Patrick Campbell, SaaS founder, strategic-value connoisseur, and cofounder of Profitwell joined up with the SaaS Mag team to explain why you should make pricing a priority.
Benchmarking your pricing and growth is crucial because it reveals how your strategies stack up against similar companies and shows important areas to focus on.
Let’s say you work out every day. You take pride in your routine—two days a week on leg training, one day on biceps and triceps, one day isolating your back, another day toning your shoulders, and resting on the remaining days. That sounds like a great routine, and I’m sure you’re very strong, but you’re missing something crucial: your core.
Many people neglect to build their core, assuming it’ll happen along the way. But your core is your foundation, and having a strong core increases your ability to strengthen all other muscles. It needs a dedicated focus and priority.
Your core is a lot like pricing in SaaS companies. People make the common mistake of not spending enough time on it. You develop a great product and lock in a small customer base, so your pricing should just fall into place, right? Wrong. Like your core, pricing is a wildly untapped growth lever. It’s the center of your business.
To end the analogy—creating a lean core could mean you hire a professional trainer to obtain better results. Building a strong pricing strategy starts with hiring a professional team to conduct a pricing audit. Before diving into what a pricing audit is and how to conduct one, let’s discuss the data we found.
ProfitWell researched the data from 5,000 companies and more than 1 million transactions in order to benchmark pricing and growth.
Here are the key takeaways from our pricing benchmark data:
Updated pricing leads to higher average revenue
We compared companies that regularly updated their pricing with those that didn’t. We found that companies that update their prices at least once every six months experience about double the average revenue per user than those companies that only update pricing once per year or less frequently. Additionally, companies that update their pricing every quarter experience nearly two to four times higher average revenue per user.
The weakest growth lever
We studied the growth levers—acquisition, retention, and monetization—of 512 SaaS companies. The data revealed acquisition as the weakest growth lever. Monetization has the highest revenue impact out of all three. Improving your monetization via your pricing strategy will no doubt have a positive impact on your company’s growth.
Pricing takes 10 hours a year
Ten hours. That’s how much time companies spend on their pricing, on average, per year. This is not nearly enough. Of course, there are a multitude of reasons why this number is shockingly low—another factor is the significant knowledge gaps on how to price.
A value metric is essential
A value metric is what you charge for, such as per 100 visits to your site, per gigabyte, etc. Data show that companies utilizing a value metric are growing at nearly double the rate of those that are merely feature-differentiated. Your value metric is an essential factor of your pricing strategy.
Leverage price localization
Price localization is another tactic more SaaS companies should be taking advantage of. This requires updating your pricing cosmetically for customers with different currencies and adjusting prices to the relative market price in that location. Making these adjustments will quickly earn you 25-50% higher growth rates.
Benchmarking is an important practice your company should get in the habit of doing, and benchmarking is key in conducting a pricing audit. Our research is extensive, revealing trends that are crucial to the success of SaaS companies. There are numerous companies to compare your own business to, which is why we developed a tool called Benchmarks. It provides access to the largest subscription data set in the world to see how your metrics stack up against other similar companies.
What is a pricing audit?
A pricing audit assesses your subscription business’ pricing process to ensure consistency across similar accounts, maximize profitability, and benchmark against other companies. A pricing audit is an examination of your company’s pricing capabilities versus industry best practices. Conducting a pricing audit will not only make your company more competitive, but you’ll also be less likely to spark a price war with other companies.
The main factors
Conducting a pricing audit goes has five elements—acquisition, monetization, retention, pricing strategy, and discounts. A pricing audit requires self-reflection. You’ll have to reflect on and admit where you can improve, which is often the most difficult part.
The first thing a pricing audit will examine is customer acquisition, which is the process of gaining new customers and perhaps the most direct way to grow your customer base. Remember, acquired customers can still churn at any point. Customer acquisition proves to be more challenging and more expensive as your customer base grows and the untapped market shrinks.
Next is monetization, the most impactful growth lever. What does your revenue look like? What are your longterm goals? A pricing audit will help set the metrics you are driving your growth toward—lifetime value, the average rate per user, conversion percent, and payback period. This is where you decide what matters to you.
A pricing audit will look at how you’re retaining customers, why they’re staying, why they’re churning, and if you’re missing core functionality.
Conducting a pricing audit will maximize revenue and guarantee the best return on your hard work. Running a pricing audit will create consistency in your company’s pricing structure. Remember: Pricing is not one-size-fits-all.
Now, after examining how you previously set up your pricing, we can determine a pricing strategy that works best for you. Are your tiers set up for monetization or acquisition? For example, do you want features so high in the pricing tier that you then have to excessively discount? These are key questions when determining the perfect pricing strategy.
Finally, a pricing audit will reflect the current discounts you offer and if you should be offering better discount incentives. Discounting is a huge topic of interest in the subscription world because unnecessary discounts can have a negative impact on your business. If you’re seeing high churn at renewal, it could be because of over-aggressive acquisition discounting.
Why a pricing audit is essential for business
You expend a lot of your time and energy into building a great product. Conducting a pricing audit will maximize revenue and guarantee the best return on your hard work. Running a pricing audit will create consistency in your company’s pricing structure. Managers should have well-founded price control principles to refer to. Remember: Pricing is not one-size-fits-all. When you develop your pricing structure, you’ll create pricing tiers that involve additional features that depend on what the customer is looking for and how much they are willing to pay. The tiers should be structured consistently with the features.
How to perform a pricing audit
We’ve gone in-depth on the importance of a pricing audit, but how do you actually conduct one? A pricing audit is performed in only three steps. In these three steps, you’ll align pricing with your goals, review current strategies, and identify potential weaknesses.
First, put together a pricing committee comprised of members from sales, finance, product, and marketing, as well as a coordinator who is the driver of your research and strategy. This committee will define the goals and objectives of your pricing strategy.
Now review current pricing packages, incentives, customer segmentation, competitive landscape, product bundling, and tiered pricing. You’ll assess all areas within the company impacted by pricing by interviewing different teams, reviewing across distribution channels, benchmarking against the competition, and analyzing historical data. Finally, identify your weaknesses and then strategize to strengthen them. A pricing audit will reveal where you’re falling short so you can work to grow that area. It will also reveal areas of growth you might not have tapped into yet.