Hey Product Hunt 👋 Get 30% off your first 3 months if you sign up using this link

Better Done Than Perfect · Season 6 · Episode 8

Software Pricing Design with Chris Mele

You'll learn what happens behind-the-scenes of enterprise pricing, what value-based selling really is, the problem with pricing tiers, and more.

Chris Mele

Why should SaaS businesses invest in a pricing strategy? In this episode, we talk to Chris Mele, the managing partner at Software Pricing Partners. You'll learn what happens behind-the-scenes of enterprise pricing, what value-based selling really is, the problem with pricing tiers, and more.

Show Notes 📝

Thanks for listening! If you found the episode useful, please spread the word on Twitter mentioning @userlist, or leave us a review on iTunes.

Key Learnings 💡

Established in 1982, Software Pricing Partners has been perfecting the science behind software pricing and is exclusively B2B software oriented.

But prior to joining the firm, Chris had a software company in the late 90s while working at Ernst & Young. During the global financial crisis of 2008, Chris's team decided to replatform (move to the cloud) and also encountered Software Pricing Partners:

"We hired the firm to help with our monetization strategy and that's when I learned how many mistakes I had truly made in the product design function — which was 100% devoid of anything pricing related. It was just all product design and that was the big journey."

Now working for the firm for a few decades, Chris shares that their clients are also experiencing the same journey he did years ago:

"That's also the big journey with our clients. We need to understand how to design products around their packaging and pricing and the manner by which they want to charge for the use of the software."

The firm currently has a mix of publicly traded software companies and smaller ones that are private equity backed or bootstrapped.

When should you invest in a pricing strategy?

As a former bootstrapper himself, Chris says he wished he had known back then that a pricing strategy was one of the better investments. The perfect time to develop it is when you've achieved product-market fit:

"You ideally want to invest in the science behind making money after you've gotten into product-market fit and are probably approaching the launch of your early access program."

Chris adds that pricing strategy adjustments depend on how often you put out products and create more value:

"If you've reached product-market fit, you've got some science behind how you want to make money, and you understand that how you go about making money for your intellectual property, products, and services needs to change and iterate very quickly in that stage is really key.

Versus if you're high growth, maybe you iterate the model quarterly and if you're publicly traded, maybe yearly. It just depends on how often you're putting out products and how often you're creating more value."

The chaos behind enterprise plans

When you look through software pricing pages, most SaaS businesses would tell you to reach out to one of their sales reps if you want information about their enterprise plans.

Chris says that what hides behind it is the chaos and the problems that could eventually hurt you:

"Maybe your list price for that enterprise package is around $10,000 but you don't get anywhere near that. In fact, you've maybe sold it 10 times in the last month at a price ranging from $50 all the way up to $9,000. That chaos, the inability to predict where the net price is being extracted and your inability to extract a consistent net price is actually the thing that's gonna hurt you the most."

Which is why it's important to have a system in place early on:

"The earlier that you can get the revenue stream baked and a little bit more consistent and predictable, the better."

To further emphasize the importance of dealing with this chaos and having more consistent pricing, he shares an experience that taught him a lesson he'll never forget.

Chris's company had two customers: Judy and Brady. Both bought the same software, with the same exact configuration of modules, same design system, and the same catalogs. The difference is, Judy was paying twice what Brad was paying:

"I saw Judy and Brad talking, and Judy looked up because she was the one that unfortunately paid twice as much. And when I met her eyes, I knew that we would never have her as a customer again. That really was a big wake-up call for me. In the behind-the-scenes chaos is your brand and your philosophy of how you want to treat customers."

And most software companies would say that the customers are at the center of the universe. But if the chaos remains unresolved, it will certainly hurt your company in the long run:

"Are we really having the customer at the center of the universe if we're kind of taking advantage of them on price? That doesn't mean that we're malicious about it. It's just that it's tucked under the chaos. And over time I see wonderful companies and brands get destroyed."

That chaos could be pinpointed to the lack of design:

"It all sources back from that simple concept of it wasn't designed up front and it was made up."

What can SaaS businesses do better?

Have a system that gives you a perspective on your price

With decades at the firm, Chris shares the biggest lesson he learned when it comes to customers and pricing:

"The biggest lesson I learned is that customers aren't really interested in paying you anything more than slightly under your costs provided that you'll answer the support line and support their investment."

