Pricing is the most important decision that determines both product and company value. Unfortunately, many startup entrepreneurs are prone to price their product too low due to reasons such as competition and lack of confidence in their product’s market-fit.
Likewise, SendBird’s first price was $49 a month. With that price point, we weren’t able to justify the economics/cost of our operations even during the early stage of our company, and it appeared to be impossible to scale our business properly even if we acquired all the customers of the mobile applications that existed in 2015.
I will share the lessons learned about pricing that we have gained over the past five years operating across South Korea and Silicon Valley. It begins with four key questions and each of those questions will be briefly answered in the following paragraphs. I will update further details in subsequent articles.
- What is pricing?
- How can pricing create fundamental value to a company?
- What are the key considerations of pricing to generate value in a company?
- What are the key metrics for SaaS pricing?
What is pricing?
Price is composed of 1) Pricing 2) Packaging, and 3) Positioning.
Pricing is how much we charge a customer, and it is determined by the primary metrics and underlying feature sets. Positioning stands for tiered segmentation of each customer group, and it represents the target customer’s persona.
Previously, SendBird didn’t articulate how we viewed the persona of our customers. We made the mistake of naming our positioning (i.e. each defined price tier) according to how it relates to our branding instead of how it relates to our customer’s persona. Lastly, each package is comprised of different features and SLAs that affect the possibility of upselling in the future.
Pricing, Positioning and Packaging demonstrate the primary focus of a company between SMB, Mid-market and Enterprise. Occasionally, companies intentionally eliminate a tiered pricing approach and replace it with a custom pricing model.
How can pricing create fundamental value to a company?
According to Price Intelligently, pricing strategy and constant process reviews are known to be the biggest drivers for better Operating Margin, LTV/CAC and CAC Payback Period. You may consider other options such as reduction of marketing and sales expenses, but achieving the Operational improvements via those cost levers take time and might result in delay of time-to-market. Also, well-designed pricing aligned with customer success metrics motivates our customers to upsell so it is likely to increase the Net Dollar Retention rate as well.
The image below describes how price impacts on net dollar retention by maximizing the customer’s value over time.
What are the key considerations of pricing to generate value in a company?
I will not explain the high-level concept of Cost-based pricing, Competitor-based pricing and Value-based pricing as these are already covered by numerous articles by other authors.
All of the articles may point out that “Value-based” pricing is virtuous. However, it’s more important to understand that those three pricing models are not mutually exclusive, but there are complementary approaches where other price models work in addition to Value-based pricing.
One of the most frequently asked questions about value-based pricing is how to understand the customer’s willingness to pay, or the value I can take from the customer. Build. vs Buy analysis is a good practice to understand this. In other words, the resources needed to build a product/service or features which meet customer expectations, can be a good indicator of the maximum willingness-to-pay of the customer.
What are the key metrics for SaaS pricing?
Pricing decision evaluating which metrics to use should be based on the three key criteria as pointed out below:
Value Alignment – We need to check whether the rise in certain indicators is designed to bring sales or real business benefits to our customers, not just the prices we charge. In the case of SendBird, we believe that primary metrics is the number of chat users and it leads to an increase in user transactions or an increase in user’s time spent on the customers’ businesses.
Scalability – It is important to have metrics that are universal to the different products of the customers or be able to support the expansion of customers’ businesses.
Predictability – Also, the metrics need to be a part of customers’ business planning so they can easily forecast how the metrics will evolve with their business expansion. If we design pricing based on metrics that the customer never uses within their team and organization, it will require substantial efforts for us to enable the customers to understand the function of the metrics.
These are well-known examples of pricing metrics: Seat-based, Usage-based, Hardware/Device number-based, Company’s business metris, and success based.
There are many researches done on which metrics are primarily used by SaaS companies, but it can be misleading to accept that immediately because the choice of metrics vary by different industries and customers’ profile. You always need to think about what metrics best reflect your customer’s persona, value, and strategic decisions for your businesses.