What were the names of the astronauts who landed on the moon in Apollo 12? Don’t look it up on Wikipedia, really think about it for a second. Unless you’re a huge space nerd like me, you probably don’t know. We know names like Neil Armstrong and Buzz Aldrin as they were the first. And their accomplishments are living on in history books and commemorative tchotchkes. While you don’t know the second crew that landed on the moon, you’ve probably heard of Jim Lovell and the crew of the “successful failure” of Apollo 13, as he so dubbed it.
What about your kids though—will they know these folks? No, they’ll probably know Elon Musk and Jeff Bezos... maybe Richard Branson…
Similar to the space missions, in B2B SaaS it doesn’t always matter who is first to do something, it matters who does it best. And on top of that, just because you're not first, doesn’t mean you’ve lost. The best way to win is to be the best for your target. You can’t be the first social media platform, but you could be the first social media platform for dogs.
Someone who exudes this philosophy is Paul Lynch, who just recently left his position as CEO of Chargify. Chargify wasn’t the first revenue management tool at all, but they did lead the pack in niching down to B2B SaaS. Paul is an immensely talented individual who has a lot to offer in this information-filled interview we conducted in 2019. Take a listen.
Listen now 🎧
Here we summarize the main takeaways for you to implement or hand off to your team for implementation.
What is value-based pricing ?
Value-based pricing could easily be called “customer-based pricing” because that’s essentially what it is. The more formal definition describes value-based pricing as basing a product or service’s price on how much the target consumers believe it’s worth.
Why is it important?
Value-based pricing is important, particularly in the world of SaaS, because providing value to your customers is key in order to grow. As Paul states, “The consumer is always in pursuit of value.” And value-based pricing involves the most important factor to the success of your business—the customer.
This ensures you’re not restricted to basing your pricing on existing pricing structures or on achieving minimal profitability, but instead on a customer’s willingness to pay. It also gives you unique flexibility in finding and implementing price points that suit different types of customers, thus providing value.
What to do today:
- Follow Paul Lynch.
- Schedule a time to meet with your leadership, product, and pricing teams to discuss your current pricing strategy, as well whether value-based pricing makes sense for you (if you’re not already using it).
What to do next quarter:
Evaluate and update your pricing strategy. Remember that pricing is not a set-it-and-forget-it type of thing. It’s a strategy that needs to be assessed on a regular basis as your business evolves. Pricing is an ongoing process, a set of steps companies should keep repeating until they find a viable (and profitable) pricing strategy.
To help you get started on how to price (or reprice) your SaaS product or service, we’ve included Paul’s rule of three, that he feels is applicable to SaaS businesses when it comes to how to price SaaS:
1. Know your markets – Specific points in terms of the market that you’re operating in will have huge variants and bearings in terms of how you price.
2. Know your competitors – Disrupting a market on price is not around being the lowest.
- Are you competing against longer sales cycles that have a higher unit cost and are more integrated into the stack?
- Are you competing against developer tools?
- Are you in a highly competitive market?
- Are you in a niche market?
3. Know your value – Don’t fall prey to the founder’s dilemma—underestimating your value.
- Are you in a highly competitive market? If so, is there a category king in this market that defines what the price should be?
- Can you disrupt?
- Are you a price leader or are you a price follower in your market? The quickest path for you to fail in any business is becoming a lost leader in a market that is focusing on value as opposed to price.
- Very often businesses are priced too low. If you price in a market at one dollar, the perception is going to be that you’ll deliver a dollar's worth of value. If that’s not the case, then you need to get your price and your positioning correct.
Determining the right pricing strategy is no easy task. It takes work. Trust us, we know pricing. So, if you’d like some help, let us know. We can help you get through Paul’s rule of three.
What to do within the next year:
Before implementing a new pricing strategy, you’ll want to run tests and gather data to validate or invalidate your hypotheses to identify the best long-term pricing strategy. Once you have enough solid data backing you, go for it.
Always be evaluating the output, and with pricing, as mentioned, it's a rinse and repeat process to ensure your pricing strategy is always optimized.
Who should own this?
If you have a pricing team in house, they should have ownership. However, pricing is typically not a single department’s decision. And depending on your company it could include leadership, pricing, product, and/or marketing teams.
I promise you in terms of 25 years of businesses, the two things I know: One, the consumer is not stupid; and two, the consumer is not rational.” –Paul Lynch
Who's up next week?
Next week, Zeb Evans, Founder and CEO at ClickUp, talks about really listening to your customers’ feedback.
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This is a ProfitWell Recur production—the first media network dedicated entirely to the SaaS and subscription space.