Pricing and packaging for SaaS businesses is 'hard' is something I hear a lot.
"One prominent feature of information goods is that they have large fixed costs of production, and small variable costs of reproduction. Cost-based pricing makes little sense in this context; value-based pricing is much more appropriate. Different consumers may have radically different values for a particular information good, so techniques for differential pricing become very important." Versioning Information Goods by Hal R. Varian, UC Berkeley, March 13, 1997 (Download the PDF here)
What Varian is talking about in that paragraph - the opening paragraph to his very popular paper - is Value Pricing, or pricing your product or service based on how much value it brings to the consumer not how much it costs to produce, serve, deliver, etc. But wait, isn't this missing something? For instance, aren't profit margins kind of important? Of course, but once you've covered your costs - fixed and incremental - everything above that is profit.
The key is that the amount of profit margin is directly proportional to the value perception of your market to your product or service. In other words, your profit margin is driven by all aspects of marketing (the Four P's of the Traditional Marketing Mix; Product, Place (Distribution), Promotion, and of course... Price.
Getting back to margins, f your costs are high (support, infrastructure, customer acquisition, etc.) your market doesn't care. There is a price range they will support based on the current value proposition - and their perceived value - and if you can't cover your costs within that price range, too bad. You either need to figure out a way to lower your costs, figure out a way to get them to pay more, or accept that the market opportunity you thought was there - and your ability to capitalize on it - isn't.
Of course, the best way to deal with this is to figure out a way to improve the value perception of the market! This is all found in the WIIFT - What's In It For Them?" - so that they will pay more for the product or service.
At the core, marketing - especially Pricing and Promotion - is an attempt to align the value-proposition of your SaaS or Web App with the needs and/or wants of the market. The real goal should be to increase the value perception of the product or service - that is to increase the value in which the consumer sees in your offering - a greater amount of WIIFT - "What's in it for them?"
What is key to understand is that price is where your value proposition and their value perception intersect. For SaaS & Web Apps this intersection often occurs on the Pricing Page of their marketing website.
Understanding what pricing really is - the intersection of value proposition and value perception - should immediately make you take a second look at your pricing page...
- Are you continuing the value-based message of the rest of your marketing website? If not, you could be losing marketing momentum.
- Do you assume the visitor to the pricing page is already a buyer? That could be a costly assumption.
- Are you just displaying prices and / or a list of features? Don't confuse features with value!
There is a lot more to consider!
To help you out I've put together a 5 Hour video series - the Pricing Page Success Formula - to help you get the most out of your Pricing Page. For a limited time you can get the Pricing Page Success Formula video series - with content on Value Pricing, Pricing Page Design, and even Price Testing - for the Introductory price of ONLY $297.
Go get this amazing video series for only $297 right now. As soon as you get it, immediately watch the 35-minute Value Pricing Basics for SaaS & Web Apps video; it will truly change the way you look not only at pricing, but your entire marketing strategy, your customers, and your offering as a whole!
Good luck out there!
- Lincoln (@lincolnmurphy on Twitter)