8 tips on setting the right price for your tech service
It's a funny thing, more often than not, I see companies seeking and getting investment that have a great idea, huge opportunity and a really interesting business plan.
Yet when they actually go to market with their product, their pricing strategy has had very little thought and is always a mad scramble to get in place. They’ve spent so much effort engineering their product that they have completely under-engineered the pricing strategy that will ensure their success!
You might think that setting the price of your product is straight forward, you take your costs, add a margin and there you go; and in some cases, that is literally how you do it. However, when it comes to technology platforms with digital products it's a bit more complex as you need to consider market factors, the perceived value of your product, the price ceiling and the size of (if any) existing budget you're attempting to grab off your competitors.
Coming up with a pricing model is one of my favourite jobs for a startup, it really helps you to get into the mind of the buyer, understand their wants and needs and get a close handle on competitors have priced their product. Getting your pricing model right is far more than maximising the amount of money you can charge. As one of my mentors once told me, pricing is a weapon. If you get it right, it's an incredibly important tool in your sales and marketing arsenal.
So what are the foundations of a solid, scalable pricing strategy?
#1 - Understand your costs
There’s no need to go into this too much as for any business owner, this is 101 - but it is always the foundation of getting your pricing strategy right. Ensure you understand how much your product has cost to develop, how much it will cost to deliver and how that cost will scale as more clients come on board (more servers, more support staff etc).
#2 - Understand the market
Now, just because you're in the same market as your competition, it doesn't mean you have to copy their pricing strategy, nor should you look at competing on price. However, you should leverage the work that they've done to understand their buyers, and the psychology behind it.
Look at how they've segmented their customers - i.e. Small, medium, large, or startups, SME, or enterprise. Understand how their pricing scales; do they increase pricing based on features, or users, or business size, or other consumption-based metrics? If there's a well understood theme across your market, you should probably consider adopting it, however, don't be afraid to try something new.
#3 - Perceived Value
This is always an enlightening conversation with a CEO when they're looking at what pricing strategy they should adopt.
So many technology companies go to market competing on price rather than value.
You definitely don’t have to be the cheapest, however, you also don't need to be the most expensive. For example, say you've developed a new product that you're taking into a market where there are currently a few competitors, and the average cost of their solution is £20,000 per year. You decide that as you've got a cloud-based model, low overheads and want to grab the market, you're going to offer your product at £2,000 per year (90% of the cost). Conventional wisdom would dictate that everyone would jump straight over to you and leave the competition... Strangely, this is rarely the case.
This largely comes down the phrase "If it's that cheap, it must be rubbish" - I've seen it time and time again, where SaaS companies have struggled by going to market with a super cheap pricing model, then had massive success by raising their prices considerably! Who knew?!
#4 - The Price Ceiling
I've been guilty of this. The first SaaS platform that I took to market had a very simple pricing model, £50 per user per month. That was it. It actually worked well and allowed us to penetrate the initial startup and SME market that we wanted to go after.
However, pretty soon after that I got a call from a large global business that liked the product, and wanted an unlimited license for their 10,000 employees… Funnily enough £500,000 a month wasn't the budget they had in mind! Nor should it have been!
Our pricing model needed to adapt to allow businesses of different sizes to pay more, but scale relative to the value the solution was delivering them. To that end, we ended up implementing a tired system where you had Up to 5 users, Up to 15 users, Up to 50 users and More. This allowed us to put in place different unit pricing and extract the maximum amount of value for each client size.
The price ceiling is really about understanding the amount of money you're saving the client. As a finger in the air, most Business to Business (B2B) SaaS solutions top out at about £10,000 per month per problem that they solve... Perhaps try that as a yardstick to see how you get on.
#5 - The Existing Budget
Think of this as putting yourself in the shoes of the company exec pitching their budget - what saving or benefit will they need to demonstrate to win the approval of the CFO? Importantly, which exec will be the one to best position your product to get the green light on budget?
Take automation software. If you can say that it will save 50% of the current workforce cost that's a REALLY SIMPLE business case for someone to put to a business and succeed on putting it through. However, if you're taking a product to market that is incremental, and cannot show an obvious saving from anywhere else in the business, this is where things get a bit more complicated.
The top tip here is to work out where the money will come from in your target clients - which line item in which budget is going to give you the revenue you need, and who is in charge of signing it off - you'll sometimes be surprised, because it's not always the person you think it is.
#6 - Taking inspiration
If you're about to launch a SaaS platform, you can't really go wrong by analysing how some of the most successful businesses have approached their pricing matrix. I know it's cliché, but they will have spent a lot of time and money in understanding the customer, their psychology, the market, the budgets and many other factors.
I always end up pointing to SalesForce as the masters for pricing; at first glance you might think that their pricing model is simplistic - fundamentally it boils down to a bronze, silver, gold style model. However, the way they've constructed the matrix heavily encourages you into the next level. This is typically done by only enabling features in the higher tiers. As they understand their customer base so well, they know that if you get to scale in their bronze tier, you'll definitely want the first feature in their silver tier, and so on and so on. It works well... You'd be surprised at how many clients are in the top tier of pricing!
#7 - Test and Adapt
After saying all of this, you don't have to, and probably won't get it right first time. When you first go to market, irrespective of how well prepped you are, how well understood the market is, the chances are your pricing model will need to adapt as you grow and the market changes. The top tip that I would advise to here is that it's a lot simpler to reduce your prices than it is to increase them!
#8 - Don't be afraid to deal to get going
When you first take your product to market, beyond the price, clients also want to see proof points and case studies. If they're the first customer, this will always make them nervous, particularly if there's a lot of money on the line.This is where the old adage of "No-one ever got fired for buying IBM" comes in. Choosing the ‘safe’, known option as opposed to the challenger is a defensible position for the person signing off the budget.
However, this puts you in a catch 22 - in order to sell, you need case studies, but in order to get case studies you need to sell. I've seen a few companies completely die because they couldn't actually get that first sale - usually they were trying to access a traditional market that didn't trust change. So, don't be afraid to battle and do deals to get your first 20 clients in and using your product. The information and feedback you'll get from them will be invaluable and the case studies will allow you to open up new clients.
There are a lot of factors to consider when setting the pricing for your product. It goes way beyond understanding your costs, margins and the competition. Hopefully you'll now feel more equipped to create a pricing model that will scale with your business and that your sales team can use as a powerful tool to land more revenue for your business.