Shut up and take my money: How to price things so your customers buy instantly
So you’re trying to create a pricing model, whether for a new offering or to make more money from your current offerings. You’re probably wondering where to begin and how pricing works.
The information below will serve as a practical guide on how pricing works and how to price your products and services. While these considerations are primarily geared towards B2B SaaS solutions many apply to different industries, marketing strategies, and sales cycles.
This piece will focus on four main considerations
- Identify your early adopters and purchasing model
- Creating a value framework
- Displaying pricing
- Pricing Psychology
Identify your early adopters and a purchasing model
When starting to think about how pricing works for your business, it’s critical to identify your early adopters. In SaaS, early adopters are often labelled as the Ideal Customer Profile (ICP).
The first step is to create a hypothesis and definition for who these early buyers might be. At a high-level these folks can be defined as the “perfect customer” – they’re experiencing the pain your product/service solves and they’re willing to pay for it.
Early adopters are naturally risk-takers and are willing to grow with your product. They often want involvement in the product roadmap and offer feedback as you build out your offerings.
Tomasz Tunguz (partner at Redpoint) says ICPs should serve three purposes:
- First, they should enable you to easily qualify or disqualify a prospect.
- Second, you should easily be able to communicate your ICPs so they can find others like them.
- Third, they should be easily defined so you can identify them quickly.
A practical ICP might be: VPs of Sales at venture-backed companies who use HubSpot as a CRM. With this defined you can use a tool like LinkedIn Sales Navigator to filter for VPs of Sales, Crunchbase to cross reference how much venture funding a company has received and then attend HubSpot’s Inbound conference to talk to these folks.
Joel York, Chief Marketing Officer at Accellion, defines three key sales models in SaaS: self-service, transactional, and enterprise. To best explain these, I’ll use examples of companies that use each model:
- A tool like Yesware would be self-service. It is low cost, purchased online and the onboarding rarely involves a sales representative or onboarding specialist.
- A tool like MailChimp qualifies as transactional. It is a larger purchase, touches multiple stakeholders, could involve some integrations and you might interact with a company representative as you purchase and onboard.
- Salesforce would qualify as an enterprise purchase. It involves multiple stakeholders, is at a higher price point, and is typically sold through the Sales Development Representative (SDR) and Account Executive (AE) model.
Defining ICP and a purchasing model are crucial steps to figuring out how pricing works for your business. They’ll enable you to ask the two questions below and form the basis of your pricing model
- What other solutions is my ICP currently using and how much do they cost?
- Which purchasing model does my solution fit into?
Create a value framework
For most companies, value lies in increasing revenue, decreasing costs, or increasing efficiency. Where does your product/service fit and how can you begin to create value for your customers? I’ll suggest two common value frameworks that can help you get to your first price.
Using this model is incredibly simple.
Ask yourself: What are the fully-loaded costs to build the product?
From there, add a margin for profitability. Then, you’re done.
In reality, this model can be problematic especially in the venture space where companies invest a great deal of resources into building a solution that can be scaled.
Value Based Pricing (the one I recommend):
To keep things simple, let’s say that value (for most organizations) is created through increasing revenue, decreasing costs or increasing productivity. Start by choosing which lane you swim in.
Take Expensify for example. They are creating value by increasing productivity and decreasing costs by allowing you to quickly submit expenses on multiple platforms.
In my first sales job, I saved all my receipts until the end of the month, and would then painstakingly uncrumple, flatten, and cross my fingers that the combination of tape, staples, and receipts would fit through the scanner. From there, I’d have to get my Directors handwritten signature and then scan them to accounting.
This whole process would take me 3-4 hours!
Not only is that unproductive time for me, there is also additional work required for the accounting team to sift through all my expenses, approve and reimburse.
Now let’s introduce Expensify to the equation. It allows you to submit on the spot through email and camera, automatically submitting your receipts for you. I’d estimate I spend 10-15 minutes on expenses now – quick & easy.
Let’s say I make $30 dollars per hour. 4 hours of lost labour is $120 dollars. Expensify costs me less than $10 dollars per month. While I increase my productivity, I also decrease the hassle. Expensify creates 10x value for me in my job.
To create a model like this it’s critical to talk to your customers and understand how they’re currently solving the problem. From there you calculate the potential increases in revenue, decreases in cost, increase in productivity.
I’d argue that shifting one’s behaviour to a new way of doing things is a major challenge and there needs to be significant upside for them. If you can create 10x in the price to the value you provide, I’d say you’re in great shape!
How pricing works for display: public, private, or mixed
This is the (multi) million-dollar question.
Our research found that over 65% of SaaS companies have multi-tiered pricing models with one enterprise / contact-us tier. Meaning there was some pricing visible on the website while also the ability for a custom price based on your needs. Similar to this example from Cloudflare:
Prospects like choice and not all prospects fit into one category. I’d recommend following the industry trend. Have some of your pricing displayed publicly while also leaving yourself the flexibility to create custom packages for certain deals.
How pricing works: Pricing Psychology
Humans have biases and are prone to heuristics, meaning you want to present logical pricing to them with obvious ‘levers’ to jump to the next price. Here are a few psychological factors you should consider when building your pricing model: Single Option Aversion and Domain Authority.
Single Option Aversion
Behavioural scientist Daniel Mochon posits that buyers are much more likely to make a purchase if presented with more than one option. He conducted an experiment where sellers showed buyers two brands of DVD players. 32% indicated they would buy the first brand and 34% chose the other. But when the participants saw a single DVD player, only 9% or 10% (depending on which brand they saw) said they would purchase the product. This represents a 66% increase in sales by simply adding a second option for the buyer.
The brain approaches almost all purchase decisions like this.
I would argue this effect only increases in B2B SaaS environments.
Many SaaS companies have multi-tiered pricing pages, giving the buyer several options to choose from. This is well and good, but the real issue is at the end of the sales cycle when the prospect gets one price and package. It can be frustrating to feel empowered with choice throughout the process only to get to the end and find there is only one option.
I’d recommend replicating the self-serve buying experience for your prospects but keeping the price hidden. This way to frame your conversation is “These are a few different packages that suit our various customers, is there a particular tier or set of features/functionalities that resonates with your needs?”
From there you can create and price out 2-3 customized tiers for their needs. These come with the benefit of greater knowledge and the scientific principles of single-option aversion.
This psychological concept basically means that you can sway people in their decision making with perceived authority. When they sense authority, they envision trust, stability, and success. While this authority bias isn’t directly related to how pricing works, it’s still relevant because it can be a catalyst in pushing sales.
Dropbox employs authority bias on its Dropbox Business pricing page by using engaging copy as well as relevant social proof to draw in prospects. The statement “More than 300,000 teams use Dropbox Business” combined with logos of Dropbox’s most prominent customers makes for a strong perceived authority. There’s also a testimonial reiterating the brand’s authority from a well-established brand in Kayak.
The decision-maker sees this page and thinks, “If it works for them, it will work for us.”
I’ll close with this…
Modern sales is all about listening, and this applies to the way you should price your offerings.
Before you begin building out your pricing make sure you clearly define and validate your ICPs. Interview them and ensure you’re listening to their pains and how they’re currently solving the problem. Open-ended questions are key. Only then can you understand their current process and build out a value based pricing model.
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Taylor is a co-founder at SalesRight where he’s on a mission to change B2B SaaS pricing. Outside of work he helps lead Venture Out, Canada’s largest LGBTQA+ technology and entrepreneurship community.
Questions? I’m always ready to chat, reach out to me on Twitter @rtaybond or check out some of my other articles on the SalesRight blog.
Header image courtesy KnowYourMeme