This post was originally published 01/06/2020.
There are many factors to consider when pricing your SaaS product—from competitor prices to CLV to the buying habits of your target market—and they all play a role in the pricing discussion. However, there is one metric which should impact your pricing more than any other, informing and evolving your pricing over time according to what your product is worth. That’s right, we’re about to take a deep dive into your value metric.
What is a Value Metric?
Your value metric is the bedrock of your pricing model, determining the what and how of your pricing. It’s how you answer the foundational question: “what does your customer want, and what do they think is fair to pay for it?”
If you were selling a physical product—say, computers—the computer itself would be your value metric. One unit is sold at one up-front price without variations or changes to the individual unit. Finding your product’s value metric, in this case, is easy. The metric is the product.
Finding software’s value metric used to be easy too, mirroring that of physical products. Companies sold one unit (the disk containing their software) at one, up-front price. This simple value metric made sense for a while, but then the internet came along, and SaaS companies realized the benefit of cloud hosting. Suddenly selling one-time physical disks was no longer the most beneficial way to price. Cloud-based software quickly gave birth to subscription billing.
Unfortunately, this transition threw a curve ball into the pricing discussion. Not only is identifying the value metric for your SaaS product much more difficult, it’s also more important than ever, since churn is now one of the key risk factors. If you want to win in SaaS today, you must directly tie the price of your product into the intangible benefit a customer realizes from your software.
Benefits of Using a Value Metric
While determining a product’s value metric is more difficult than ever, this style of value-based pricing has quickly become SaaS’s leading pricing strategy for a few simple reasons. First of all, you know your customer is willing to pay it. This pricing just makes sense to the customer, reducing the friction you experience when persuading them to make room in their budget for you.
But there’s another benefit to value-based pricing. It’s also a useful forcing function for your team to consider how you’re offering your SaaS product. Many SaaS companies today default to a simple per-month or per-user pricing setup. While this model is convenient, it might not be the most effective way to price your product—for you or your customer. Letting your product’s value metric dominate pricing conversations can open your team’s eyes to new strategies, prices, and models which could deliver a huge return on your company’s growth.
Chart comparing growth by pricing model (Source)
Additionally, finding your product’s value metric forces you to think about what your customer actually values about your product. Not only does this insight into your customer’s experience inform your pricing strategy—it can also improve your sales and marketing focus while driving your product roadmap.
But guessing your value metric and knowing your value metric are two different things.
Finding the Best Value Metric for Your SaaS Product
It’s easy for back-end processes and sales goals to take the lead in a pricing discussion. After all, you have investors to please and a company to grow. But despite the inherent pressure of operating in the SaaS market, it’s important to never lose sight of your customer.
Your customer doesn’t care about your bottom line, your customer is concerned about their own. If your product’s value doesn’t meet or exceed the price they’re paying, they’ll leave (taking all hope of meeting your revenue numbers with them).
That’s why finding your company’s value metric always starts by asking “what does my customer want?”
1. Get up in your customer’s business.
You can’t nail down your product’s value metric without a thorough understanding of your customer:
Who’s the day-to-day user of your product?
What do they use it for?
What impact does your product have on both their individual and larger business goals?
What pain points does your product solve for them?
Keep in mind that your best value metric isn’t always the most obvious one. Take AWS for example. The most obvious pricing metric for this cloud hosting company, and the main metric chosen by their competitors, is the amount of storage space available to the user. However, in 2006 they implemented a multidimensional usage-based pricing strategy (known as Events-Based Billing) to create a custom price for each individual user. This pricing is perfect for their audience (detail-oriented developers) and was a key driver in tripling their growth in 2007 and 2008.
Open the value conversation with your key customer segments—your best-fit accounts—and review the insights you collect with a customer-focused lens, rather than a business one. Your customers are the power-users of your product. Daily use arms them with in-depth understanding of its functionality (or lack there-of). They know exactly how well your product solves their unique business challenges. Gathering their feedback is an invaluable step toward determining your value metric.
Customer interviews vs. data
Interviews can teach you a lot about how customers perceive your product, and are an integral part of this initial discovery process. However, they’re not the only way to gain the information you need. Customer and application data is another key source of truth when it comes to how customers actually use.
