#15: Mental Models on Pricing your SaaS
A deep-dive into how to begin thinking about product monetisation strategies
Disclaimer: This edition was written by our community member, Varun Choraria.
Dear Reader,
I hope you’re doing well. One of the greater nuances that exist in the world of SaaS is pricing strategies, which can really make or break your Go-To-Market. In the 15th edition of this newsletter, I’d like to take a crack at sharing some interesting observations around the subject, which I encourage you to share your thoughts over in our #saas slack channel.
So sit back, relax and enjoy the edition. If you’ve got constructive feedback to share- I’m easily reachable on slack or on Twitter.
Week in Review: Highlights of our community
We’ve had some interesting contributions to #general this week:
SSK is inquisitive about how founders plan their goals for the year. Share your thoughts!
Harkirat, is looking for connects/ case studies around how to engage employees/ interns in the workplace through gamification of work.
Utkarsh Chaudhary has shared BITS’ own startup accelerator-Conquest 2021 edition. Just last year, they had over 3000+ registrations, with 250+ mentors, and an equity-less grant of INR 50L. If you’ve got an idea or an MVP- reach out to Utkarsh or check out the website below.
In #random, Rishi shared this video- which has Daniel Ingram describe what it’s like to be enlightened.
In #useful-articles-tools, Harkirat shared with us two interesting things:
A twitter thread that demonstrates how we can identify our own blind spots, and move beyond them for better relationships.
The right way to price innovation
In a recent poll that I found on twitter- most founders landed up changing their own pricing at least 2-5 times. So, let’s start by defining ‘price.’
When most people hear the word “price,” they think of a number. That's a price point. When we use the term price, we are trying to get at something more fundamental. We want to understand the perceived value that the innovation holds for the customer. How much is the customer willing to pay for that value? What would the demand be? Seen in this light, price is both an indication of what customers value and a measure of how much they are willing to pay for that value.
So, this begs the question- is there a way to correlate pricing to customer’s Willingness-to-Pay? Most strategies are based on a cost-based pricing model- where you essentially add up the costs to produce a good or a service, and sell at a markup.
But, customers perceive and assign values to different products based on their belief systems. Hence, in most cases you might actually be undervaluing your product or service. This graph explains it well:
Takeaway- bundle and configure your products based on the features that your customers value, divided by segments.
If you’re wondering pricing is something that can be iterated over- then you’ll need to go back to the drawing board sooner than you’d imagine.
How would you tackle this problem?
Well, here are some interesting strategies:
Maximisation: This strategy maximizes your goal (such as profit or revenue) in the short term. Most companies choose this strategy for new offerings. You determine the optimal price—the point on the price elasticity curve at which the profit or revenue curve reaches its maximum.
Penetration: With this pricing strategy, you intentionally price your product lower than in a maximization strategy to rapidly gain market share. This is also known as a land-and-expand strategy. When should you choose it? In some markets you must gain share quickly, especially in those dominated by network effects or where customers are highly loyal to the first brand they choose. If you gain customers early in such markets, you are better positioned to maximize customers' lifetime value from future sales and upsells. With a penetration pricing strategy, you make a grab for market share and then expand.
Skimming: Here you first cater to customers with a higher WTP—the early adopters. Then, you systematically decrease price in order to reach other customer segments with lower willingness to pay. Your initial price needs to be higher than the price you would have charged had you chosen a maximization strategy. A skimming strategy is especially appropriate if you have a significant number of customers who are willing to pay a higher price than others for your product.
All this, and more
In this book below. If you’re a SaaS founder or in charge of your product’s GTM- this is a must read book, along with one of our previous editions on JTBD (linked below).
You can refer to my notes as well, by simply clicking on the button below.
And, you can also check out our previous edition on Jobs-To-Be-Done (JTBD) with another summary enclosed, to help you analyse the concepts better.
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