Too many B2B SaaS companies rely on cost-based or competitor-based pricing. This leaves money on the table, with companies misinterpreting the value that their customers are receiving.
Instead, understanding the value drivers of your customer base should be viewed as integral to the pricing structure. It is imperative to be able to align the value of what you provide & receive from them. Value-driven pricing is the only way for optimal value extraction. Your top line will reap the rewards.
Continual price reviews & optimisation massively boosts the LTV/CAC ratio & CAC is paid back at a far faster rate.
One Price Intelligently survey found that annually reviewing your prices made your LTV/CAC double. Making it a continuous process 6xed their LTV/CAC.
“Price is what you pay. Value is what you get” – Warren Buffet
Customer segmentation & the pricing-persona fit
To truly understand the value drivers of your customers, you first need to quantify their qualitative buyer personas. You need to create a perfect fit between this persona & how you price for them. This is known as a ‘persona-pricing fit.’
You should dig into your internal data, speak to your clients & bucket the different people into segments.
What is your target audience – who has the greatest LTV? Who has the lowest CAC? Who has the best LTV/CAC ratio as a result? What do these different groups value? What do they not value? How is your pricing strategy going to tap into these value levers? Can you remove certain features for certain groups?
The findings will drive huge results for your company. You may be able to remove certain features for certain groups. You may want to stop targeting certain groups. You may find the customer base only really value one feature.
Whatever the findings, you can be certain that you will find some way to improve the pricing structure & the business – be it via lowering CAC, opportunity costs, or improving LTV etc.
In turn, this needs to bleed through your upselling, acquisition & retention strategies.
Upselling: knowing how to drive your customers up the value chain
You now know what your highest value customer base looks like. You know what they value & what they do not. Your pricing structure must reflect this. How are you going to move your existing customer base up to the higher value pricing band?
Mention did this exceptionally well, increasing ARPA by 296% by changing their pricing structure to encourage upselling.
Crucially, they realised that in order to extract more value from their existing customers themselves, they had to determine what their customers value themselves & leverage that in their pricing model to upsell to them.
They made 3 major changes to their pricing model to reflect what their customers valued:
- Reprioritised the ‘freemium’ offering – moving it to the bottom to become an ‘afterthought’
- Put alerts first rather than user numbers, focusing on what customers actually valued
- Delved into their CRM to analyse the feature usage per type of customers, finding only the large users used the export feature. They unbundled & re-distributed the available features to reflect this for hopes of future upselling
Acquisition: pricing in accordance with your customer’s value drivers
By mapping out the value drivers of your different customer groups, you can structure your prices in such a way as to target them correctly – without leaving money on the table.
You can get creative with ways that allow the consumer to communicate their value to you. They want to feel like they are getting maximum ROI. In doing so, you can drive a massive increase in your conversion rate.
RJMetrics completely changed their business, improving their conversation rate by 310% by getting creative in how their prospective customers communicated their value
RJMetrics realised that their prospective clients were failing to adequately communicate their value drivers. They resolved this via a trial & error process. The end product was a platform which allowed customers to pay the most appropriate price for the value that they receive.
Not letting your pricing strategy get in the way of retention
Now that you understand the importance of your existing customer base & particularly which customers offer you the most value, you must do everything in your power to retain them. When raising prices in order to extract further value, special efforts must be made.
Appcues managed to increase revenue by 263% in one month by keeping current customers in mind during a price change
Appcues realised they were leaving lots of money on the table. Clients voiced how they would pay more than $1,000 for Appcues’ product. At the time, they were only charging $450. They knew they had to increase their prices but did not want customers to churn. They sent an email to their customers, 10 days before the change, to let them know they would grandfather them to their existing price plan. A huge 85% of their customer base opened it but no one churned.
Many SaaS companies fail to re-evaluate their pricing strategy on a regular basis. This harms your LTV/CAC ratio & your bottom line in turn.
Don’t leave money on the table – follow these 3 tips:
- Know who your customers are with the highest LTV & lowest CAC & ensure your pricing structure is built with them in mind
- Ensure you are acquiring customers at a price which adequately reflects your value – even if it means your customer base is smaller
- Never lose sight of your existing customer base & keep them in the loop & on side during any changes