Let’s be honest.
You either guessed or completely made up your prices, right?
Don’t worry, I’m not here to judge you – in fact, you’re not alone. Two out of three business leaders I’ve worked with confess they copied their closest competitor or flat-out made up their pricing model.
I’ve been pricing products and services for over 25 years and have had plenty of hard lessons about what not to do. A poorly calculated guess on your pricing can result in a long, painful path to growth. While an educated guess based on some information and coupled with constant experimentation can lead you to the promised land.
I want to save you time and headaches by telling you the three deadliest and most common pricing mistakes due to guesswork, and fewer mistakes could mean a boost in revenue, profit, or both!
MISTAKE 1 - "We should double prices and see what happens."
Random and uninformed doubling may sound worthwhile but can be dangerous. It’s a finger-in-the-air guess that won’t get you closer to the ideal pricing model for the special sauce that’s unique to you. You would also rob yourself of learning what drives your customer’s decision-making, especially as they compare you to alternatives. And worst of all, some customers will be upset to realize they are paying double for the same value others are getting – a surefire way to lose trust.
The ideal approach is carefully raising your prices over time as you release more value into the market. More value can come from new features, additional services, better quality, or lightning-fast customer support. Regularly test higher price points for specific products for a specific audience, especially if customers are clamoring for more. But always do so with reliable data.
If you want to raise your prices, here are a few questions to guide your efforts and avoid guessing:
- What percentage of sales pushed back on your prices last year?
- If everyone paid full price with a smile, consider a price increase.
- How much are customers buying after the initial purchase?
- If they keep coming back for more, consider a price increase.
Raising prices is a great way to boost growth, but stay away from guesswork by tracking how customers buy your offer over time.
MISTAKE 2 - "We should slap a margin on our costs."
It seems fair and is easy to calculate in a spreadsheet; therefore, it is the perfect way to price, right? Well, there’s one big problem.
This approach is completely disconnected from value. And in some industries, like technology, where the value changes constantly, you leave hard-earned money on the table by taking this route.
This is another form of guesswork that ends up charging everyone the perfectly average and perfectly wrong price. As a result, your prices are too high for smaller customers and too cheap for bigger ones. A double whammy!
If you want to take a more calculated approach, look at your street prices (the real prices people actually paid) across different types of customers and look for patterns. Ask yourself:
- Are customers paying different prices for the same product or service?
- If you notice wild differences in prices paid, dig into why.
- Are customers paying the same price but experiencing very different values?
- Different needs, usage patterns, and outcomes may warrant different prices.
The idea is to see how prices change across products and customers with different budgets. There is no such thing as an average value, so don’t guess based on average margins.
MISTAKE 3 - "We should copy our competitor and call it a day."
- Talk to your customers and prospects (yes, even the losses) to probe into what they value most/least and how price factors into their decisions.
- Get crisp and tangible about the impact of your value versus alternatives; framing is everything!
- Keep your packages/bundles simple to understand; less is more in the early days!
- How are buying experiences the same or different across competitors?
- Dig into the full journey, from free trials to billing, to see where you use your strengths to win with a simpler pricing experience. Craft a price that reflects a 10 to 15 times return on investment for your clients, but ensure you are still competitive in the market and can produce a healthy margin. Repeat steps 1 – 3 and iterate as things change.
This is the most common form of guesswork; and can lead your pricing down a dark alley.
You’ve worked hard building your brand and value; it would be a shame to let your competitor decide how much your products or services are worth. I’m all for understanding your competition and how you stack up, but use it to solidify your pricing strategy rather than hand it over in a gift basket. Consider the following when evaluating the competition:
- Dig into the full journey, from free trials to billing, to see where you use your strengths to win with a simpler pricing experience. Craft a price that reflects a 10 to 15 times return on investment for your clients, but ensure you are still competitive in the market and can produce a healthy margin. Repeat steps 1 – 3 and iterate as things change.
- Is there a type of customer you can serve better than your competitors?
- Look for under-served customers you can serve faster or smarter and win them with a quick start.
Make sure you’re also looking at future competitors who can become a threat down the road. And remember, It’s best to watch your competitor’s pricing to measure, not to mimic!
By steering clear of these three mistakes, you’ll be able to figure out a pricing strategy that fits your brand, products, and customers. As a final tip, here are four steps to get started with pricing without the guesswork.
- How are buying experiences the same or different across competitors?
Are you now ready to ditch the “finger in the air” approach for your prices? My guess is as good as yours…but I hope you do!
Psychological Pricing Tactics
- Anchoring: Showcasing a high price to make subsequent prices seem relatively lower.
- Charm Prices: Ending prices in 9 or 99 to signal a bargain or lower price point.
- Free First: Offering a trial period or free version as the only option to reduce the perceived risk of purchase.
- Decoy Pricing: Introducing a less attractive option to make other options seem more appealing.
- Goldilocks effect: Setting three options to make the middle option more attractive to choose.
Pricing I/O’s implementation & roll-out guidance, and pricing validation can optimize conversion rates using these tactics.
Creative SaaS Pricing Model Examples
- Soft Bundles: Offering customized bundles of products or services.
- Hybrid Models: Combining different pricing models, such as feature-based and usage-based, for different customer segments.
- Active User Pricing: Pricing is based on the number of active users over time.
- Reverse Freemium Models: Offering a free trial that converts to a free version after a period of time.
- Outcome-Based Pricing: Pricing based on the outcomes achieved.
Pricing I/O specializes in developing new pricing and packaging prototypes, optimizing packaging, and preparing go-to-market strategies using these examples.
How do SaaS Companies Optimize Pricing?
By tracking pricing metrics, regularly reassessing pricing, and using data to guide pricing decisions, SaaS companies can optimize their pricing strategies. Pricing I/O offers pricing renewal increases, pricing governance, and expert enablement services to help companies achieve their pricing goals and capture value.
The FAQ’s
- Choosing the Right Pricing Model: Evaluate your market, competition, and customer needs to choose the best pricing model for your business.
- Pros/Cons of Freemium Pricing: Freemium can attract a large user base but may not convert to paying customers.
- Evaluating Payment Frequency: Consider your product and customer preferences when deciding between annual, quarterly, or monthly options.
- Using Pricing to Drive Growth: Pricing can be a powerful tool to drive growth by attracting new customers and increasing revenue from existing customers.
Pricing I/O’s holistic framework for optimal pricing and value capture blends research, consulting, and coaching for lasting pricing solutions.
In conclusion, mastering SaaS pricing models is key to achieving breakthrough growth in the competitive SaaS landscape. With PricingI/O as your partner, you can optimize your pricing strategy to maximize revenue and profitability.
Contact us today to learn more about how we can help you achieve your pricing goals.
