SaaS Pricing: 3 Keys for Early-Stage Products

The Common Pricing Challenge for Startups

Having interacted with numerous founders, a prevalent concern, especially among those in the early stages, consistently emerges: establishing effective pricing strategies.

When it comes to enterprise software, conventional approaches like per-seat pricing are often straightforward for highly specialized products.

This is particularly true for tools utilized consistently by users in similar ways, such as platforms like Zoom or Slack.

The Complexity of Startup Pricing

However, a significantly different scenario unfolds for startups delivering more intricate services or products.

Many startups encounter difficulties with a per-seat model because their offerings, unlike those of Zoom or Slack, are employed in a diverse range of applications.

Salesforce, for instance, utilizes both standard seat licenses and administrative licenses.

Customers have the option of reduced pricing for components with limited usage, while other aspects of the product are subject to pricing determined through annual renewal negotiations.

Focusing on Value and Outcomes

Initial pricing conversations should prioritize understanding the buyer’s viewpoint and the value the product delivers.

Founders must concentrate on the results and the ultimate outcome, establishing a justifiable figure for customers.

Self-assessment can be challenging, particularly when requesting payment for a creation.

Tips for Navigating the Pricing Process

Establishing the right pricing structure requires time and consideration.

Here are three suggestions to facilitate this process:

• Consider the diverse ways your product is used.
• Focus on the value delivered to the customer.
• Be prepared to justify your pricing.

The Evolving Nature of Pricing

Establishing a price point isn't a static process. Within the realm of enterprise software, numerous intangible elements come into play. A software product's perceived worth, its overall quality, and the user experience it delivers can fluctuate considerably.

The process of determining pricing is often extended, and contrary to the beliefs of some entrepreneurs, prioritizing customer acquisition isn't the initial step. The foundational action is ensuring a completely developed and robust product.

For companies in the late-seed or Series A funding stages, the primary focus is securing the first 10 to 20 clients and achieving demonstrable successes for inclusion in investor presentations and board reports. However, as an organization expands beyond reliance on the CEO for sales, a clearly defined go-to-market strategy becomes essential.

A common mistake among startups is the assumption that pricing can be determined by surveying 50 potential customers about their willingness to pay for a hypothetical solution. This approach is often premature, as the product is still under development. Product-market fit and effective messaging haven’t been established, yet significant effort is devoted to pricing? While revenue is undoubtedly important, the emphasis should be on identifying avenues for generating revenue rather than rigidly defining a pricing structure.

Even well-established organizations frequently refine their pricing strategies over time. Several data infrastructure companies have shared their experiences with pricing new offerings while simultaneously managing the pricing of existing products that generate substantial revenue – hundreds of millions of dollars. Furthermore, large SaaS companies recognize that technology leaders prioritize cost considerations and incorporate this into their pricing models, but only after their products are fully mature.

Software companies routinely revise their pricing structures. This is an expectation among customers. Prior to detailed financial analysis, ensure that all aspects of your product are fully prepared and refined.

The Importance of Straightforward Pricing

Introducing unnecessary complexity into your pricing structure can hinder the entire sales process. A thorough understanding of the buyer’s journey is paramount. Selling isn’t simply securing agreement from a Chief Information Officer (CIO); it’s a more involved process.

Procurement isn’t instantaneous; it necessitates multiple discussions. The CIO needs to consult with the IT department, or the team intended to utilize the product, as well as with financial stakeholders.

Even with a strong advocate within the CIO’s office or a cooperative procurement manager, pricing that is difficult to explain or comprehend will prove problematic. Complex or ambiguous pricing introduces friction, and consequently, sales cycles are prolonged as stakeholders struggle to understand the fundamental costs and future payments.

Key questions arise: Is the cost determined per user? Does company size influence the price? These considerations can quickly become convoluted.

Consider a scenario where a company has 3,000 employees, but only 1,000 will actively use the product. It seems unreasonable to charge for the 2,000 who won’t benefit. While you can explain the product’s scalability for 3,000 users, this justification can create challenges during renewal discussions.

Cost sensitivity is at an all-time high, reinforcing the need for pricing simplicity.

