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Estd 4.22.2023
Introduction
For SaaS executives, few metrics impact the bottom line as directly as pricing. While many companies meticulously set target prices based on market research, competitive analysis, and value perception, the actual realized price often tells a different story. This gap—known as pricing variance—can significantly impact revenue forecasts, profitability, and strategic decision-making.
According to a study by Simon-Kucher & Partners, companies that regularly conduct pricing variance analyses experience 15-20% higher profitability compared to those that don't. Yet surprisingly, only 24% of SaaS companies have formal processes for analyzing these discrepancies.
This article explores why actual pricing consistently differs from targets and how SaaS leaders can use pricing variance analysis to uncover hidden revenue opportunities and plug profit leaks.
What Is Pricing Variance Analysis?
Pricing variance analysis is the systematic examination of differences between target pricing (what you planned to charge) and actual realized pricing (what customers actually paid). This analysis helps executives understand:
- How much revenue is being left on the table
- Which segments or customers receive the most discounts
- Whether pricing strategies are being executed as intended
- Which sales representatives or channels adhere to pricing guidelines
For SaaS businesses specifically, this variance becomes particularly important when analyzing metrics like Average Revenue Per User (ARPU), discounting patterns, or enterprise deal structures.
Common Causes of Pricing Variance
1. Discretionary Discounting
The most prevalent cause of pricing variance is discretionary discounting, where sales teams offer price reductions to close deals. Research by Gartner indicates that 70% of B2B SaaS companies allow significant sales discretion in pricing, leading to an average discount variance of 28% from list prices.
This typically occurs when:
- Sales representatives are incentivized primarily on volume rather than margin
- Approval processes for discounts are unclear or easily circumvented
- Deal close dates approach quarter-end, creating pressure to hit targets
2. Package and Feature Mix Differences
SaaS companies often create target pricing based on expected feature adoption or package selection, but customers frequently choose different combinations than anticipated.
For example, if your pricing model assumed 40% of customers would select your premium tier but only 25% do, your actual realized price will be lower than target. According to OpenView Partners' 2022 SaaS Benchmarks Report, the average difference between projected and actual tier distribution is 18%.
3. Contract Term Variability
Many SaaS pricing models offer discounts for longer-term commitments. When customers choose different contract lengths than expected, it creates variance.
Research by SaaS Capital shows monthly contracts typically command 15-25% price premiums over annual ones. If your model assumed 80% annual contracts but you achieve only 60%, your actual pricing will differ significantly from targets.
4. Geographic and Market Segment Differences
Different markets often have different willingness-to-pay thresholds. If your expansion plans assumed uniform global pricing but required adaptation to local markets, variance occurs.
According to ProfitWell, SaaS willingness-to-pay can vary by as much as 40% between industries and 20-30% between geographic regions.
5. Implementation of Price Increases
Price increases rarely execute perfectly across the customer base. When existing customers are grandfathered into previous pricing or given partial increases, variance emerges between target and actual pricing.
Conducting Effective Pricing Variance Analysis
Step 1: Define Clear Target Prices
Effective variance analysis requires well-documented target prices. This means:
- Establishing list prices for all products/tiers
- Documenting authorized discount thresholds
- Setting expected discount rates by customer segment
- Defining expected package/feature mix assumptions
Step 2: Measure Actual Realized Pricing
Calculate what customers actually paid using:
Actual Realized Price = Total Revenue / Total Units Sold (or customers)For SaaS specifically, segment this by:
- Customer cohort
- Plan type
- Geographic region
- Customer size
- Acquisition channel
Step 3: Calculate and Categorize Variances
Determine the difference between target and actual prices, then categorize variances by cause:
- Discount variance: Authorized discounts vs. actual discounts given
- Mix variance: Expected feature/tier selection vs. actual selection
- Term variance: Expected contract length vs. actual
- Segment variance: Variations in pricing across different customer segments
Step 4: Implement a Regular Variance Review Process
Leading SaaS companies institute quarterly pricing variance reviews where:
- Finance presents variance analysis to leadership
- Sales explains significant variances in enterprise deals
- Product teams address packaging mix differences
- Marketing discusses segment performance
Real-World Example: How Slack Reduced Pricing Variance
In 2019, Slack faced challenges with inconsistent enterprise pricing that created a 32% variance between target and actual prices. Their solution involved:
- Implementing tiered approval processes for discounts (reducing unauthorized discounts by 15%)
- Creating segment-specific pricing targets (reducing segment variance by 22%)
- Redesigning sales compensation to reward margin preservation (improving price realization by 8%)
- Standardizing term length incentives (reducing term length variance by 17%)
According to their S-1 filing before going public, these changes contributed to improving their gross margins from 87% to 88.4% within a year.
Technology Solutions for Pricing Variance Analysis
Modern solutions have emerged to help SaaS companies track and analyze pricing variance:
- CPQ (Configure, Price, Quote) Software: Tools like Salesforce CPQ or DealHub enforce pricing guardrails and approval workflows
- Revenue Intelligence Platforms: Solutions like Clari or InsightSquared help track pricing patterns across the sales organization
- Pricing Optimization Software: Platforms such as Price Intelligently by ProfitWell analyze willingness-to-pay by segment to set more accurate targets
Conclusion: From Analysis to Action
Understanding why actual prices differ from targets is only valuable when it drives action. Leading SaaS companies use pricing variance analysis to:
- Adjust pricing targets to reflect market realities
- Refine sales compensation to balance volume and value
- Redesign packaging to align with customer preferences
- Implement approval workflows that protect margins
- Create segment-specific pricing strategies
As competitive pressures and market conditions evolve rapidly in the SaaS industry, regular pricing variance analysis has become a critical practice for maintaining financial health. By systematically examining the gap between target and actual pricing, executives can uncover hidden opportunities to improve profitability without sacrificing growth.
Remember that pricing variance isn't inherently negative—it's a signal. Sometimes it indicates undisciplined discounting, but often it reveals important insights about what customers truly value. The key is having visibility into these patterns and using them to make informed decisions about your pricing strategy.