How to Build a SaaS Pricing Matrix

Pricing is a critical variable in your company's success; your product needs to be priced appropriately to gain traction among customers. It also affects your go-to-market strategy, sales process and cycle, net churn rate, as well as your bottom line.

Determining an appropriate price is often one of the biggest challenges a team will face. Pricing needs to be reviewed and reset regularly.

The impact: The price of your product is tremendously important. In regards to the customer, it affects their willingness to buy and their perception of your product. The price directly affects your revenue and indirectly your ability to position yourself for growth within your market.

The goal: Create a pricing matrix that is simple for your sales team to use and sets your company up to achieve your growth and revenue objectives.

How can Golden Section Assist?

Background

Fundamental pricing approaches:

1. Value-based: You price your product at some percentage of your value proposition. The value of your product aligns with the ROI your customer sees in using it.
2. Competitor-based: you price your product according to how your competitors have priced their product.
3. Growth-based: You price your product by some sort of growth metric (like number of users, set of features or depth of use) that allows your per account revenue to grow over time as the customer's company grows. The rationale behind this approach is that your product gets an early foothold at a lower price, becomes an irreplaceable component of your customer's workflow, and then grow as you customer's company grows.

Golden Section advocates for a value-based pricing structure. Using the value proposition to justify pricing is asking the customer to engage in an investment rather than a cost. People inherently resist costs and seek investments. We are wired to be loss-averse and

gain-seeking. As a result, the ROI you can provide needs to be compelling. The size of the ROI (which is the amount of value your solution brings over and above its price) differs in different industries. A lot depends on the current buying environment and how the buyers are used to hearing ROI. However, in most cases a 3x ROI in 12 months or less is usually compelling.

Note that the firmness of the cost of the problem your solution solves is linearly related to the amount of ROI the customer expects. For instance, if your solution could prevent a $1M problem but the likelihood of that problem occurring is less than 2%, then your product is a bit more like insurance than an investment and as such won't command a large price. The reason for this is that the customers will ask 'how likely is that $1M cost to occur' and decide to haircut the cost by its probability factor (if they don't do this actively, then they will subconsciously) and conclude that the effective cost is only

$20K. Hence, your price is likely to need to be beneath $7K to be compelling. If, however, you can demonstrate a $1M problem that occurs with a high frequency and your solution solves it, then your pricing can be closer to $300K per year. The probability of the cost matters.

Finally, the true value proposition will only become clearer over time. Make it a practice to go back to customers to check your assumptions: Did your solution deliver on your proposed value? Are there additional, unexpected areas of added value?

Steps

How to price your product:

1. ROI: This has previously been calculated in the Customer ROI play.
2. Discount Factor: Determining a discount factor is more art than science. As discussed above, a prospective customer will discount your ROI based on a number of factors, including time for value proposition to manifest, cost of problem you are solving (is this a big problem or a minor one?), probability of risk, and visibility of risk for which your product is solving. Generally, the discount factor will need to be higher the lower the risk, visibility, or cost of the problem and the longer the timeline before any value manifests. It is helpful to use the components below to judge your discount factor.
3. Customer Return: Generally, we have found a 3x ROI in a 12 month period to be a compelling reason to purchase.
4. Discount Rate: Generally, a customer will want to see some kind of economy of scale. Moreover, you want to incentivize the use of your product by additional users. To that end, it might be a good idea to offer a higher discount rate as more users are added to a subscription. Number of users might not be the best metric for your product; consider if number of providers, number of locations, or some other metric is more aligned with your value proposition.
5. Terms and Sales Discretion: This is a good spot to spell out the terms your company requires for a sale and what level of discretion a sales rep has to modify these terms without approval.
6. Pass it by leadership to confirm it meets their expectations and growth objectives.
   • Internal sources
   • Sales Reps have direct experience selling your product. They know buyer's needs, priorities and concerns. How would this working? What aspects need to be improved to support a higher price?
   • CRM Data: You can do some preliminary research into a pricing hypothesis using past data. What is the average ACV by product, segment, persona, etc? How has that price changed over time and how has it compared with your list price? As the average price changed, did it affect your win rate, sales cycle, or churn?
   • External sources
   • Win-loss Interviews: Interview a few key buyers to get their honest feedback on the buying process. What value did they understand your product would deliver? What has been the product's actual value to them? How would this price affect their buying decision?
   • Competition: Run some comps. Who are your competitors? What product exactly are they delivering and at what price point? How are they packaging that product?
   • Test group: Deliver the matrix to a select group of Sales Reps who are selling to different segments, personas, locations, etc. A diverse group like this will give you a clearer sense of how the matrix affects sales across your vertical. Gather feedback from these Sales Reps: quantitatively, how

did the new pricing matrix affect ACV, win rates, days to close, etc? And qualitatively, how did it affect sales conversations and the sales process?

2\. Rollout and iterate over time.

Notes

1. Keep it simple, silly. A simple pricing structure is easier for a sales team to manage, easier to use by an executive team making revenue forecasts and targets, and easier for a customer. As we discussed in the Funnel Creation play, we want to minimize friction and concerns at every point for prospects; a simple, straightforward pricing structure does that. A simple pricing structure is also easy for a sales rep to explain. Simplicity needs to be balanced with a pricing structure that allows your company to maximize revenue from customers based on their willingness to pay.
2. You don't need to beat your competition on price but on the whole package.
3. It's alright to price higher than you're comfortable with. First of all, if you price too low, a prospect may subconsciously undervalue your product and never convert. Think of a bottle of wine: you assume a $100 bottle of wine is of higher quality than a $10 bottle based on price tag alone. If you set a higher price point, you are implicitly setting yourself as a high-quality provider. However, you need to make sure you can deliver on this implicit promise.
4. Another benefit to a higher price: The more customers pay, the more they will expect and so the more feedback they will give you in terms of bugs, product quality, realized value. Moreover, when you price higher, you engage customers in more detailed conversations regarding their needs, thresholds and priorities. Through this, you get much better insight into how a buyer perceives the value of your product. While this sounds like a burden rather than a blessing, feedback like this is crucial to developing a strong product, message and company.
5. Finally, at a higher price point, you will generate higher revenues which allow you to invest in more R&D to improve your product and cement your market position over time.
6. You want to balance extracting revenue from a customer with churn. It's alright to leave a little money on the table; this can always be captured as upsell/expansion in the future.
7. To maintain your margin, it's often helpful to combine your higher-margin products/services into one line item. This will help reduce churn in any one of those line items.
8. You will need to review your pricing matrix often as your product and market evolve.
9. A note on enterprise sales: Enterprise-level buyers are not as concerned with price. They are looking to make a large investment in a product that truly meets their needs. To that end, enterprise sales usually entail a good deal of customization which makes a