We recently convened members of our growing SaaS portfolio to consider how to develop successful pricing models for software. We were joined by Xi Bing Ang and Nick Zarb, two pricing specialists at Simon-Kucher & Partners, the global strategy and marketing consultancy.
The Beringea Scale-Up Academy has recently covered how to build products that drive value for your customers and how to sell them, but underpinning product strategy and the sales machine is the issue of understanding how to package and price your software.
We therefore convened members of the SaaS portfolio from our U.K. and U.S. funds to discuss the fundamentals of B2B software pricing. Providing their insights were Xi Bing Ang, Senior Director from the London office of Simon-Kucher & Partners, and Nick Zarb, Partner in the San Francisco office.
To share a few of the lessons from an incredibly valuable discussion, we spoke with Xi Bing and got his perspectives on the key pricing questions an early-stage SaaS company should be considering.
Q. Why does pricing (and packaging) matter?
Pricing is THE most powerful profit lever. Fundamentally, in any business there are only four levers for driving profit improvement or growth: reducing variable costs; cutting fixed costs; increasing sales volume; and improving price achievement.
As pricing improvements generally flow straight to the bottom line (if done smartly), all else being equal, the same percentage improvement in pricing leads to a much higher percentage improvement in profit than any of the other three levers. For example, in a back-of-the-envelope scenario of a company with 25% margins that is seeking to drive a 20% profit increase, the business would either require a 20% increase in sales volume or simply a 5% increase in price.
When it comes to B2B SaaS businesses, it is also impossible to decouple the topic of pricing from the topic of packaging, i.e. what are the types and combinations of products and features that we sell to customers? You cannot, therefore, build a successful pricing strategy without first considering your packaging model.
Q. How will packaging and pricing impact the growth of a start-up?
Packaging and pricing sit at the core of the growth strategy of a start-up. In the early phases of growth, smartly designed packaging and pricing is crucial for driving new customer acquisition and early adoption. Once there is a sizable base of customers, and renewals, upsells, and cross-sells become key drivers of ARR growth, packaging and pricing can also make-or-break customer retention and ACV growth.
What does packaging and pricing mean for B2B SaaS companies?
Fundamentally there are three main design questions when it comes to packaging and pricing for B2B SaaS companies. Design question #1 is ‘what do you sell’, aka the packaging structure design. Some companies might take an ‘all you can eat’ approach that means clients sign up for every product and feature, others might sell a core platform with the option to pay for additional products or services, and others may have an entirely bespoke configuration of options for each client.
Whichever model you’re working with, getting the packaging structure right is crucial to ensuring you simultaneously have the right offers to acquire new customers, but also the right ones to up- or cross-sell customers effectively over time.
The next design question is then ‘how do you charge’, which is a question of selecting the right price metric(s). For historical reasons, many B2B SaaS companies tend to default to pricing based on the number of users or seats. But this may not always be optimal for truly capturing (and scaling over time) the value delivered by your software to the customer. Increasingly, therefore, we see usage-based and outcome-based pricing being deployed by companies. Getting this right is not easy and requires rigorous voice-of-customer research as well as data modelling.
Finally, question #3 is the price level itself: ‘what do you charge’. Here it is important to make sure two components of price level are optimised — the list price of your product(s) as well as how you then manage customer-level net pricing to ensure you are capturing true willingness-to-pay at the most granular individual customer level.
And I’ll leave you with one final thought. In B2B SaaS, packaging and pricing ultimately lives and dies in the hands of your revenue team: salespeople, account managers, customer success, and even your product specialists. Having the right weapons at your disposal for this part of your organisation — pricing tools, negotiations training and value proposition messaging — are critical to landing the desired packaging and pricing outcomes one prospect at a time, one customer account at a time.
If you’re interested in learning more about the Beringea Scale-Up Academy and our approach to working with portfolio companies, please get in touch with us at email@example.com