April 2022
Author: Bryan Belanger
Anybody who knows a little bit about SaaS pricing strategy has heard of value-based pricing. It’s the ideal method for establishing a SaaS pricing strategy. In its simplest form, value-based pricing means setting pricing primarily based on the customer’s perceived value received from the product. Other strategy options include pricing based on costs and/or based on competition and market pricing.
Value-based pricing strategies are undeniably successful and the appropriate path forward for most SaaS vendors. However, there’s a fundamental challenge for startup founders specifically: Value-based pricing strategy design requires a lot of data and research, which is cost prohibitive and time consuming for most early-stage companies.
Value-based pricing research typically involves large survey-based data collection efforts using Van Westendorp, conjoint, discrete choice and/or similar methodologies. Survey results are then categorized and segmented to determine pricing and packaging by ideal customer profile. Depending on the scope and segmentation of the research, these surveys can grow beyond 1,000 responses quickly. This type of work carries a nontrivial cost, as expenses are incurred in incentivizing survey respondents and third-party research and/or strategy firms are used to field the research and analyze the results.
All SaaS startups should do customer discovery interviews in the early stages of framing the problem to be solved by their product. User research should continue through the development process as beta users are onboarded. Most do this to some degree or another. Marty Cagan’s book “Inspired” is a great primer for those seeking to build a customer discovery program.
Customer discovery programs can and should include questions on value. The framing and positioning of these questions are important — it is often better to ask directional questions to understand value preferences and trade-offs than it is to directly ask, “What price would you pay?” The Van Westendorp methodology referenced earlier addresses this by asking customers a series of standard questions about value and willingness to pay. Others frame this type of questioning by considering the current state or comparing similar jobs to be done — for example, “What is this challenge costing you currently, and what would you pay if it could be reduced by 10%?”
This type of research is naturally qualitative, while value-based strategy survey methods are quantitative. Qualitative research is a valuable method of value testing for startups and can be executed at a much more effective cost.
Research studies show that qualitative research typically achieves thematic saturation (meaning respondents start to repeat the same things as each other) at between nine and 17 interviews. If you can build a SaaS startup discovery program of 10 key customers that align to your ideal customer profile (ICP), you can run an effective qualitative research effort to assess value-based pricing for your product or service.
In designing a customer research program, remember that discovery users are supposed to be “customers.” They should be users who agree to pay for your product once launched.
Competitor-based and market-based pricing strategies often get lost or downplayed in the narratives around value-based pricing. But aligning pricing and packaging strategy to the competition and the broader market is often the best place for a SaaS startup to begin.
Jason Lemkin of SaaStr has written some of the best pieces I’ve seen on this topic, including this post about the three types of Day 1 pricing. Jason provides some actionable recommendations on which type of Day 1 pricing strategy to use, and given his track record and experience, I’d recommend you follow that link and get his advice on “how.” I’ll focus here on reinforcing the importance of competitor-based pricing.
There are many reasons to start with competitor-based pricing and to continue tracking competitor and market pricing as you get started with your offering:
Starting with competitive and market pricing to design initial pricing and packaging strategies, and then shaping those approaches through customer discovery interviews is the best path forward for most early-stage SaaS companies. For what it’s worth, it’s how we’re framing pricing for XaaS Pricing. There’s one key message that’s worth reinforcing — anchoring to competitors doesn’t mean going too cheap or just blatantly copying. It’s about taking what has worked for others that are swimming in similar streams, and then adapting it to your specific offering and customers.
XaaS Pricing tracks pricing and packaging models of 20,000-plus vendors, identifying which vendors are at which state of the usage-based (and ultimately outcome-based) pricing journey. If you’re interested in better understanding how the SaaS market is approaching usage-based pricing, contact us today about beta access to the XaaS Pricing platform.
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The ultimate guide to conducting SaaS pricing research