How to Price a SaaS Offer
This episode might reference ProfitWell and ProfitWell Recur, which following the acquisition by Paddle is now Paddle Studios. Some information may be out of date.
Originally published: April 4th, 2018
Value metrics are what you charge for, where it could be some measure of usage, some per user pricing, or even a cut of cash made from a product. So to answer Zeal's question, we looked at over 6,000 companies and data from nearly 600,000 subscriber buyers, and here's what we found.
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Deeper insights into value metrics
For one, it’s hard to deny the impact of value metrics on a business, particularly when it comes to growth. When we compare companies utilizing some sort of value metric versus those who are strictly utilizing feature differentiation, those who have value metric based pricing are growing at nearly double the rate as their feature differentiated counterparts - and the gap is widening.
Growth Differential
This growth differential for value metric companies is because you’re baking expansion revenue directly into your pricing model. If you’ve aligned your value metric correctly with your target customer base, then as they use more of that metric, they’ll naturally be inclined to pay more, because they’re getting more value. Plus, you won’t have to fight tooth and nail to convince them to upgrade for a feature they probably don’t need.
Gross logo churn rates of those companies who are utilizing a value metric are actually half those of those pricing based on feature differentiation.
Gross Churn Across Different Pricing Models
Plus, just raw expansion revenue as a proportion of overall revenue is higher - with value metric companies seeing roughly 10 to 25% higher expansion revenue on an absolute basis.
Signs You Have the Right Value Metric
Clearly a value metric is the way to go, but what are some signs you’ve hit the right one? First, I’d make sure you’re seeing this type of throughput from an expansion revenue perspective. If you’re seeing less than 15% of your revenue from expansion, you’re probably using the wrong metric.
Ultimately, the beauty of the subscription model is that with more and more technology coming into the billing mix, we now have the ability to fulfill the dream of commerce, which is to bake the relationship of our users directly into our pricing model, allowing a symbiosis to germinate and grow as that user continues to be nurtured by the value we’re providing.
Want to learn more? Check out our recent episode: How Discounts Impact Retention and subscribe to the show to get new episodes.
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You've got the questions,
and we have the data.
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Each week,
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we dive deep on benchmarks
of the subscription economy that
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you just can't get any else?
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This is the profit well report.
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Yo Patrick, it's zero
with publicity dot ai. Curious.
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What are the best practices
for pricing your SaaS offer in
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today's landscape? Zeal,
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that's an amazing backdrop
and also an amazing question
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because it gets to one of my
favorite topics of all time, value metrics.
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Value metrics are
what you charge for,
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where it could be some measure
of usage, some per user
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pricing, or even a cut of
cash made from a product.
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So to answer Zeeel's question,
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we looked at over six
thousand companies and data from nearly
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six hundred thousand
subscriber buyers,
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00:00:43,380 --> 00:00:45,205
and here's what
we found. For one,
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it's hard to deny the impact
of value metrics on a business,
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particularly when
it comes to growth.
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00:00:49,845 --> 00:00:53,090
When we compare companies
utilizing some value metric to
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those who are strictly
using feature differentiated pricing,
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those who use a value
metric are growing at nearly double
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the rate as their feature
differentiated counterparts.
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And the gap is widening.
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The growth differential for
value metric companies is
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because you're baking expansion
revenue directly into your
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pricing If you've aligned
your value metric correctly with
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your target customer base,
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then as they use
more of that metric,
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they're naturally inclined to
pay you more because they're
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getting more value. Plus,
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you won't have to fight tooth
and nail to convince them to
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upgrade for a feature
they probably don't need.
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Gross logo churn rates of
those companies who are utilizing a
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value metric are actually
half those of feature differentiated
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pricing models plus just
raw expansion revenue proportion of
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overall revenue was higher
with value metric companies seeing
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roughly ten to twenty
five percent higher expansion
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revenue on an absolute basis.
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Clearly, a vow you
metric is the way to go,
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but what are some signs you've
hit the right one? First,
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I'd make sure you're seeing
this type of throughput from an
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expansion revenue perspective.
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If you're seeing less than
fifteen percent of your revenue
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from expansion, you're probably using
the wrong value metric. Ultimately,
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the beauty of the subscription
model is that with more and
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more technology coming
into the billing mix,
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we now have the ability to
fulfill the dream of commerce,
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which has debate the
relationship of our users
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directly to our pricing model,
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allowing a symbiosis to
germinate and allowing those
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customers to grow as you
continue to provide them more you.
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Well, that's all for now.
If you have any questions,
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shoot me an email or video
to p c at profitable dot com.
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Let's also thank Zeal
for sparking this research by
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clicking the below to share on
LinkedIn to give him a nice
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little shout out. We'll
see you next week.
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This episode of the Proposal Report
is brought to you by GoSquared,
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intelligent software to convert
clothes and delight customers,
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GoSquared dot com.
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