Source: Jim Geisman, founder and president of Software Pricing Partners
Is your SaaS business facing a pricing crisis and you don’t even know it? Software pricing expert Jim Geisman shares three tips for developing a tiered pricing structure that clearly communicates the value of your various product options or editions.
Building a business around a single product is like standing on one leg: You can do it for a while, but in the long run you will fall down.
For one thing, single-product companies are at a disadvantage when it comes to landing growth capital, even if your business is in the process of beginning to scale. More importantly, relying on just one product leaves you vulnerable to a competitor capable of building a better (and maybe cheaper) version of your product.
Ultimately, that’s why many software companies begin with one product, but quickly evolve into a multi-edition business with a tiered pricing model. Doing that allows businesses to not only appeal to a wider base of potential customers, it also makes it easier to communicate the value of specific features and functionality.
Of course, the task of creating and pricing multiple editions isn’t always simple. To do it, you’ve got to answer two key questions:
- Which features belong in which editions?
- How should each edition be priced?
Those might seem like reasonably simple questions to answer, but doing so actually requires a framework that ensures no tier is too heavy (or light) on features, and that the value of upgrading is clear and compelling.
3 Steps for Developing a Tiered Pricing Structure
In my mind, there are three critical steps for creating that framework:
- Determine frequency of use and value delivered to identify which features should go with successive editions. Also, consider offering some options as add-on features with narrow appeal but high value.
- Evaluate functional differences between editions in terms of value and price relative to each other.
- Balance your entry-level price with the prices of your higher value editions.
The basic goal of this process is to take a closer look at the value and dollar differences between editions so it makes sense to you and the customer. While you want to make sure that customers are paying for the functional value they receive, it’s also important not to make the price “steps” between editions so high that the buyers won’t upgrade because they don’t think they’re getting a reasonable deal.
Here’s where a certain degree of strategy is involved in developing and deploying a multi-edition, tiered pricing model.
If your SaaS company’s goal is to attract as many new users as possible, you might choose a low entry price. That being said, while a low entry price with “small” price steps between editions may encourage upgrades, it could also limit the price you can charge for your premium editions.
If you want to be paid fairly for premium editions and want the price steps to be “reasonable,” you’ll need to consider a higher entry-level price. The problem with that approach? Higher prices typically lower the attractiveness of the entry-level product and limit the number of new customers.
The conflict between low entry price and premium edition prices arises because buyers look at the price and value of each product edition relative to each other to decide which edition is right for them. So, you have to ask yourself: Is the entry price low enough to encourage purchase? And does the price and added functionality from edition to edition encourage or discourage upgrades?
Freemium is a great example of the downside to this approach. While that pricing strategy has worked for several big businesses (Dropbox, MailChimp, Yammer, etc.), it often proves disastrous for B2B software companies at scale.
The right thing to do in that situation, however, is another post for another day.
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