As the SaaS market grows rapidly, software suppliers expect more recurring revenue from their products. However, reality does not always meet expectations. Pricing strategies expert Josh Bloom shares the top five traps for software companies.
With the software-as-a-service (SaaS) market growing 5 times faster than the traditional software market, more and more software suppliers are adding SaaS models to their portfolio. However, while SaaS has been recognized as an opportunity for both suppliers and buyers, suppliers are still looking for the best ways to monetize their SaaS offerings. In fact, many founders are thrown off balance when it comes to a detailed conversation around pricing, and decisions are based on gut-feeling or by imitating the market, rather than a formal process or scientific rigor. This can result in some severe pricing and packaging mistakes…
The 5 most common pricing and packaging traps:
- Overconfidence with the market: New companies with innovative ideas tend to focus on market size, targeting multi-billion dollar markets. But while their software may be capable of serving a large customer base, limited resources, relatively small marketing budgets, and a handful of sales reps mean the company itself usually isn’t.
- Low confidence with pricing: There’s often misalignment between how the company and the customer perceive price. An internal sales survey might highlight pricing as the number one criteria, but if you go out and talk to the customers and their prospects, price might not be as high up on the list as you thought.
- Lack of a packaging structure: As a default, companies offer either a one-size-fits-all model, or a huge menu of SKUs. Even packages that do have upsell paths are predicated by jargon and feature checkmarks, rather than customer-driven criteria. Little effort is made to tailor to different segments, or to communicate the underlying value message associated with a new use case/workflow.
- Packages don’t accommodate a changing product: When building one initial product for a highly specific segment, the focus is on the urgent need to create a business case. But when the company starts to expand and develop multiple products, they fail to address the need of fencing the different segments and business needs.
- A natural desire to monetize: There’s a temptation to bring every internal development to the forefront and add it to a packaging structure straight away. As a result, this can mean pricing is usually based on internal developments, rather than what makes sense to the customer.
Do any of these pricing mistakes sound familiar in your company? Then stay tuned for part 2, where I will be sharing eight best practices on how to circumvent them.