How to Develop Your SaaS Pricing Model

How to Develop Your SaaS
Pricing Model
A guide by Lincoln Murphy, SaaS Marketing
Expert with Sixteen Ventures

Pricing isn’t Rocket Science
Developing your SaaS Pricing Model isn’t Rocket
Science, but even in the Rocket Science business, you
need to price your work so you can sell it and make
money!
Copyright© 2013 Lincoln Murphy. All Rights Reserved.

Pricing Model != Pricing Page
Just so we’re clear, your Pricing Strategy is so much
more than your Pricing Page. It’s about far more than
not leaving money on the table and making a proﬁt;
though proﬁt is a good thing, after all, that’s why we’re
in business!

Pricing... is everything
Your SaaS Pricing Model will help determine – among
other things – your market position, whether or not
your target customers can buy from you, and whether
or not you can provide the level of service required by
those customers.
It’s pretty important.

Presentation Source
This presentation is based on my popular “How to
Develop your SaaS Pricing Model” post... you can ﬁnd
a lot more detail on the techniques and ideas
presented here:
http://sixteenventures.com/develop-pricing-strategy
The presentation continues ☞

A SaaS Pricing Model has Various Inputs
These ‘inputs’ when developing your model are:
Internal - focused on you, the SaaS provider
External - focused on your market & customers
Focusing most of your energy on the latter will likely
prove to be the most successful route to take
Ask the questions on the next slides to help you
develop your SaaS pricing model
Copyright© 2013 Lincoln Murphy. All Rights Reserved. http://sixteenventures.com/

Internal / Strategic Questions
Quantity vs. Quality: Do you want a massive amount of
customers or fewer, potentially more proﬁtable
customers? There are pros and cons to both…
Market Position: Do you want to be the low-end, low-
price leader or Super-Premium, high-end offering
targeting elite customers only? Who do you want to
pick a ﬁght with in the market that we’re entering and
how will you compete? Hint: SaaS doesn’t mean
Cheap!

External/ Customer-Facing Questions
Once you have the internally facing, big ideas ﬁgured
out, then you move on to - and spend most of your
time going forward on - external/ customer-facing
questions.
Remember... pricing is not a one-time, set-it-and-
forget-it deal. As you enter new markets, target
different segments, etc. you’ll have to revisit these
questions

Who are you marketing your SaaS
offering to?
If you’re new to market… who’s your ideal customer?
If you’re In-market… look for patterns within your
customer base to deﬁne market segments
If you have different segments you’re selling to, the
questions below should be answered for each one

What value will they get from your
offering?
Not the features… not the benefits… what VALUE are
they going to get from your offering?
The benefit of the benefit is a good way to think about
this
This requires that you really understand your customer

What will the ROI – monetary or
perceived – be on that value?
This is the hard part usually… takes a lot of work to
ﬁgure this out
You really have to know your customer… often better
than they know themselves
I’ve written about the 10x ROI pricing rule before…

What metric(s) will the price will be
based on?
Could be a ‘seat’, user, functionality, storage, etc.
This is the thing that your customer will say “yes, I need
7 of those…” and feel good about the purchase.
Segmenting your pricing tiers/bundles on something of
value avoids this issue and keeps people from gaming
the system to avoid forced upgrades
Done right, customers will even be happy to upgrade
because they’ve reached a greater level of success.

How many will they buy?
How many of the metric from above?
If you sell bundles of 10 *metrics*, how many bundles
of 10 will they sign-up for?
How many will they sign-up for at ﬁrst?
How many will they add over their lifetime as a
customer to drive Expansion Revenue? (hint: you want
this number to be higher than the “at ﬁrst” number)

What is their estimated Customer Lifetime?
3 months? 3 years?
This is the metric that will help drive our Acquisition
spend… if a customer pays $1000/mo but only stays 2
months and you paid $3000 to acquire them, you lost
$1000 + support/operating costs. This is bad.
If you think you can keep a $1000/mo customer for 36
months, and you pay $2000 to acquire them, we’ll have
34 months of proﬁtable revenue from that customer,
even if they don’t expand their use of the service
(Expansion Revenue) over that time. This is good.

Presentation Source
Remember, this presentation is based on my popular
“How to Develop your SaaS Pricing Model” post... you
can ﬁnd a lot more detail on the techniques and ideas
presented here:
The presentation continues ☞

What is their buying process?
This determines whether you go the e-commerce or
higher-touch, human-powered route
Price doesn’t determine which model should be used
Complex products often require more human interaction
But some markets – regardless of product complexity –
require a human touch
As much as you’d like to think you can drive this, this is a
market-driven element of your business model unless
you are so big and powerful you can change consumer
behavior (be realistic here)

What is their internal procurement
process?
This is different than – but directly impacts – their buying
process!
Who are the various players in that process?
What are the steps that need to be taken to get sign-off
within their company?
How do they pay their vendors? Can they use a credit
card?
Will they pay annually or monthly?
Will they want a contract even though you don’t require a
contract?

What level of service must you provide the
customer?
If you come in “cheap” your market might be savvy
enough to know that you won’t be able to provide the
level of service they require once you get more than a
handful of customers and might pass because they
realize you don’t “get it” yet, even though your price is
lower than the other guys
Data loss and security breaches are never tolerated so
you have to ensure you have enough margin to provide
that baseline level of support.
Support is where your “big margins” become important!

Some other things you need to consider
Should you bundle features / functionally, include
everything and charge per user, or do a la carte?
Will prospects want or expect a Free Trial?
What is the on-boarding process going to require?
What do your commercial competitors do?
What other things – homegrown or re-purposed software
– are you displacing in the market?

That’s just the ﬁrst pass...
Once you have all of these questions answered – oh,
and those aren’t all of them, either – you can start to put
together your Pricing Strategy, including the actual price
– the number – that you’ll charge for access to your
SaaS or Cloud offering.
So yeah, developing your SaaS Pricing Model isn’t
Rocket Science…
…it’s just a super-important, high-level Strategic initiative
that requires many different inputs and can ultimately
determine whether your company thrives or goes out of
business!

Presentation Source
Remember, this presentation is based on my popular
“How to Develop your SaaS Pricing Model” post... you
can ﬁnd a lot more detail on the techniques and ideas
presented here:

Thank You!
Lincoln Murphy
Sixteen Ventures
lincoln@sixteenventures.com
http://sixteenventures.com
@lincolnmurphy

How to Develop Your SaaS Pricing Model

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