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Estd 4.22.2023
Introduction
Pricing is the most powerful, yet most underutilized lever for SaaS growth. According to research by Price Intelligently, a mere 1% improvement in pricing can yield an 11-15% increase in profits. Yet, surprisingly, the average SaaS company spends only 6 hours on their pricing strategy over their entire company lifetime. If you're an executive at a SaaS company, this statistic should be alarming – you're potentially leaving millions on the table through suboptimal pricing.
A comprehensive pricing audit can reveal these hidden opportunities and identify critical gaps in your monetization strategy. This article walks through a consultant's systematic approach to conducting a SaaS pricing audit that delivers actionable insights and measurable revenue impact.
Why SaaS Pricing Audits Matter
Before diving into the methodology, let's establish why regular pricing audits are crucial:
- Market Evolution: SaaS markets evolve rapidly, with new competitors and feature sets constantly emerging.
- Value Perception Shifts: How customers perceive your value proposition changes over time.
- Customer Segmentation Changes: Your ideal customer profile may have evolved since your last pricing exercise.
- Feature Development: Your product likely has new capabilities deserving monetization.
According to OpenView Partners' 2023 SaaS Benchmarks report, companies that revisit pricing at least annually grow 30% faster than those that don't. With that context, let's explore the step-by-step audit process.
Step 1: Establish Clear Objectives and Metrics
Begin by defining what success looks like for your pricing strategy:
Key Metrics to Track:
- Annual Contract Value (ACV): Are you targeting higher ACV or pursuing volume?
- Revenue Growth Rate: What growth targets must pricing support?
- Customer Acquisition Cost (CAC) Payback: How quickly must customers become profitable?
- Net Revenue Retention (NRR): What expansion targets are you aiming for?
- Conversion Rates: How does pricing affect your funnel?
Document your current performance against these metrics before making any changes to establish a baseline for measuring improvement.
Step 2: Conduct a Competitive Analysis
Understanding your position in the market is essential to effective pricing.
Competitive Analysis Framework:
- Map Direct Competitors: Identify 5-7 direct competitors with similar offerings.
- Record Pricing Structure: Note their tiers, price points, and packaging strategies.
- Feature Matrix: Create a detailed feature comparison across pricing tiers.
- Positioning Analysis: Analyze their messaging—are they positioning as premium, value, or specialized?
According to Harvard Business Review, 72% of SaaS buying decisions involve competitive comparisons, making this analysis critical.
Step 3: Evaluate Your Value Metrics
A value metric is how you charge customers (per user, per transaction, etc.).
Value Metric Assessment:
- List Potential Value Metrics: Identify all possible ways to charge for your product.
- Test Against Criteria: Good value metrics should:
- Scale with value delivered
- Align with customer ROI
- Be predictable for customers
- Be simple to understand
- Quantify the Impact: Model how different value metrics would affect revenue for different customer segments.
Research by ProfitWell indicates that companies using value metrics aligned with customer success achieve 8-10% higher growth rates than those using arbitrary metrics like user seats when that doesn't align with value delivery.
Step 4: Customer Value Research
Understanding what customers truly value is fundamental to effective pricing.
Research Methods:
- Customer Interviews: Conduct 15-20 interviews across customer segments.
- Feature Value Survey: Use the Van Westendorp Price Sensitivity Meter or Conjoint Analysis.
- Win/Loss Analysis: Examine why prospects convert or walk away.
Key questions to answer:
- What problems does your solution solve?
- Which features are must-haves vs. nice-to-haves?
- What would make customers pay more?
- What alternatives do they consider?
Step 5: Segmentation Analysis
Different customer segments have different willingness to pay and feature requirements.
Segmentation Approach:
- Identify Key Variables: Company size, industry, use case, geography.
- Analyze Current Customer Data: Look for patterns in usage, support needs, and expansion.
- Create Segment Profiles: Document distinct needs and willingness to pay by segment.
- Prioritize Segments: Determine which segments to optimize for.
According to data from Tomasz Tunguz at Redpoint Ventures, effective segmentation can increase average revenue per account by 25-35% by aligning offerings with specific customer needs.
Step 6: Package and Tier Optimization
Well-designed tiers help customers self-select into appropriate pricing levels.
Tiering Strategy:
- Good-Better-Best Framework: Design three primary tiers to capture different segments.
- Feature Allocation: Decide which features belong in which tier based on your value research.
- Price Anchoring: Set your middle tier as the intended landing spot for most customers.
- Upsell Pathways: Create clear value-based reasons to upgrade.
When analyzing your tiers, ensure:
- At least 15-20% of customers choose your top tier
- No more than 30% select your entry-level tier
- Clear differentiation exists between tiers
Step 7: Pricing Model Selection
Choose between subscription, usage-based, hybrid, or other pricing models.
Model Assessment:
- Predictability Analysis: How important is revenue predictability for your business?
- Customer Preference: Do customers prefer fixed costs or usage-based flexibility?
- Market Standard: What models are customers accustomed to in your space?
- Cash Flow Impact: How will the model affect cash flow and financial planning?
Recent trends show a clear shift toward hybrid pricing models. According to OpenView's 2023 report, 45% of SaaS companies now employ some form of usage-based component in their pricing, up from 34% in 2021.
Step 8: Price Point Optimization
With structure determined, optimize actual price points.
Price Setting Process:
- Willingness to Pay Analysis: Use customer research to set upper bounds.
- Cost Analysis: Establish floor prices that maintain healthy margins.
- Scenario Modeling: Model the revenue impact of different price points.
- Cohort Impact Analysis: Evaluate how changes affect different customer segments.
Be aware that most SaaS companies underprice their products. Research by Simon-Kucher & Partners reveals that 77% of SaaS companies leave money on the table with suboptimal pricing.
Step 9: Discount Strategy Review
Discounting practices can significantly impact realized price.
Discount Analysis:
- Current Discount Patterns: Analyze historic discount rates by customer segment, deal size, and sales rep.
- Discount Authority Matrix: Develop guidelines for who can approve what level of discount.
- Annual vs. Monthly Pricing: Set appropriate differential (typically 15-20%).
- Special Case Handling: Define policies for enterprise deals, non-profits, etc.
Effective discount governance can increase net realized price by 3-5% according to pricing consultancy firm Ibbaka.
Step 10: Implementation Planning
A pricing change requires careful execution.
Implementation Roadmap:
- Existing Customer Strategy: Will changes apply to existing customers? If so, how and when?
- Communication Plan: Develop messaging that emphasizes value, not price.
- Sales Enablement: Prepare materials to help your team articulate the new pricing.
- Technical Requirements: Map system changes needed to support new pricing.
- Timeline: Create a phased rollout plan with clear milestones.
According to research by Patrick Campbell at ProfitWell, the most successful pricing changes involve at least 4-6 weeks of preparation before launch.
Step 11: Measurement and Iteration
A pricing audit is not a one-time event but an ongoing process.
Measurement Framework:
- Key Metrics Dashboard: Track impact on conversion, ACV, retention, and growth.
- Customer Feedback Loop: Establish mechanisms to collect feedback.
- Competitive Monitoring: Continue tracking market changes.
- Iteration Schedule: Plan for quarterly reviews and annual deep dives.
The most successful SaaS companies iterate on pricing 3-4 times per year with smaller adjustments and conduct comprehensive reviews annually.
Conclusion
An effective SaaS pricing audit is a strategic exercise that combines quantitative analysis, customer research, and competitive intelligence. When executed correctly, it not only impro