A Simple SaaS Pricing Approach
This analogy clarified it for me.
Photo by SaiKrishna Saketh Yellapragada on Unsplash
I was talking to someone this week about how they charge for a new bit of functionality they’d created for their SaaS and I asked them, “Is it a seatbelt or is it a tow bar?”. He had no idea what I meant and so I explained my logic. And then thought that this would be a good subject for this week’s newsletter. It’s a really simple way of getting your head round how you price your product, especially one that is multi-faceted.
Usage vs Willingness to Pay
The first concept is around these two ideas, which you may already know about but let me just clarify what I mean by them.
Usage (or ‘Feature Importance’)
If we listed out all of your product’s features, we would see some of them would be used by every one of your customers, others might be used by most of them, some others might be used by a minority of customers and you may even find you have some things that nobody ever uses.
Hold that thought.
Willingness to Pay
There is some work you can do around figuring out people’s willingness to pay, if you’re interested in it, then I would recommend reading up about The Van Westendorp Price Sensitivity Meter.
In a nutshell, this exercise involves asking respondents four key questions:
"At what price would you consider the product to be a bargain, or such a great deal that you would buy it immediately?"
"At what price would you consider the product to be getting expensive, but you would still consider buying it?"
"At what price would you consider the product to be so expensive that you would not consider buying it?"
"At what price would you consider the product to be so cheap that you would question its quality or credibility?"
By analysing the responses to these questions, researchers can identify the optimal price range for the product or service that balances perceived value with willingness to pay.
But for the purposes of this newsletter, we’re more interested in how people’s willingness to pay changes for some features relative to others.
If we imagine these two axes on a matrix with four quadrants, you might get something that looks like this:
Seatbelt or Tow Bar?
If we were to rank Seatbelts and Tow Bars based on usage/willingness to pay where would we put them?
Seatbelts - everyone uses them. Or if they don’t, they should. You wouldn’t buy a car without seatbelts. But how would you feel if the sales person said that if you wanted seatbelts it would cost an extra $2,000 on top of the standard price? You’d be outraged. You’d expect them to be included as standard.
Tow Bars - aren’t universally required. But if your hobby/leisure-time requires you to tow a trailer or have a heavy duty bike rack, then a tow bar is pretty important to you. Learning that the addition of a tow bar comes with an additional fee wouldn’t be a surprise - and if you need it, then you need it. So long as the price isn’t ridiculous, you’d pay it.
What about something like leather seats, tinted windows, metallic pedals? Well, you might notice that for a portion of your customers if they tend to want leather seats they also want those other things, too. So for a particular section of your customers you can bundle those altogether and people would be willing to pay extra for them, too. These things are universally wanted (in a particular customer segment) AND people are willing to pay extra for them because they see them as extra to the core product offering.
If we plot them on the matrix, we can also see that each quadrant has a pricing role:
Core
This is your basic tier. Everyone who is a customer gets (and expects) these features. On your pricing page you might want to list them out so people understand what the core tier includes. If you were to try and carve out any of these features and charge more for them, customers would think you were taking the p*ss.
For SaaS, these features might include the basic number of users you need, storage for data required to make the service work, maybe some sort of standard set of analytics.
Premium
Some of your customers will identify themselves as wanting the premium pack of features. You may be sold a ‘sports edition’ of your car which includes leather seats, tinted windows, a better sound system etc. These customers accept that these features are both premium and make sense to be included as part of one offering.
From a SaaS point of view, this might be an enterprise tier where functionality such as SSO, user permissions, extra users or admins, increased storage etc would all be included. A customer would identify that, as a larger company, their needs will be more complex and therefore require additional or extended functionality that cost extra. All (or the vast majority) of your larger customers would use these features.
The key here is that they would accept that these premium features live together. What you want to avoid is a situation where these set of customers feel that half the things in there aren’t something they would use because they will then perceive that they are paying a premium for only half the value.
Add on
A tow bar is something that only a minority of your customers will want. But for the ones that do want it, they are willing to pay extra for it. They accept that not everyone needs this feature and that it comes at a cost, but they also know that they are only paying extra for this specific feature and it doesn’t come bundled with stuff they don’t need. As an example, if you wanted a tow bar but the dealership said it only comes as part of a package that includes a roof rack, that might be good if you were also in the market for a roof rack, but it might annoy you if you’re being forced to pay extra for something you don’t need.
For SaaS, add ons might include bespoke customisation, specific third party integrations (especially where there is a cost of providing that third party service), additional data, additional seats, or even priority support. Things that you can’t just assume that everyone will need, yet for those that do it will be logical that they would need to pay extra for it. And it could be that both core and premium customers might want to pick and choose from the same list of add ons.
Waste of space
If you discover a feature that hardly anyone uses and you could never charge a premium for anyway because it’s just not perceived as being something people would care about enough to pay extra for, then you probably want to clear these out.
I’m struggling to think of anything car related, but let’s say every car came with a leather bound road map. Thirty years ago that might have been a nice touch for premium customers, but nowadays who uses a map when they are driving?
Maybe your original SaaS product had a feature that allowed you to connect a MySpace account. Nobody really uses it anymore and the handful that do wouldn’t be prepared to pay extra for doing so. You probably need to forget about this one - certainly don’t waste effort on marketing it.
So, was it a seatbelt or a tow bar?
I began with a story about a conversation I had with someone struggling to price a new SaaS feature. Was what they were adding a seatbelt or a tow bar? In all honesty we weren’t sure, but it at least helped us frame things for discussion rather than just guessing. Often these things aren’t black and white and you can end up bundling some features into a premium tier and then giving people the option to expand one or more of those features as an Add on.
An example is Hubspot where you have tiers that are based on an assumption around number of seats and number of contacts for each tier, but you can then extend each of these as an add on.
I hope working out whether your features are Seatbelts or Tow Bars is a fun exercise.
