Dan started his career in software as an engineer and eventually became an engineer manager. He reached a turning point when his fascination shifted from value creation to value capture:
"I ultimately became more fascinated by how our products created value for customers (in terms of dollars and cents) and the business, versus building and shipping features. That interest led me to pursue an MBA."
This program gave him his theoretical grounding in pricing. His internship at Silicon Valley for a successful startup gave him practical experience in pricing and packaging:
"One of the questions on the CEO's desk when I showed up was if they should pursue a freemium model. Among the other things I did there, I helped them get the answer to that question that summer."
After earning his MBA, Dan got deeper into the value creation side of software by serving as a product manager and product strategy leader. The companies and products he worked for helped him gain tremendous experience in spotting the mistakes most acquired companies make with their pricing and product strategies
Dan now helps B2B SaaS companies through his consultancy, Product Tranquility.
What is packaging for SaaS products?
"Most executives think who and how you charge determines your success. And the 'how you charge' is the packaging."
Packaging is made up of four elements:
- Price metric
- Price model
- Offer configurations or bundles
- Price fences
Price metric
The price metric is the unit of value that companies charge customers for. The price scales as the customer consumes more. It could come in the form of:
- Number of seats
- Per API transaction
- Amount of gigabytes of data transferred or stored
Price model
The price model is how and when the payments flow through the system.
Before companies transitioned to the SaaS model, software was sold as a perpetual license and customers paid 90% of the customer lifetime value upfront.
"With SaaS, we have subscription models that have incremental payments. Customers are not taking ownership but they're paying for access to the software over time. We now even have conversations around the pay-as-you go model."
Offer configurations or bundles
This element covers all the capabilities you have as a company, which include not only the product features, but your services as well (such as customer support).
"How do we take all of the capabilities we're offering as a company and group them into offers? Sometimes these are also called bundles that map to a specific set of needs or set of use cases. What we usually see in the SaaS world is that it comes in terms of a good, better, and best tiers."
Price fences
"With this element, we're trying to figure out these situations where we want to charge two different customers two different prices for effectively the same product. We usually think of price fences in terms of volume, time, or identity."
In B2B SaaS, some companies give different prices for government institutions, educational institutions, or startups, as compared to a regular customer.
"For example, you can give startups a special program where they don't pay the full freight because you see the value of them growing. While most might not make it, those startups that do become successful will be loyal customers over time."
And while deciding on the price level is important, Dan emphasizes these four elements have more impact on your long-term success:
"Yes, at the end of those conversations of thinking through packaging, we do need to put a price on the thing that we've defined. But those elements are much more impactful to the long-term success of your pricing strategy than the final number that you pick."
Ownership of pricing and packaging
Unlike sales, having a dedicated person for pricing is a relatively new function. Dan shares that less than half of Fortune 500 companies have a pricing officer or team.
Instead of doing it later, Dan recommends that founders explicitly designate somebody to take ownership of pricing much sooner than you're comfortable with.
Product marketing is in the best position
If you don't have a pricing officer in place already, he believes that product marketing is in the best position to take ownership of the pricing function because:
- They hold the strategic imperatives of the business.
- They have an understanding of the competitive landscape because they're usually responsible for helping to build sales enablement.
- They have to understand the value of what's being delivered.
- They need to understand the value and how it's communicated.
Sales are stakeholders but shouldn't own pricing
"Generally, whoever's responsible for negotiating prices with customers shouldn't own the long overall strategic pricing for the company. Your salespeople may be good people, but incentives tend to drive behavior in an overpowering way."
While they shouldn't own the pricing strategy, they are key stakeholders in that conversation:
"You shouldn't change pricing without sales being a key stakeholder in the conversation. Often, they understand what customers really value in a way that maybe the rest of the organization doesn't see as clearly."
How often should you revisit your pricing?
While there's no magic number, Dan says that you should revisit it at least once every two years and no more than once a quarter. This is based on factors that include:
- Major shifts in the market
- Release of a new functionality (either by you or a competitor)
- New competitor in the space
- Major global event (e.g. COVID pandemic)
"We have to be aware of what's going on in our marketplace that is affecting the assumptions that underpin our thought process around this and be willing to look at them."
During the height of COVID, we saw massive fiscal and monetary stimulus from the world's governments to help the global economy. The printing of more currency might have contributed to the worldwide monetary inflation:
"Inflation is a structural break that underpins a lot of economic models. This causes changes in central banks, interest rates are now percolating through the economy. This then changes the funding available to SaaS companies which in turn, causes shifts in their business models."
Unlike before, where founders could go raise another funding round, they now have to think hard about how to increase their market share:
"I think a lot of startup leaders are now recognizing that that free money train has also changed. So now they have to take a really hard look at how they could capture a fair amount of value for the value that they created. Because they can't just rely on investors in order to fund their business anymore."
Price positioning
"When thinking about bringing a new business to the market, there's a strategic choice around pricing that will define a lot of decisions that you will make."
For example, Southwest Airlines is one of the most affordable airlines because they not only wanted to compete with other airlines, but they made the explicit choice of being price competitive with bus fare.