Which is why you have to understand the market instead of just relying on what the customer says:

"If you put the customer at the center of the universe and what they say rules the roost, just know that you'll never get paid fairly for your value. So you're going to need some way to understand the competitive set to understand the market."

And this process could be very painstaking:

"You're trying to get a perspective of what you've built and your value and early on, it's really hard. You just have to know that during the early stages, when you develop that perspective, it's gonna be wrong so it has to be validated, and then you have to iterate very quickly."

Chris also warns that getting that perspective doesn't mean copying a competitor's pricing:

"Even if they have similar features in yours, you just don't copy a competitor's pricing. You need to understand what is in the evaluation set of the buyer. You don't ever want to look and see what the competitor's pricing is and go figure out how they're pricing, how they're packaging, and copy all of that because it's not gonna work."

He explains further that every pricing model has a blueprint of risk attached to it:

"Every model that is built, every monetization design, carries with it a blueprint of risk. And so when you copy somebody else's blueprint, you copy their unknowable blueprint of risk. And that might be really bad for you. That might not even work for you. It might not even be sellable by your sales team."

Chris emphasizes that developing the perspective is an inside-out process rather than the opposite:

"You still want to get outside inputs to help validate, but this is you developing your perspective because you get what you demand in the marketplace."

Value-based pricing and selling

Value-based selling is getting paid uniformly, fairly, and consistently for your value.Value-based selling is not charging a customer twice the price just because they have a bigger budget.

"That's not value-based pricing, that's used car sales and that's completely different. You can still do that but just know that that's a friction-filled nightmare at scale."

To do value-based pricing, you have to enumerate the value that you're offering. But this is where even big companies fail:

"What value are you providing through your products and services? And you would be amazed: publicly traded companies, privately held, and bootstrapped ones cannot enumerate their value. They don't have it so they can't equip their sales team with it."

Talking about sales, companies often demand that the salesperson has to be tougher on price. Chris says this thinking is a real disservice to your sales team:

"Often what is really wrong is the model and it probably has to do something with the packaging."

Chris says having good packaging will help you and your sales team:

"Defending the price point is not being tough on price. It's having really good packaging that is harmonized with what the buyer wants to take down."

For example, a potential customer tells you that they'll need a 40% discount on the price because they'll only be using 40% of your features. If you have poor packaging, the salesperson would have to give that discount to handle the scenario.

"There are lots of reasons that people give discounts and it's not always because the salesperson isn't good at their job. It actually has more to do with the fact that the company didn't give a good monetization design to make the sales team or the partners successful."

Dealing with different customer classes

Customer classes are groups of customers that take down value similarly.

If your customers are SaaS people who are operating in slightly different models, these are the questions you'd have to answer in order to come up with different offers:

"The question is, 'are they doing exactly the same thing in the software and extracting that value in exactly the same way?' And we wouldn't know unless we dug into the details, but often you can find some differentiation: how they're using the product or how they're organizing their workflows around their product or something that might spawn the ability to have a different offer for that group of customers."

But if you can't find the answer to these questions, you can answer these questions instead:

"If you can't find that and they truly are the same person, B2B and B2C, then you might hunt back and ask, 'what is the manner or the basis by which I'm charging for the software?'"

For example you're charging software based on locations and you charge customers based on the number of physical locations that they have of their hospitals. However, not all locations are created equal:

"Some locations are open 24/7 like an ER. Some locations are open Monday, Wednesday, Friday, because they're a satellite office and in a county outside of the major city. And the list goes on and on and on. So right away we know, there's probably something different about the locations. Now, this isn't packaging, this is what we call licensing. In 1982, we invented the concept of a licensing metric, a value metric, like what is it that goes into the quantity field of the contract?"

In order to deal with your different customer classes, you have to know which license metric to use:

"I have two different groups of customers using the software very differently. We deal with these two customer classes by picking the right way to gear the model. We select a slightly different license metric that basically accumulates a different amount of list price for that kind of usage."

Which is why you need different frameworks to solve your pricing problems:

"There are real frameworks and they're different. They're not marketing frameworks, they're not buying personas. You don't show up to the table with marketing content-driven frameworks for monetization-related problems. You need a different set of frameworks, a different set of thought processes, a different way to bring those things together and solve it."

