Pricing model for SaaS: more money - more problems

Hello, community!

Today we want to share with you the translation article, the author of which Lincoln Murphy is one of the gurus of the Western SaaS market. Since 2006, he has helped more than 300 companies to accelerate their growth and development through optimizing the customer's life cycle, from its conquest to retention. The article is devoted to a very important issue - the choice of a pricing policy that would help each client to get exactly the kind of income that he is really ready to pay for your product. So let's go!
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This article is about pricing models for SaaS, but I'll start it with a story about people's behavior patterns.

We all know well that happiness cannot be bought for money. For money, you can buy freedom, and already use it to do something that will make you happy. Money is only a means.



But quite often it happens that people and companies, as soon as they start making serious money, face serious problems. Life and business become more complex, and situations arise that are directly opposite to the original goals.

In this article, we will look at the issue of shaping more efficient and profitable pricing for SaaS in the light of the “more money - more problems” situation (as Notorious BIG sang, “Mo 'Money, Mo' Problems” sang).

With age, we begin to understand that things in this world are not important. We are not so killed at work and disappear there all day long to buy a bigger TV, a cool sports car or a giant house. We do all this because it should ultimately allow us to spend more time with family, with friends, and even with colleagues. People and communication are what we are working for.

Complexity creates problems

Interestingly, the more people start earning money, the more problems they have. Same with business. Sometimes these are some customer complaints, low productivity, sometimes something else. Perhaps all these problems are actually potential opportunities for which there simply is not enough time.

“More money” usually means an increase in income, but this is not always an increase in profits. This is usually an increase in * complexity *, which is manifested in an increase in overhead costs, in a larger number of employees, in a decrease in efficiency, in a headache, in what we see less often with the family. All this does not make us happy.

This is not what we wanted?

On issues and prices

Therefore, when I help start-ups or already grown up companies involved in SaaS or web applications in developing a pricing strategy, I always try to find a price scale that does not correspond to the income of their clients, not the number of employees in client firms, etc. and the complexity of client organizations.

For some applications, this does not work or does not matter, but in most cases there is a direct relationship between the type of clients, the complexity of their organization and how much they are using this application to solve their problem and are willing to pay for it (by the way, if you are young a business that has not yet even entered the market with its product, it may be useful for you to test the price level that a potential consumer of the product is prepared for. As other companies do, we told in the article “Growth Hacking: how to make money and the service before it starts? " in a blog on your website).

In other words, as soon as an organization builds up revenue, side effects arise that are associated with an increase in its complexity - because human, managerial, financial, and other problems also grow.
This is an excellent proof of the More Money, More Problems Theorem.

Complexity creates opportunities

Moreover, if you manage to cope or partially overcome the problems encountered by the client, new opportunities to enjoy money will open up before you!

Increased income from the outside may seem happy, which fell on the heads of your customers, but if this suddenly turns out to be stress and increase in the amount of work, they do not need such happiness. And what do you think, if you offered them to reduce the complexity, would they agree to pay for it? It would be logical if it were like this: the more you help them with the problems of their business, the more they earn.

As I said, this obviously does not apply to any applications or any situations, but if you haven’t thought about it yet, think about it.
Small and medium-sized companies suffer from this misfortune more often, because for large organizations there is nothing new here, it is a past stage. Remember, however, that regardless of the size of the firm, you sell your solution to real people. What motivates them? If you understand this, you will get rich.

But how does this relate to the SaaS business?

Mental Experiment: Account Fee

Let me give you an example of an approach in which the complexity of a client’s organization is taken into account when shaping a pricing strategy for SaaS or when applying an already developed strategy.

Suppose you offer all users all the possibilities you have, and the difference in price and versions is determined only by the “number of users”. This is a fairly common method inherited from software companies that charge by the number of licenses. But because of this approach, you can miss a lot of benefits.
Suppose you have two subscribers:
 Large company with a simple structure. Signed for 50 seats.
 Firm smaller, but much more complicated. Signed for 2 seats.

