by Marcos Rivera, author of “Street Pricing: A Pricing Playlist for Hip Leaders in B2B SaaS”
THE SCORE, released in 1996 by the Fugees, is one of my favorite albums of any music genre, period. The multi-platinum selling album was full of ear candy, including the chart-topping single, “Killing Me Softly.” It’s hard not to reminisce over this song without closing your eyes and embracing how Lauryn Hill, with pitch-perfect emotion and lyrical dexterity, covered the famous chorus sung by the legendary Roberta Flack. Just, wow!
“Killing Me Softly” professes about a slow, subtle type of emotional pain that is rooted in the deep connections between words and feelings. It’s stealthy and imperceptible. One moment you are grooving to the melody, and before you know it, you’re emotionally breaking down, tears and all!
For the SaaSlete who may not be meeting growth expectations but can’t pinpoint what is holding them back, it might be something slow, subtle, and hard to detect as you listen to the blaring alarms that warn you growth is in jeopardy. For example, you could be missing the quarterly number, losing the big RFP to a competitor, or dropping overall market share. There could be something else that is less obvious pulling you back. Something stealthy, imperceptible, and not well understood.
Yes, I’m talking about pricing (one time!).
Your pricing model could be killing your growth and you won’t even know it. You’ll think the slowdown is due to product feature gaps, or it’s because your last marketing campaign flopped, or it’s the new sales rep who can’t seem to close.
Nope! Chances are your pricing model is the culprit behind the sluggish growth. But to know for sure, you have to notice the right signals.
So, what do I mean by signals? A signal is a measure or metric that might mean your pricing or packaging is leading your business away from your growth objectives and towards unintended consequences.
In other words, you might be either leaving money on the table or losing deals you should win. Whether it’s the value metric you charge for, the package you bundle, or the price level you set, a bad signal could mean there’s something off in how much value you exchange with your customer.
How do you notice these signals before it’s too late? I’m glad you asked.
In an ideal world, we want to convert a prospect to a customer, a customer to a growing customer, and a growing customer to a staying customer. In order to see the right signals, you need clear vision within acquisition, expansion, and retention motions of your SaaS business.
To give you some concrete examples, here are a few signals related to acquisition and expansion, and how to watch out for them:
EXAMPLE SIGNAL 1: Too many customers are buying, and staying, in your entry-level package. To watch for this signal, start tracking the percentage of active customers in each plan after six months from purchase.
EXAMPLE SIGNAL 2: Very few customers upgrade or buy more after the initial sale. To watch for this signal, start tracking the percentage of new revenue from upselling and cross-selling.
We are only scratching the surface in terms of signals needed to prevent your pricing model from killing you softly. Man, I wish there were a framework around pricing-related signals to use as reference.
Well, today is still your lucky day.
I like to call this framework 20/20 VISION, illustrated in FIGURE 5.4. I lay out a set of questions compared to a threshold of 20 percent. If you answer “yes” to any of the questions, it could be a signal your pricing model might be wack, out of whack, or both!
The 20/20 Vision framework is a great place to start building up your pricing radar. There are no shortages of signals to track in the world of SaaS. But it is even more important to look at these signals in combinations versus just in isolation. For example, if your close win rate (percent of qualified opportunities you end up winning) is declining and your discount rate is rising over the same time period, you should consider this a major red flag that warrants an investigation into your pricing.
A companion framework to 20/20 VISION is an easy to remember rule of thumb I call the 2×2 Rule. The rule, which is more guideline than hard directive, states you must update your pricing model at least once every two years. and no more than once every two quarters.
The 2×2 Rule is based on experience, not science. Technology is changing rapidly, and B2B SaaS companies are releasing new value-added updates more frequently than before. In two years’ time, I’m pretty sure your R&D squads have created enough value for customers to feel the difference, and with most contracts expiring within two years, a pricing change is justified.
The point of the 2×2 Rule is to keep from waiting too long before capturing new value, and on the flip side, avoid overreacting to a new change in the pricing model. Upon rolling out a new change, be sure to allow time for sales to get used to selling the new packages/prices and give
customers a chance to react and provide feedback. After two quarterly sales cycles, your sales team should have their new sales pitch and positioning down, and you would have collected enough data to make an informed decision.
Armed with 20/20 vision, you’ll be able to track the right pricing signals and take action before you begin to lose traction towards your growth objectives. Use the 2×2 rule as an immediate filter to recognize if your current model is due for change.
You’re now ready to capture more value, eyes wide open.
*excerpted from “Street Pricing: A Pricing Playlist for Hip Leaders in B2B SaaS”
Marcos Rivera, founder and CEO of Pricing I/O, is a B2B SaaS pricing expert who uses his street smarts to help companies capture value and unlock growth. With over 20 years of experience, Marcos coaches SaaS Founders worldwide and is a frequent speaker, guest lecturer, and adviser to startups. He is author of “Street Pricing: A Pricing Playlist for Hip Leaders in B2B SaaS“.