"And that is a strategic choice because your price positioning is a decision of, given my price point in the market, which competitors am I going to invite comparison to?"
So what does this look like in B2B SaaS?
"In B2B SaaS, this price point or average contract value can define things like the ability to support an outside sales team.
If you only have inside sales, it's very expensive to fly out salespeople around the country for meetings or have an external sales office versus having a call center where all your salespeople are outbounding on the phone. Those are very different economic models."
Dan shares that when companies don't make this decision, they often end up in a no man's land:
"They're at a price point from an ACV level that's not quite large enough to support an outside sales force but their product is too complex to be sold from an inside sales model. So they get stuck in this no man's land and then those companies die out."
Focus on company profitability at the early stage
While good pricing maximizes a company's long-term profitability, Dan says you should focus on the overall profitability instead of your unit economics when you're at an early stage.
"All the expense of a hardware business is in the fixed cost of getting awareness of your offering and then the developers to actually build it, not the extra license that you're selling.
So I'm not necessarily worried about making sure my overall PnL is profitable, but making sure that if we do scale this thing, we're not selling $20 bills for $10 because you're gonna be out of business real quick."
Don't A/B test your B2B pricing
Dan says that when you're in a B2B market, it's generally a terrible idea to A/B test your pricing because it causes a lot of problems.
For one, it creates a problem for your salespeople:
"Oftentimes, you've got sales in between and you've got longer buying cycles with multiple stakeholders. So imagine that you're trying to just run an A/B test on the website and that lead sees a price. When they have a conversation with the salesperson, the salesperson doesn't know what price the lead saw because your marketing team is running an A/B test.
So someone's going to lose trust, or someone's going to be confused—and confused conversations don't go well."
It also creates problems for your leads who have a buying committee:
"Imagine if the price is constantly changing during the long sales cycle. If you've got a buying committee with multiple stakeholders who signed off at different times. When someone needs to make the final decision, the price is entirely different and that's going to cause a lot of consternation and confusion."
The SVCS model for SaaS pricing
Dan shares that companies usually face a few significant challenges when they're trying to tackle their pricing. These are:
- Unclear target customer profile
- Poor understanding of how they create customer value
- Unclear about their product's unique differentiation
- General unappreciation for the depth of decisions that go into a strong pricing and packaging approach
"A lot of companies tend to think about pricing as a decision, mainly around price level and neglect many other factors of packaging."
Because of this, Dan developed his SVCS model that stands for four components:
- Segments
- Value
- Competition
- Strategy
Segments
"We need to think of your customer segments first because the context your customer is in is critical. This dictates the constraints they're facing and which value drives they view as important."
Value
"Each segment will rank order value drivers differently, and cause them to value your product differently."
Competition
"We need to think through the competition because different segments have different competitive alternatives available to them. What will they buy if your company doesn't exist?"
Dan says that these first three elements are inputs to the overall pricing because the pricing power ultimately comes from the differentiated value you create for a particular segment beyond the available alternatives.
Strategy
These three elements are then filtered down into a strategy.
"Strategy is ultimately about trade-offs and companies would like to be everything to everyone. But we have to make decisions about which customers we're going to serve given the available segments in the market.
Where are we best suited to play, when, and who are we going to target? How do we position ourselves in the minds of those customers to clarify our differentiated value?"
Early stage pricing mistakes made by startups
Thinking your pricing and packaging is still viable even after the acquisition
"If the acquirer has a portfolio of 25 or 50 products and they each are priced and packaged differently, that creates an incredible drag on your go-to-market."
Which is why you need to shift from what is optimal for that individual product versus what's overall optimal for the company:
"What you're likely to start doing is shifting from monetizing each individual capability or feature to just trying to make things consistent. For example, you were charging for this super valuable feature, but now you're just going to roll into a general seat license because complexity compounds."
Not enough conversation around "who are our customers and why do they buy?"
Dan shares that when he comes in and asks C-suite officers this question, they give different answers:
"That's a problem because it makes everything incredibly difficult to move forward. So it's not only about making sure that you had that conversation, but that everyone has to agree."
For example, from a product management perspective, people would have their favorite feature and advocate for it so it gets built:
"But generally what I found is that the meta-level conversation of 'who are we really trying to serve here?' hasn't happened.
What you tend to find is that both of those are probably the best feature for two different customer segments and no one has actually made the decision to identify which set of customers we're really trying to best in the world for."
Final advice
Do have a pricing process and owner in place.
"I generally recommend having a pricing council or committee to bring together the different stakeholders. Pricing is painfully cross-functional and you're bound to make a decision that might negatively impact one of the stakeholders. That's why there needs to be a person/committee that's driving and owning the process and moving the business forward, but making sure that everyone is represented and all the views are understood."
Don't discount just to cut the price.
"Think of discounting in terms of a give-get. Have a policy for discounting and enforcing it. Understand that you have different offers created for people with different budgets. Beyond that, if people are really pushing for the price, you need to ask for something in return (like a case study, logo, or multi-year commitment)."
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