Answering the questions that lead to optimal product pricing

Today we are talking about how to price B2B SaaS products, learning from pricing examples. Joining us is Marcos Rivera, the author of the new book Street Pricing: A Pricing Playlist for Hip Leaders in B2B SaaS. Marcos is a pricing specialist with deep roots in product management, having served in roles from product manager to executive senior director for product management. He has leveraged his experience to specialize in pricing for the last several years and founded Pricing I/O to train and coach high-growth B2B SaaS companies on how to accelerate Annual Recurring Revenue (ARR). 

Summary of some concepts discussed for product managers
[2:18] How did you find yourself moving from product management into SaaS product pricing and packaging?

I started building products way back in the nineties and cut my teeth on creating and crafting products starting with basic integrations. Everything I built I had to price. It wasn’t easy. I had to dig deep and learn how to do it because the success of my product depended on it. I realized it’s not as formulaic as I thought it was. There’s not a spreadsheet that cranks out the optimal price. I realized there is a pattern and a way to understand value and capture it with pricing.



[4:20] Can you take us through a story about product pricing?

I worked closely with the company Mindbody, a fitness SaaS company. They raised prices without data or a good value story, and their customers reacted negatively. We had to step back and take a look at how we think about capturing value in cases where it’s warranted and whether we’re raising prices in cases where it’s not warranted. Most companies want to increase the number of customers and extract more value from the existing base, which is not easy to balance.

For pricing and engagement, we go through the 5Q Framework. 5Q stands for five questions. The big question in your mind—how much should I charge?—is one of the last things to figure out. First, you have to understand what experience you’re pricing for, who’s buying your product, what their motivations are, and your purpose in pricing.

Mindbody, which sells fitness plans and software for gyms, sold a few fitness plans, and you didn’t see a lot of differentiation between them. They had grown so much, they never thought how to layer value in their plans. I started pressing them on whom they really wanted to win. The yoga instructor who has a couple of clients? The massive chains like Orange Theory? And I asked why they wanted them. What’s the big play here? If you’re expanding your software, how are you expanding it? Where’s your value?

They said they needed to grow market share and gain clients but at the same time lift the amount of dollars per client. They found some customers were paying very little for the value they were getting, others were paying the right amount, and the rest were overpaying. We needed to calibrate that.

Step one was a neutral strategy, which is balancing the amount of pricing tactics used to get customers with the amount of money you’re getting.

Step two was figuring out what customers they wanted. We wanted to make it easy for new yoga instructors who don’t have a lot of courses to come into the platform. We needed a leaner version to compete and give them something they needed, but not too lean, like a free offer, because we wanted commitment. We wanted another price point for growing gyms, and another one for mature gyms.

Once we had nailed in the who, we worked on the what. They had new functionality and innovation and didn’t know what to do with them. We had to create different packages.

Then, we extracted price points from three inputs. First, we did analysis on happy, inactive, and churned customers to see patterns in what they were paying. Second, we ran a survey to find out what aspects of the product people loved and were willing to pay a premium for. Third, we did a competitive deep dive, looking at competitors’ pricing.

There’s not a single optimal number or a magic spreadsheet for pricing. You have to strategic with what you want, whom you want, the experience you want to give them, and how you want to capture that.

[13:08]  Were there different ways of attracting customers in this case?

Absolutely, the go-to-market piece is very important. You can have self-serve all the way to very guided sales-led motions. A yoga instructor is looking at the website and price and expecting understand whether it’s worth it for them. You have to be transparent in that sector, but also give them the ability to see what type of value framing they can get. They’re investing $49, but that’s less than the cost a full hour of training for a high-end instructor. Frame it the right way to lead them to click on buy now or start the free trial. If you frame it the right way, it doesn’t look expensive. As long as humans are buying from other humans, you have to take the psychology factor into play when it comes to pricing.

Big enterprises buy differently from individuals. They have ROIs to justify, big budgets, and crazy parameters to stay within. Sales guys have to navigate all this. Giving them a good pricing frame and a zone they can stay in helps them see where those boundaries are and avoids rampant and random discounting, which leaves a lot of value on the table, makes it hard to raise prices later as you innovate more, and creates an artificial ceiling that’s hard for a PM to break through.

Giving sales people parameters, a great starting point, and good value story are the key ways of winning the enterprise.

[17:35] What are you 5Q questions?

1. Why? Why are you creating this pricing?
   
2. Who? Who is the customer you want to win?
   
3. What? What is the offer mix?
   
4. How? How much should we charge for this?
   
5. Which? Which parts of pricing are working and which parts are not working?
   

[18:54] What’s another example of pricing strategy?

A company was having trouble selling their product, and removed the friction of commission calculations, which is a pretty heavy thing because you have to make sure you’re in compliance with the government. They were comparing their product to QuickBooks, which has a free or cheap plan, and this company was trying to command a much higher amount. Sales resorted to discounting to make deals happen, which led to a lot of churn—they’re not buying for value, they’re buying because it’s cheap, so they’ll find the next cheapest thing and move on.

We reframed the value by breaking down the cost per rep. It was $3, not even the price of a cup of coffee. When people are spending money on something, they’re also thinking about what else they could spend money on. Am I getting the bang for the buck? By framing it differently, you increase value perception. There’s no trickery here, but you could be mistakenly making your product look more expensive and less reasonable by not properly framing.

[21:50] What’s another example?

Everyone thinks you have to have good, better, and best packages. Seventy-two percent of SaaS companies use this model. It’s a good model for a lot of reasons, but it’s not a good tool for companies that have a lot more variability in what they’re selling. There was a fintech firm that sold to banks everywhere from Zimbabwe to the UK. These banks had very different needs based on the economics and regulations of their countries, which created a lot of variability in what customers want. The good, better, best model has a progression laid out as customer move up in maturity. If you customers stay in one spot or grow in so many different ways they need a wide variety of packages, you can have a lot of dynamics that lead to over discounting and not being able to give customers the experience they want. If you create too many packages, it can get really confusing.

We shifted the fintech company to a different model, called Core and More or Base Plus. Everyone starts at the same base function—checking, savings, and tracking account numbers and customers. Then you have nicely defined bolt-ons. It’s simple on the front, flexible on the back. You’re able to serve needs at a simpler starting point and create avenues for more complex needs. It eases tensions without trying to force somebody into a package. You’re able to give them a bit more of what they want and a price for growth.

[26:45] What issues have you seen with founders guessing on product pricing?

Pricing impacts 100% of your revenue, so it shocks me that companies spent about six hours last year talking about their pricing strategy. Founders know pricing is important, but they guess on it because they don’t have data or know what data to look at and they don’t have a framework. I have seen companies iterate and guess through pricing and land on a good model, but if you want to go down that path, it will take 18-24 months. We give you a direct and non-biased view of where you can and cannot extract value, give you a framework to learn from, and teach you how to price. That’s important because your product, customers, and competitors and going to change, and you have to be in the driver’s seat to continue to capture that value.

Action Guide: Put the information Marcus shared into action now. Click here to download the Action Guide.
Useful links:

• Check out Marcos’s book, Street Pricing
  
• Learn more about Pricing I/O
  
• Connect with Marcos on LinkedIn
  

Innovation Quote

“Don’t compare your Chapter One to someone else’s Chapter Twenty.” – unknown

Thanks!

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