A recommended approach is to develop a tiered pricing model – small, medium, and large – where the price correlates directly with the size of the client organization. Larger customers, particularly those with operations in multiple locations, typically present more complex environments.

This complexity necessitates increased resources for support and deployment, justifying a higher price point.

When engaging with a large enterprise CIO, you can reasonably explain that a more substantial effort is required to implement a solution tailored to their needs, and they are likely to understand. Requesting $200,000 or $300,000 is acceptable if the pricing structure is clear and the value is well-articulated.

For startups focused on acquiring their initial customers, remember that the product is still evolving. CIOs will generally expect a fixed fee for the first year, with potential incremental costs in subsequent years.

The small-medium-large model remains the most easily understood and negotiated option. Without this clarity, confusion arises, sales cycles lengthen, stakeholders become frustrated, and opportunities are lost.

Prioritizing Delivered Value

A crucial element in determining pricing is the demonstrable value your offering provides. Effective product positioning necessitates a functional solution, as the ability to showcase value is compromised by a flawed product. While a product might excel at initial implementation, customer expectations extend beyond this initial phase.

Clients seek a solution designed for longevity, seamless integration within their existing infrastructure, robust security features, dedicated customer support, and access to referenceable clients. Fundamentally, they require answers to two key inquiries: Does this address a critical business challenge? And, am I receiving a worthwhile return on my investment?

Avoid complicating the value proposition unnecessarily. Focus on the potential for cost savings and reductions. Disregarding budgetary constraints, what would be the expense associated with the customer developing a comparable solution in-house? Can your pricing undercut that cost by a margin of 50% to 70%?

When establishing a price point, factor in the customer’s comprehensive internal expenditures, including development, security protocols, ongoing maintenance, support services, deployment procedures, user training, and operational costs.

Should a customer express price concerns, highlight the time and resource efficiencies your product delivers. The Chief Information Officer you are engaging with likely prioritizes core business functions over internal software development, preferring to concentrate on their primary offerings and market position.

Consider a practical benchmark – what I refer to as “the intern rule.” Does the cost of your product fall below the expense of employing a full-time intern to accomplish the same tasks? If so, you are immediately demonstrating tangible value.

Don't overlook the importance of long-term value. Will your product continue to deliver benefits over time through ongoing enhancements, consistent support, dedicated customer success initiatives, and new integrations? The core promise of AI lies in continuous improvement, and customers anticipate models to evolve and become more effective.

Recently, I consulted with a technology executive from a prominent telecommunications company facing substantial financial losses due to fraudulent activity. An investment of a few million dollars in an AI-powered cybersecurity platform yielded nearly $10 million in savings within the first year. As the models improved, alongside enhanced support, success metrics, and security measures, the subscription cost adjusted upwards, reflecting the diminishing incidence of fraud.

Present this type of detailed cost-benefit analysis to customers to justify subscription price adjustments aligned with the increasing value of your solution.

Strategic Considerations for Pricing

During the process of establishing pricing strategies, it's important to remember that even industry leaders like AWS periodically revise their pricing structures. Therefore, prioritize simplicity over striving for immediate perfection.

Initial versions of your product will likely lack some features found in more mature competitive offerings. Combining this with a complicated buying process is counterproductive.

Furthermore, intricate pricing schemes can lengthen the sales cycle, which is particularly detrimental when building initial momentum.

Communicating Value Effectively

Consider how you are conveying both the immediate and future benefits of your product to potential customers. Even if your current scope doesn't define it as such, conceptualize your product as a platform.

Products designed for sustained growth are consistently updated and enhanced. Customers generally accept reasonable increases in subscription costs as new features and capabilities are introduced.

The Importance of Customer Feedback

Because pricing is an ongoing process, it’s crucial to establish a system for gathering feedback from your customer base. This feedback should focus on the value your product delivers and areas where additional value could be provided.

Analyzing this input will be instrumental in refining your pricing model and ensuring its continued effectiveness over time. Customer insights are key to long-term success.

Key Takeaways

• Prioritize simplicity in initial pricing.
• Frame your product as a platform for future growth.
• Establish a feedback loop with customers.