How To Shape Pricing Strategy of a SaaS Product

How To Shape Pricing Strategy of a SaaS Product

With this article, you will become familiar with the basic unit economics of SaaS products and how those metrics shape a pricing strategy.

Startups can fund growth either by spending VC money or by the money they earn from their customers. A business can use a variety of pricing strategies when selling a product or service—and, according to Price Intelligently’s SaaS Pricing Strategy ebook, a good pricing strategy is twice as efficient than improving retention and four times as efficient as acquisition. Even though, out of every 10 blog posts on growth, 70% are focused on acquisition, 20% are centered on retention, and only 10% is about pricing.

With this article, you will become familiar with the basic unit economics of SaaS products and how those metrics shape a pricing strategy. You will also learn how to create quantifiable buyer personas based on the metrics—and how buyers can influence the positioning and packaging of your product.

Learning the unit economics of pricing

Every price is a number—and it can be derived from other numbers. First of all, we need to understand what the basic unit economics of good pricing are. Doing so will help us understand whether we can calculate a proper price or we should follow a gut feeling.

While some companies prefer not to stress over pricing too much in the beginning—like Google when they decided to offer one price of $50 per employee per year in half an hour—I’m going to advocate a data-based approach.

Measuring Customer Acquisition Cost

Customer Acquisition Cost (CAC) is the cost associated in convincing a customer to buy a product or a service.

CAC = total cost of marketing and sales / ## of customers acquired

In some cases, calculating CAC may not be straightforward as it depends on your definition of the “total cost” of marketing and sales. For example, measuring advertising spend is relatively simple—but should you also include the cost of the engineering team building the latest batch of new viral features? How do you track that on regular basis?

It’s always better to look at product and marketing as a whole and include that cost. Calculating the real cost of marketing-oriented engineering may be difficult, but I had some success with training engineering teams to estimate projects in terms of budgets instead of hours or story points.

If your estimate is that a project will take $10,000 instead of 10 story points, it’s much easier to include engineering projects in your CAC. (As a sidenote: budgeting estimates are also easier to prioritize. Making a choice is easy if you know that project A will cost $5,000 in order to bring a projected value of $6,000—and that project B will cost $7,000 but bring $10,000 in value.)

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