couple of growth drivers built into its structure.
Opportunities to Upsell
A subscription model typically has multiple plans one can choose from. They are tiered based on user licenses, benefits, or both. Over time, your customers’ needs may scale in size or complexity. Understanding how users engage with your product can help you offer upgrades as a strategic value addition instead of overt promotion.
Visibility into how your users consume your offering is a strategic advantage of the cloud; when leveraged correctly, it can provide several key insights into your product’s value proposition and
positioning. Tactical upselling can be an effective growth strategy for SaaS businesses and allows an additional stream of revenue from existing customers.
Value-based pricing
Nobody likes to be charged for anything they didn’t use. The deep-seated hatred for ambiguously worded charges unites us all in its fiery embrace. The Fair Billing Act protects users from unfair billing practices. For example, Slack is known for its fair billing policy of charging only for active users. If a paid user becomes inactive, they add a prorated credit for unused time.
For any product or service, the end user’s willingness to pay depends on the perceived value of your offering. Value-based pricing is an approach that leverages this philosophy. Value-based pricing is a way to zero in on your value proposition, highlight your USP, and quantify your competitive advantage. What features are your users willing to pay for?
While this approach warrants a lot of soul-searching, waiting at the end of the tunnel is the key to profit maximization and revenue growth – a price your target users are only too happy to pay.
Pricing and growth: A symbiotic duo
Growth means more revenue, not necessarily more customers. According to Price Intelligently, pricing is 4x times more efficient in improving revenue as acquisition and 2x times as efficient in improving retention. Pricing strategies remain an untapped growth lever for SaaS companies.
PwC identifies four areas of pricing management – pricing strategy, pricing formulation, transaction management, and performance management – that differentiate market leaders from laggards. Market leaders consistently outdo their competitors through their perceptive uses of growth systems and models.
For example, the PLG model, in addition to maximizing value, can be a valuable informant of your pricing. The freemium model or a trial model can be used to encourage adoption and usage over time. This is a core metric for models like usage-based billing. Businesses can also bundle solutions together to expand the size of the overall market, reduce transaction costs and increase the company’s overall profitability.
On the other hand, pricing models can contribute invaluable insights into product development. ‘Usage’ can be a defining metric that decides whether a valuable feature should qualify for a higher tier or evolve into a different product by itself. Adopting a model like usage-based billing also forces customer-facing functions to prioritize their processes to drive usage, producing a far more adaptable and accessible user experience.
Why should you iterate your pricing?
As more businesses begin to favor value-based pricing as an ethical billing practice, it reiterates the importance of price optimization. Value-based pricing is a research-intensive approach that has experimentation built into it. It may take you a couple of iterations to identify your golden numbers.
Several studies have proven the impact of price optimization on revenue growth and profitability. In addition, iterating your price points and feature bundles can help you understand your user base, their usage patterns, which features they value most, and which ones they’d be willing to pay for.
Running pricing experiments is the most effective way to validate your pricing hypotheses and identify the optimal price points for your business.
How can you iterate your pricing with ease?
Once you’ve decided to optimize your pricing strategy, the last weapon you need in your arsenal is the right tech stack. Despite the evident benefits, many organizations are apprehensive about running pricing experiments because of the operational overhead. Executing even a simple pricing change can be overwhelming without the right tools.
An entitlements management system (EMS) gives you fine-grained control over features across your product. You can iterate feature bundles and override subscription-level entitlements without developer dependencies. For example, with Chargebee entitlements, you can accelerate GTM strategies for plan bundling and launch experiments faster. You can streamline your provisioning workflows by centralizing entitlements data and optimizing your software monetization experiments to deliver maximum value.
The right tech stack can give you an in-depth understanding of your user base and enable you to capitalize on it effortlessly.
Closing notes
A study by the Business Research Company estimates that the SaaS market is expected to become a $439 billion market by 2025 with a CAGR of 12.5%. Regardless of fluctuating macroeconomic factors, the demand and usage of software products aren’t showing signs of slowing down. This exciting space has ever-increasing demand and a lot of room for disruptive players.
Start iterating early and get your pricing right if you’re building a business. Pricing could determine the extent of your market penetration or even your survival. Remember, there are no small pricing experiments, only small revenues.
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