Many scenarios are possible, and I’m writing for some now.
1. A smaller organization is more likely to use more system capabilities, because they need all of them, but ... Because of your pricing policy, they pay LESS than a larger firm, which, in all likelihood, needs only basic options.
2. A smaller organization could use your product even more actively if it were not related to the number of jobs. But since you tied the price to exactly the number of places, they will leave as many accounts as they already have, and maybe they will just share logins or use other tricks to evade the upgrade. You yourself have created this artificial barrier.
3. It seems to be illogical that they use the system in this way, but this is because you tied the price to a metric, which they themselves do not consider to be important or decisive when using your product.
4. A larger organization might also want more jobs, and for some of them more opportunities, but they will not increase the order, because it will be expensive. Incorrectly building a price scale, you have created both the prerequisites for dissatisfaction with the price, and obstacles for expansion.
5. If you changed the approach and began to take into account the complexity of organizations, the barriers to the introduction of new opportunities would be removed, and the price would become consistent with what each particular firm considers important.
6. By tying, as in this example, the price to an unimportant metric, you depreciate your priceless product in the eyes of customers. As a result, neither one nor the other company wants to pay you more, because the number of seats is not something significant for them.

If you put the price in line with the complexity of the client company, you would sell a cheaper version with fewer options and an unlimited number of places for a company that used to pay for 50 places, and a much more expensive version for a more complex company, and not two , and for an unlimited number of places.

Stop! So, I suggest taking less for 50 places than from a smaller subscriber? But that's not all.

I argue that by adjusting the pricing policy for what customers consider important (in this case, the complexity of the organization), we will actually get MORE from each of the companies in this scenario, both initially and in the process.
It is very difficult to explain everything in such terms, so I will tell you one story from life. Listen guys.

Watch out for the “Seems” metric

I will tell you a story about one company, which, although I didn’t start by taking money for each job, ended up badly. It was a SaaS-vendor for delivery and fulfillment (for online stores).

The price offered was calculated on the basis of how many packages the customer sent per month. At the same time, all users had access to all features. For an online store that completes and sends parcels to its customers, the “Number of Parcels” seems to be a pretty adequate metric.

But it only seems so.
And what if you have the following two clients:
1. A company that sends souvenirs at an average price of $ 5, and such packages are 100,000 per month.
2. A company that sends electronics at an average price of $ 5,000, and there are only 300 such packages per month.

And here our metric breaks down.
The second company has a much smaller number of parcels, but much higher needs. They need to create ratings, buy insurance, work with customs, etc. And the first company simply sends the goods, it is possible that the courier.

And what would happen if this SaaS vendor took the money for the functionality and complexity of the process, without tying the price to the number of packages? The first company in this case would pay as much, but the second - much more. Since, with such a price scale, customers understand what they are paying for, there will be no objection from the second company.

Here are some more examples of matching the price (and offers) of customer complexity:
 An accounting SaaS vendor, such as Xero, whose price is segmented depending on the need for payments, in calculating taxes, in multi-currency transactions and other more complex things. This is not a wholesale approach to pricing, although on the Xero website, an unimportant metric is given as an example.
 An e-marketing vendor such as GetResponse, which has a low retail price for the average customer, and a premium offer with dedicated IP, DKIM / SPF authentication, extended API, and so on. contained in their package GetResponse 360.

But ... what would happen if no one ever did that? How would you look with your price segmentation, depending on the complexity of the client?
Here it is useful to remember the following:
People buy from you, not because they understand what you are doing, but because you understand what they are doing.

Here the most important thing is to think.
As the saying goes…

Doubt in price is doubt in value.

Thus, when you begin to relate your price model to customer needs, in our case by offering price levels according to the degree of complexity of the organization, you adjust your metric to the one that these organizations understand and consider the most important.

The higher the awareness of value, the greater the desire to pay.
They have “more money and more problems”, but now “more money” is yours, because you helped them to better understand their values. In addition, since you fixed it in your price list and debugged the sales process, it turns out that the extra money came to you at no extra cost in the form of nerves and time and made you one step closer to your goal - to freedom and a better life!

Let your SaaS company grow and thrive!