Setting the price for your product is one of the most important decisions a tech business can make. Your pricing strategy will make or break your scaleup journey.
There are two elements to your pricing strategy:
- Finding the pricing model that best suits your product and your commercial goals.
- Calibrating your model to find your optimal selling price.
This article looks at step 1. We’ll look at the three fundamental pricing models and examples of how you can implement them.
(If you’re interested in step 2, download a free copy of our book – it explains how to calibrate a Freemium pricing model).
Maximisation is about generating as much revenue as possible, as fast as possible. How you do this depends on what you’re selling.
B2C SaaS businesses. You must be selling a premium product targeted at high net worth consumers. There is no alternative.
B2B SaaS businesses. Your product must be targeted at mid-market or enterprise level businesses. They need to be able to afford to pay and your product has to be sophisticated. Your ideal clients don’t just pay to use your product. They pay for consulting projects to implement what you’ve built, and tailor it to their workflows. And they keep on paying for high end support.
You’re dealing with a small number of sales, so you negotiate for the highest possible price each time. You’re not pushing product; your pricing is value based and unique to each client.
Marketplaces and e-commerce. A maximisation requires dynamic pricing. Think of how airlines, or Uber, measure supply and demand and recalibrate pricing in real time.
#1 You need credibility. The founding team must have worked with clients matching your ideal customer avatar. And, you must have demonstrable experience solving the problem your product now addresses.
#2 You need resources. Maximisation strategies only work if you can afford to implement them:
- The bar for your MVP is set much higher. Mid-value and enterprise businesses won’t accept a minimal initial feature set. It doesn’t matter how impressive your roadmap is. Consumers will expect a luxury product, expect to invest heavily in UX.
- You’re selling high value products at enterprise level. This needs founders with experience in building a sophisticated sales operation. Even then, you’ll need to be able to afford to hire a sales team from day one. Or, be happy to outsource on a profit share basis.
- You need to build brand presence fast. You need a lot of cash to invest in the branding assets you need, and to get them seen. It’ll take time, and you need to be able to afford to wait for sales income.
#3 You need connections. Tech businesses that pull off maximisation are well networked with their ideal customers. The advantage of getting a leg up from a former manager is huge. You need resources, so you need a strong network of potential investors. Or, the skills to quickly build those connections.
To decide if this strategy is right for you, you need to examine your personal goals as founders. It’s almost impossible to implement this model without external help. This may be an outsourced sales partnership. It may be bringing in pre-MVP early investors. Either way, you need to be comfortable with:
- Giving up a large share of long-term profits and wealth.
- Sharing control over a large part of your business strategy.
If you are comfortable with this, then it’s a great strategy. You might have a smaller slice but it’s a much larger cake you’re sharing.
A penetration strategy focusses on winning a dominant market share. It’s by far the most common strategy adopted by SaaS businesses.
There are various models you can adopt. Each uses low pricing to reduce customer friction and grow user base quickly. Most of the models are so common they don’t need me to describe them to you:
- The Freemium model, by far the most common approach.
- Free consumer product supported by ad revenue.
- Extended free trial periods.
- Discounted pricing.
The real reason why most tech businesses fail
Despite their popularity, our experience is that most SaaS businesses sleepwalk into them. They see them as an easy way to start out, and that they can pivot later. It’s often a terminal mistake.
Firstly, they assume these techniques work well with a limited budget for sales and marketing. It must be easy to give something away for free, right? Unfortunately, the reality is that users are saturated with free products.
Even if it’s a great product, and even if you’re giving it for free, you still need a substantial advertising budget. Otherwise, users won’t know you exist.
Most SaaS start-ups fail by misunderstanding this and running out of cash before they’ve built any traction.
Secondly, changing your strategy is hard. If you train your users to expect things for free, it’s really hard to make them pay. The more features you give for free, the harder it is to charge for premium. This is where most SaaS scale-ups fail. Even though you’ve built traction, your investors lose patience. You run out of time before you find a path to profit.
The secret to pulling it off
The solution is to see penetration as a long-term game. Your product must have one or both of these advantages:
That your product improves with scale. For most businesses, this means leveraging economies of scale. For tech businesses, this is rarely relevant. Servers and data are cheap, and they don’t get much cheaper at scale. Your product needs to harvest user data. Either to build a better product, e.g. via machine learning or a network effect. Or, to sell targeted advertising.
That your product has high switching costs. This usually, again, means taking a predatory approach to your users’ data. This time, it’s by making it difficult for them to migrate it.
Equally important is having the right mindset. The pathway to profit involves using your users. It requires founders who have a hard commercial edge.
If you’re willing to do what it takes, these are the pricing models that make you the next tech unicorn.
A skimming strategy means you start with a high price. Then, you broaden your product so you can address more of the market at lower prices.
This strategy isn’t seen much in software. In the tech world, you see it in consumer hardware. Think of how Apple leads with premium products, before repackaging older tech at lower prices.
However, there are examples of software businesses that have adopted similar strategies. They start with high-end professional products, before broadening out into mid-market and consumer offerings. Adobe, Oracle, and Workday have all pulled this off.
Another example is tech consultancies that pivot to a hybrid business model. By developing internal tools, they work more efficiently, allowing them to deliver consulting services at lower price points. Then, with further development, they can take the same tool to market as an external product. This lets them access further customers with a lightweight support model.
From an investor’s perspective, the SaaS start-up and scale-up market is saturated. Coupled with a post-Covid tightening in investor appetite, you need to work hard to stand out.
One way of doing this is by not being yet another pitch centered on a penetration strategy. A well thought out plan based on skimming will certainly differentiate you.
… Putting it into practice
Your pricing model needs to be explicit. You need to decide which strategy is right for you, then align your entire sales, marketing, product, and tech engineering around it.
The best way to do this is for the founding team to collectively agree on what’s more important. Is it revenue growth, volume growth, profit generation, or market share?
Once you’ve decided this, you know which model is right for you. Then it’s just a case of adapting it around your product.
P.S. whenever you’re ready …
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