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Pricing Insights from 1800 SaaS Companies

first_imgIn November 2016, we launched a tool for SaaS companies to assess their pricing maturity and get advice on how to take their pricing to the next level. Now a year and a half later, we’ve had 1,800 SaaS companies participate. This dataset offers a unique vantage point into how SaaS companies approach their pricing and packaging. After crunching the numbers, here’s what we learned.There’s still untapped opportunity to improve pricingOur pricing calculator graded companies on a scale from 0 to 100 based on their pricing capabilities. To achieve an Excellent score of 80 or above, companies needed to hone their target market and buyer, conduct pricing research and/or testing, and have a process for revisiting pricing over time.Only 4% of companies actually received an Excellent score. Later stage companies were a bit better than their early and expansion stage peers, but even the vast majority of those more mature companies haven’t figured it out. 13% of later stage companies received an Excellent score.After creating this calculator, we thought it would be difficult to get a Failing score. To do so, a company needed to seriously underinvest in their pricing function. But it turns out, 44% of companies failed, including 26% of later stage companies.Why haven’t you adopted value-based pricing?SaaS companies have nearly limitless flexibility around how they package and price their products, unlike, say, consumer product companies. SaaS companies could choose anything from a low priced, seat-based model (i.e. Slack) to a highly granular, usage-based model (i.e. Twilio, AWS).To capitalize on this flexibility, SaaS companies must take a value-based approach to how they come up with pricing. In the words of Patrick Campbell, Founder & CEO of ProfitWell, “Your price is an exchange rate on the value you’re providing.”But fewer than two in five companies (39%) actually do that. The rest make a judgement call (26%), copy from competitors (25%), or take a cost-plus approach (10%). If you want to build pricing capabilities, step one is to reorient pricing around value.Usage-based pricing is taking on seat-based pricingThe value metric is one of the most important building blocks of pricing. It is the main unit that defines how much a company charges and how much a customer pays. The value metric could be based on users (named users, concurrent users, active users), usage (transactions, storage, computing, servers), or something else entirely.Historically, user or seat-based pricing has been most popular with usage-based pricing a distant second. A Pacific Crest study from 2014 found that 37% of companies primarily charged based on users while 23% charged based on usage.Well, it looks like usage-based pricing is finally catching up. In our latest survey, 38% of companies charged based on usage. This has real advantages for SaaS companies:It reflects the business value being unlocked by the productIt allows customers to start small and trial a productIt provides a seamless expansion path as customers get hooked on a productOur survey adds data to back this up: companies with usage-based pricing are more likely to say that their pricing aligns ‘perfectly’ or ‘pretty well’ with value compared to per user pricing.Pricing is in a constant state of evolutionWe asked SaaS companies how regularly they revisit and change their pricing. Nearly four-in-five said that they change their pricing at least once per year, and most of those change pricing multiple times per year. Later stage companies do tend to revisit pricing less frequently than earlier stage ones, but even they still revisit it once per year on average.If you haven’t changed pricing in the past year, now’s the time to assess whether it’s working or if there are opportunities to improve what you’re doing.If you do change pricing regularly, you should reflect on your pricing process and whether that’s optimal. When you made pricing changes in the past, what impact did it have on different KPIs? Are you collecting the right customer and pricing data to make smart decisions? Do you have a way to synthesize feedback from the field?SaaS companies are becoming less reliant on discountingWhen people think about buying software, the conventional wisdom is to never pay full price. I’m sure everyone’s had some baffling experience where they somehow received a 70% or 80% “discount” without very much effort, especially when buying right at quarter close.The survey revealed that today’s SaaS companies are increasingly moving away from this discounting mentality. 31% of companies surveyed said that they do very little discounting (‘the price is the price’) and another 38% do only occasional discounting (10-25% of deals).Later stage companies are hiring pricing prosEarly and expansion stage companies tend to have a major blind spot with pricing, as I wrote last year. Most of these companies have no one in their organization who handles pricing even as just a part of their job description.With growth and later stage companies, on the other hand, we’re seeing the emergence of a dedicated pricing professional. 20% of growth stage ($20-100M) and 42% of later stage ($100M+) had a pricing manager or pricing team. A quick search for “pricing” and “software” on LinkedIn, returned 2,700+ results representing companies such as Adobe, Akamai, Anaplan, AppDynamics, athenahealth, Auth0, Box, Cvent, DocuSign, Informatica, Intralinks, Kronos, LinkedIn, LogMeIn, Medallia, Nuance, PagerDuty, Salesforce, Splunk, Sprinklr, Workday, Zendesk, Zoom and many more.The job responsibilities and requisite skills for this job are still in flux, and are defined differently across SaaS companies. When hiring for this position, you’re likely to find candidates who fit these three archetypes, based on TeamFit’s survey of 274 pricing professionals:Analyst (50%): Skilled in data analysis, statistics, optimizationCoach (33%): Excellent at working with and coaching sales teamsStrategist (14%): Work with C-level to develop a go-forward strategy; great at recognizing patterns, structuring choices, and handling ambiguityCompanies are split on whether to publish pricingIt’s an old debate: should you publish pricing online or should you be more opaque with pricing? In our survey, 45% of companies do publish pricing while 55% do not.As one might suspect, deal size is a major driver of whether companies publish their pricing. Among companies with average deals less than $5k per year, 69% do publish their pricing. Meanwhile, 35% of companies with $5-25k deals publish pricing and only 11% of companies with >$25k deals do so.There are a host of benefits and drawbacks to publishing pricing. All else being equal – and for companies in that gray area with deals between $5-25k – I have a personal bias towards greater transparency (which you can read about here). That’s because I think buyers are doing more and more research before talking to vendors, it provides a better buying experience, and helps qualify deals that come in.Want to see how your pricing stacks up against your peers? Check out our SaaS pricing maturity calculator and browse our State of SaaS Pricing Infographic here.AddThis Sharing ButtonsShare to FacebookFacebookShare to TwitterTwitterShare to PrintPrintShare to EmailEmailShare to MoreAddThis24last_img read more