Pricing SaaS without complexity: The first steps to simplifying your pricing strategy

It’s no secret that newspaper subscription and advertising revenues have taken a huge nose-dive, and the New York Times is no exception. When the newspaper launched its paywall for digital access back in the spring of 2011, the complicated pricing scheme was met with a significant amount of confusion and resistance.

Up until that point, avid readers had been granted unlimited online access to its articles and digital media. The various digital subscription plans included separate rates for mobile phone and tablet apps ($20 and $15 every four weeks respectively), as well as an all-inclusive digital subscription priced at $35 every four weeks. The going rates for digital subscriptions at other newspapers were well below what the Times was charging, and adding to the confusion was the fact that the Times charged less for a print subscription that included the all-access digital pass.

Fast forward to 2013, and the New York Times is still using the same complex pricing scheme despite disappointing earnings and low digital subscriber growth. The company claims they will be providing lower priced options by the end of the year, but it may be too late to regain the average customer’s confidence in the value of a subscription. Considering it just entered into an agreement to sell the Boston Globe for a meager $70 million (a 93% loss) to John Henry, owner of the Red Sox baseball team, a pricing page facelift could be essential to the news giant’s survival as revenue streams continue to dry up.

What does this have to do with my business?

Most of you probably haven’t given newspaper sales a second thought since you ran paper routes on two wheels, so let’s talk some real turkey. Complex pricing schemes are killing businesses across most markets, and as cloud computing leads to a decrease in software prices and the maintenance business model (customers pay 20% of the original software license price for implementation and maintenance) goes the way of the dodo, it’s more important than ever to use straightforward, transparent pricing based on the value of your SaaS offering so you don’t frustrate your customers. After all, nothing is simpler for potential customers than walking away from something they don’t understand.

The problem is, cost plus and competitor based pricing strategies have placed pricing at the tail end of the development process. SaaS companies are focusing all of their efforts on developing features individually, rather than looking at how their services come together as a whole to improve the businesses of their customers. Sure, analyzing your development costs and your competitors’ prices are essential components to developing your own pricing strategy, but focusing on customer value from the inception of your product leads to the positioning of resources with the features that have the greatest positive impact. This impact is what increases the value of your service for your customers and allows you to charge higher prices that boost your margins.

Learn from the master

The New York Times should rip a page out of Apple’s playbook when it comes to pricing strategy. Almost everyone can remember that a song on iTunes costs a buck, or that the price of an iPhone rises in simple increments based on storage capacity. The overall effectiveness of Apple’s communication is one of the main reasons the company is so successful. If consumers understand exactly what value they’re receiving at a given price, they’re more likely to make the purchase.

The tier structure of the Times’ pricing scheme is based on the types of devices subscribers use, but why does access to the tablet app cost $5 more than the phone app? Screen size? In addition, what happens when users figure out they can access the Times website easily from their tablet devices without paying the extra $5? If you pay the $15 every four weeks for web and mobile access, then you don’t need to pay more for a tablet app just to look at the website on an iPad. One all-inclusive, affordable price for unlimited access would probably be the company’s best bet for increasing users and revenue, despite the fact that it would lower the profits earned from each subscriber.

A value-based pricing strategy removes the complexity

However, there is no “one size fits all” in the SaaS world, and I’m all for unbundling your product or service if it adds value (read my post on that topic here). You can maximize revenue with a range of services that appeal to multiple customer segments, but the reasons for breaking up your product need to be conveyed clearly in the prices or customers will walk away. The pricing complexity that deters customers stems from an emphasis on creating a boatload of undesirable features that don’t justify the prices of the services that include them.

Since value based pricing persuades you to focus on how the right features will combine to fulfill the needs of your ideal buyers, it removes this complexity before it even gets a chance to sprout. To create a simple, attractive pricing scheme you need to first develop a valuable solution and accurately quantify the value to the customer of solving their issue, then you can determine price points for your services that improve your bottom line while still staying within the range of the customer’s willingness to pay. Taking on this consumer perspective is the key to increasing consumer demand and your revenue, not providing a laundry list of product attributes that fail to improve the differentiated value of your services.

I get it, but what are the first steps moving forward?

I’m not trying to sound like a broken record, but it’s important to emphasize that pricing is a process. In order to communicate the value of the product simply and effectively at a given rate, pricing needs to play an ongoing role in your research and development. As such, let’s take a look at four of the initial steps on the path to intelligible pricing.

1. Identify the target customers

We’ve mentioned this first step countless times in past posts, but it always bears repeating. Nothing is more critical to a value based pricing strategy than understanding your buyer personas, whether you’re selling to one type of customer or multiple segments. Define your ideal buyers so you can develop product features that collectively make up an indispensable service for your target customer base.

2. Quantify the value the service provides for your target customers

A successful pricing strategy is dependent on knowing which features of your service have the most impact on your client’s pain points. For a SaaS product, you need to uncover how your offering will improve your customer’s business. Will this service save them time? Will it save them money? What sets it apart from the pack? The research you put into understanding the value of your product will produce data that helps you decide whether you’re on the right track or if the team needs to go back to the drawing board.

3. Determine willingness to pay

I have to mention the New York Times again, because this is where the company truly mucked up its pricing strategy. As I said before, prior to launching the paywall the Times granted unlimited digital access for free, so digital subscriptions were devalued from the beginning. Then the rates conjured up were well above the prices of its competitors, making the positioning and packaging of the subscriptions look even more ridiculous. No matter how much differentiated value you think your service offers, evaluate your competitors and collect pricing data from the consumers before determining the optimal price point for maximizing revenue.

4. Determine the operational costs to deliver value

Now that you’ve determined who your target buyers are, what your service brings to the table, and how much the customers are willing to pay for it, you can take a closer look at the cost of doing business. You don’t have to ignore development and operational costs to implement value based pricing, but it’s important to place a cost analysis towards the end of your strategic pricing process so it doesn’t become the main justification for your rates. Remember, you’re trying to maximize profits and revenue, and simply covering your costs and adding an arbitrary margin will potentially leave cash on the table because you’re not accounting for value or consumer demand.

Summary: value is at the heart of simple pricing

It may seem like the development of a streamlined pricing scheme starts with the construction of your product tiers and an attractive pricing page, but without an understanding of what features collectively provide the greatest value to your customers and their businesses, you may end up wasting time developing the wrong product. Focusing on value at every step in the process of creating or retooling your services is crucial to picking ideal price points and communicating them effectively further down the line, and it will ensure that your business not only stays afloat, but thrives in an increasingly competitive SaaS market.