Testing your pricing

But how do you test pricing using sales?

"A lot of this depends on 'are we launching a brand new product?' or 'are we a very mature company that has a lot of data to drive the next decision that we're trying to iterate on?'"

Doing a paid pilot

"If you're gearing any of this because you're trying to do sort of a self-service model, this implies that the monetization decisions that you need to make are the right ones, and you may not know that on day one."

If you gear it wrong, you might end up putting yourself into a capital raising position because you're not generating enough revenue:

"But the problem isn't in the product, which you're invariably gonna think it is. The problem is in its packaging, its licensing, or how you put the pricing together."

To keep this from happening, Chris recommends doing a paid pilot during the early stage because a great litmus test is to charge.

Using contracts to gate new features

Another thing you can do is to gate features and put them in the fine print of your terms and conditions:

"In the legal terms and conditions of our agreement, we can actually say that they have no rights to module two."

Most of the time, customers won't usually read the whole contract and they'll continue using the new feature until it gets sticky:

"Let them fall in love with module two. And when they fall in love with module two, three months later, you can remind them of the terms and conditions that say they can't actually access module two.

You can now send out a nice reminder and say, 'Hey, we noticed that you were in module two and you've been using it for a while. Looks like you're getting great value and here's what your upgrade path looks like. We'll give you 30 days to upgrade and if you don't want to, we're gonna shut down your access to module two."

By doing this, you'll get some paying customers because they want full access to module two without diverting from the priorities of those first three months of the stuff that they were working on.

That's why it's better to do the rollout process gradually:

"You never really want to pull the trigger and make a change worldwide. You want to do that in solid footsteps in the sand with a savvy rollout process. And that rollout process is: go slow to move fast.

In the 'go slow ' stage, use your legal terms and conditions, and then gear later once you've done the litmus test for the strategy. And of course this implies that you can see the usage, which is a wonderful thing to have in everybody's software."

Why you should get better at packaging

Learning the skill of packaging will really help because customers will often compare notes:

"I fundamentally believe that as a SaaS company, in order to succeed, you really need to be continuously monetizing. So we call that continuous monetization."

And when doing experiments, you can test out additional offers instead of just playing around with price:

"It is much more preferred to spawn an additional offer that you are testing, not to just play around with the price. When I say an offer, maybe it's the enterprise edition or professional edition plus this services component, or whatever it is that you're offering as a bundle of capabilities to your customer. That offer can have a price point attached to it."

The problem with pricing tiers

The current default for dealing with a big client with an impressive business side is tiered pricing. Unfortunately, this is not an effective way of approaching high-volume progressive pricing:

"We believe in smoothing out discounts in a model where discounts are earned. They're not given, and they're earned in the sense that the higher the commitment, the more discount that you earn. That's a preferred way to do that, but not in a tier."

And the problem with tiers is that it assumes that scale is linear:

"'Every time you use my software, you extract a dollar's worth of value or whatever that is and it scales linearly. So if you need a hundred billion units, then the price is a hundred billion.' And that never plays out because of one simple, very important concept and that is there's nothing more valuable than the first tranche of units that you deploy to your customer."

For example, a company deploys their ERP for a business's sales team, purchasing department, and executive team. And then eventually, they also want to deploy the software to the scheduling department because there's another 200 people there. And while the expansion sale was closed, the scheduling department only made use of the scheduling module of the ERP.

"So what happens is the deeper that you entangle your software, what's really happening under the hood is you're switching groups of users that are deriving ever decreasing value from your software. The value is better represented as a curve. It's never a straight line."

And because of this wrong assumption and the lack of a good design, you'll end up overstating more discounts.

Final advice

Don't use unethical ways to gather competitive intelligence.

"If you want to gather competitive intelligence, go out and talk to your competitor's customers and do that research because that's considered customer research. It's harder to do it this way, but it's better."

Do get better at packaging, pricing, and licensing.

"In times of uncertainty, there are many things that you can do in pricing that are very short-term. They can significantly move the needle and prevent you from letting a resource go or going back to a capital raise."

Thanks for listening! If you found the episode useful, please spread the word on Twitter mentioning @userlist, or leave us a review on iTunes.

Subscribe to win your free shirt

Join our mailing list below, learn about new episodes as they go live, and win one of our custom-designed shirts from Cotton Bureau.