Last updated Feb 27 2020
Chapter 5: how to create your SaaS pricing strategy for 2020
Like all businesses, SaaS startups need incoming cash flow to survive and be sustainable. A good SaaS product pricing strategy plays an important role here: pricing defines profit for your product and services, and portrays value to your target market. Optimal pricing takes into account your (variable and fixed) costs and also demand, competitors, optimal buyer personas, and overall pricing power.
Overall, pricing can be one of your biggest growth levers—yet it is often improvised, or treated as an afterthought.
Note: this section is based on a pricing workshop held by Patrick Campbell from PriceIntelligently during our XAwards event.
The full video is embedded at the bottom of the page.
The average amount of time spent on pricing amongst companies is a mere 8 hours total over the life of the business. This is a phenomenal realization because you have to ask yourself: can your business be successful if you only spent 8 hours on product, marketing, or sales? The answer is most likely no. So you shouldn’t only spend 8 hours on pricing either.
Re-think acquisition: shift your focus to monetization and retention
A decade or so ago, starting a company was harder—but with fewer competitors, it made sense to go all-out on acquisition. Today, growing competition and market saturation have made switching products easier, and led to a decline in relative value of features and an increase in Customer Acquisition Cost (CAC). The scenarios couldn’t be more different, yet a lot of existing advice is still based on acquisition models from the past.
When you put too much focus on acquiring new customers, you neglect two other strategic pillars: making more money per each (monetization) and keeping your target customers around for a long time (retention). But to grow your SaaS business, improving monetization and retention has two to four times the impact of just sticking with acquisition:
SaaS companies that are primarily acquisition-focused invest their time, energy, and resources into bringing people on board, but later miss out on the opportunity to find out important data points such as what value proposition drove people to their core product, and what kept them there.
The same logic applies to your startup: if you don’t have a clear sense of which customers you are getting, how can you know what to build, or how to price it?
Let customer data drive your SaaS pricing strategy
Gathering customer data helps you understand the general makeup of your customers and quantify the value people derive from your product, so you can drive your pricing strategy accordingly.
Surveys are a very effective and relatively fast way to obtain information, but you need to be smart and intentional about the questions you ask. Standard survey templates include demographic data points such as age, gender, location, etc., but behavioral insights are more useful for pricing purposes.
You should consider asking your customers these questions:
- how do you use our product/service?
- what problem is our product/service solving for you?
- what feature(s) do you find most important?
- what would persuade you to use our product more often?
- what’s the one thing our product is missing?
If you need some additional inspiration, you can get started by taking a look at the survey questions we love asking our Hotjar users. After you send out a survey and collect all the answers, you can always follow-up with a few customers using the in-person interview formats we covered in the chapters on positioning and product-market fit.
Involve users in your pricing process
If no-one has paid for your product yet, pricing it is hard: when we launched Hotjar, we simply picked a number that looked like a no-brainer and put little extra thought into it—which is why now, two years later and with over 180,000 websites using us (and all the customer data that comes with it), we are in the middle of refining and updating our pricing structure.
To come up with an initial price:
- start by looking around and checking your competitors to see if any useful patterns can be detected. Never replicate or copy their pricing model: just try to get some information about what is going on in the space around your product, and use this input to start determining your own pricing.
- Use the data you gathered from your existing customers or potential customers to quantify the amount of value they would get from your product, and pick a number that is around 10% of that.
- Build a landing page with different pricing options, and test to find out what happens when you have three pricing plans vs. five, when you double vs. triple your initial price, when you offer an additional pricing tier, etc.
You can also get customers involved more explicitly by asking ranged survey questions to discover their ‘price sensitivity’. This model is known as the Price Sensitivity Meter (PSM) and is based on four questions that let you derive the different thresholds of your customers’ willingness to pay for your new product/service.
Ask your customers these 4 questions to determine price sensitivity:
- At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
- At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
- At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
- At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)
Once you have a sample of data in place that is highly representative of your whole customer population, plotting the answers onto a graph will help you visualize an optimal price band. This is a more advanced process, which Patrick Campbell explains in the video below (starts at 39:50):
Patrick Campbell at Hotjar's XAwards event
- Pricing is the biggest impact lever on your business: do not improvise it.
- Stop focusing exclusively on acquisition, and switch your attention to monetization and retention.
- Get to know your (current and potential) customers via surveys and interviews to develop accurate, quantified buyer personas.
- Use a Price Sensitivity Meter to uncover your optimal price bands.
- 6 Must-Reads on Pricing a Product, First Round
- Pricing Strategy Framework for a SaaS Startup, Lincoln Murphy
- ‘Monetize Backwards’ to Build a SaaS Business that Lasts, Wistia Blog
- The Ultimate Guide to SaaS Pricing Models, Strategies & Psychological Hacks, Cobloom
- Solving the Pricing Challenge (2014), Hotjar blog
Video & Audio
- 1. Four key ingredients for startup success
- 2. Positioning and branding your product
- 3. Finding and maintaining product/market fit
- 4. When, how and where to get funding
- 5. Pricing your product
- 6. Launching your product and getting traction
- 7. Setting up your business operations
- 8. Growing your team
- 9. Credits
- Back to start
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