Over the past couple of years, I’ve polled dozens of startup executives about how they approach pricing and monetization for their SaaS products. One of the questions I ask is, “How did you come up with your pricing?” Given how data-driven the executives tend to be about other aspects of their businesses, I initially expected their answers would be thoughtful and backed by evidence. Here’s what I heard instead.
The first response: gut-based pricing. The founders got in a room, brainstormed for a couple of hours, and made a gut decision on pricing. While that’s not an ideal process, I could certainly sympathize with how busy the founders were and how they probably had never gone through a pricing exercise previously.
The second response: competitor-based pricing. The founders looked at what other companies were doing, copied the model, and charged slightly less. They figured competitor-driven pricing would help them get initial traction and then they could always optimize pricing later. That came off as short-sighted to me. It would naturally draw the business into unwanted comparisons against said competitor and could push the (larger, better-funded) competitor to fight back on price, escalating into a profit-draining price war.
The third response: cost-plus pricing. The finance guy calculated what the costs would likely be (acquisition and ongoing costs), added room for an attractive margin, and left things at that. While I liked that approach a bit more and certainly appreciated the thorough documentation of costs that went into the decision, it seemed to me like the cart was leading the horse.
These anecdotes aren’t one-off aberrations. They reflect how the majority of startups come up with their pricing, and I have new evidence to back that up. In a survey my firm conducted of 1,000 SaaS companies, we found that most companies procrastinate on pricing and make decisions without the right data or the proper grasp of customer value. The result is a systematic failure to fully monetize SaaS products and capture the value of new innovations.
Only 14 percent of SaaS companies considered pricing before building their products, with the rest incorporating pricing later in the development process or only once the product was ready to go live. Building products without considering pricing wastes precious engineering time and resources on features that buyers don’t care about. It results in having a product that a company then has to find a market for, rather than launching already knowing there’s product-market fit.
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