In addition to performing interviews with key customer segments, we recommend taking a deep dive into your customer data to learn not only who those top segments are (and what attributes they share), but also how they’re using your product.
Pay close attention to your application usage data to learn the what, when, where, and how. What features are used the most? Which are ignored? How long do users spend in this functionality or that? How much time do users spend in your app on a daily basis?
Reviewing data is a key part of gaining a 360° view of your business and requires a significant amount of processing power to accomplish well.
2. Think about outcomes, not just features.
In general, value metrics can be grouped into two types: functional and outcome-based.
Functional value metrics are formed around a function the product performs, like how Asana charges for access to various product features. Outcome-based value metrics are based on an outcome the company helps the customer achieve. Functional value metrics are by far the most popular SaaS value metric—especially the per-user metric. But there is a lot to be said for favoring an outcome-based value metric.
For starters, outcome-based value metrics reduce churn. According to Patrick Campbell of ProfitWell, “…both types of value metrics outperform feature differentiation with up to 75% less churn, but the outcome-based value metrics take this a step further with an additional 40% reduction in churn.”
Chart showing how outcome-based value metrics drive down churn (source)
If you think about it, this phenomena makes complete sense—why would customers churn when a portion of what they pay is based on their successes in your product? If they are not doing well, then they aren’t paying as much. If they’re finding success with your product, why would they leave? (Cloud hosting is a great example of this. You only pay for the bandwidth you use, but you only use bandwidth if people are visiting your site.) This type of result-oriented relationship defines the outcome-based value metric.
Outcome-based value metrics tie your success to the success of your customers, creating a symbiotic relationship. When your pricing model is aligned to customer success, that means as they grow, you do too. This relationship is the ideal situation for a fast-growth SaaS company, as it paves the way for exponential growth. (Plus, it ensures your customer that you really do put their success first. A win win for everyone.)
3. Bring it back to your goals.
Once you’ve determined your customer’s need and narrowed down the outcomes your product creates, it’s time to bring things back to those growth goals we mentioned earlier. If you’re a fast-growth startup, you need to price like one. That means choosing a value metric that is scalable.
Take the popular video hosting platform, Wistia, as an example. Their pricing metric centers around bandwidth and number of videos—both pricing metrics which scale as their customers do. This framework keeps everyone happy, allowing their smaller clients to afford their services without leaving money on the table from their video-happy, enterprise-level customers.
4. Keep things easy to understand.
This should go without saying, but if prospective customers can’t understand your pricing model, you haven’t found the right value metric. Remember the benefits of value-based pricing that we talked about earlier? They all depend on your customer understanding the relationship between your pricing and the value they receive.
However, this doesn’t mean you have to simplify your pricing model at all. While the complexity of AWS’s events-based billing model can sound intimidating, they offer their clients a handy calculator to help each user determine and understand their unique price on the front end.
5. Stay flexible.
If your company is growing like it should, your value metric will not remain static. That means your pricing shouldn’t either. As the value of your SaaS evolves over time, you must regularly re-evaluate your value metric’s relevance and adjust accordingly.
Don’t fall into the trap of “setting and forgetting” your pricing. Profitwell’s Jordan McBride encourages businesses to make pricing a consistent process in their organization. He says making minor tweaks to their pricing model every three months,and major changes every six can help businesses capture an 11% increase in profit they would otherwise be missing. (Don’t worry, it’s not as hard as you think.)
Value Metric is Just Half the Battle
Pricing your product is a complicated and ever-evolving task—even if pricing looks simple from the customers’ perspective (which it should). It can take a heavy lift from your team, as you search for the magic number potential customers are willing to pay, argue over which pricing models will keep you profitable, and consider when you should change your price (not to mention how you’ll communicate that change to your customers).
Your value metric can act as your north star through these changes, but finding (and implementing) this metric is much easier if you’re equipped with the best technology to help.
Maxio’s subscription and billing platform is that solution. Maxio streamlines your subscription billing while enabling you to get up and running quickly with custom pricing (and the ability to easily make changes as you go). Set price points and experiment with different pricing schemes as you work to find the model which best fits your business.