Aligning Pricing with Progress
Jasdeep Garcha
·
08/23/2024
Pricing in SaaS is often held on a pedestal and viewed as something that should stay relatively static, but to stay competitive and relevant, pricing must evolve alongside product development and the market. Companies that treat pricing as dynamic, rather than a static number, position themselves to better capture and communicate value. This post was informed by a conversation with Jonathan Sadow, Co-Founder of Scoop.
Simplicity to start is key: Overly complex pricing models can become a burden, making it difficult to scale and communicate value effectively.
Pricing must change with the product: As products improve, pricing should reflect that improvement.
Foundation matters: Building a flexible billing and entitlement system is necessary to support future pricing changes.
Many companies fall into the trap of overcomplicating their pricing models before much market feedback or business progress. Initially, it seems like a good idea to anticipate the permutations of customers the business might serve at scale and to build for that reality upfront so you can capture as much demand as possible. However, even if that might be well considered, it often makes your pricing model more challenging to manage and adjust as you learn. Moreover, it often leads to early confusion, both internally and for customers.
“Complexity just means it's harder to understand what you're spending money on.” - Jon Sadow
Scoop initially developed a sophisticated pricing engine for its first product, a peer-to-peer commuting platform. The pricing model took into account geographic variations, mileage, and cost considerations to optimize pricing. While this seemed like a good and useful strategy, the depth of the system created substantial technical debt, making it cumbersome to adapt the pricing model as the business expanded into new markets and heard more feedback from initial users. In hindsight, starting with a simple pricing model would not have sacrificed early adoption, and it would have allowed for easier adjustments and clearer communication of value to customers.
The reality is that pricing is a construct that implies ROI to users and that construct should be straightforward until you absolutely need to add more levers. Early on in product and business development, a simple, clear pricing structure is often the best way to go to market and to mitigate the risk of baking too many assumptions into your product.
With that said, as your product improves and your business grows, your pricing should, as well. Pricing can quickly become outdated as new features are added, new market segments are targeted, or customer needs change. To address that, businesses must refine their pricing strategies to reflect the current value delivered by their products to the various segments they are serving.
There are several indicators that pricing should change that can occur at any stage:
Your customer base is becoming increasingly diverse in terms of market segments served, functions served, or geographies served, so should be served differently
Usage patterns in the product clearly indicate good, better, best feature sets that are misaligned with how you sell the product today
Some customers are clearly getting more value from the product than others but are paying the same price
“You may go to a fancy restaurant, and they have a fancy dish, but then they have the server pour out the broth into your dish. Or you may go somewhere else and all the server's meant to do is put down the hot soup on your plate. It doesn't matter. Both can work, both can taste good. It depends on what the customer is looking for, right?” - Jon Sadow
Pricing should be a living element of the product strategy, not a fixed feature. Over time and ideally, it should get closer to the value end users are getting from your product. By paying attention to customer feedback, usage patterns, and overall business strategy, it should be clear when to reassess.
There’s a difference between over-engineering and planning for the future. While it rarely pays off to build beyond simple pricing early in business development, it is advantageous to think a bit further out and set expectations to allow for other realities in the future culturally and in your infrastructure.
“You know the kids are gonna change in size. It's like being like a twin bed will always work. Well no, at some point a twin bed is not going to work. You're gonna have a bigger kid with a bigger space. And I think a lot of the time, startups and even business units think about pricing as we're just gonna commit to this twin bed.” - Jon Sadow
Many companies struggle with outdated or rigid billing systems that were not designed to accommodate changes or new pricing models. This rigidity can ultimately stifle a company’s ability to innovate in its pricing strategy and respond to market changes.
Too often companies run into a scenario where their billing system is designed with a rigid set of rules for pricing and entitlements. Over time, as the company introduces new features or changes its business model, those rigid rules create technical debt, making it increasingly difficult to modify the pricing structure. Eventually, the company finds itself needing a complete overhaul of its billing system — a much more costly and time-consuming process than having planned for it in the first place.
To avoid this, companies should invest in flexible tooling that can feasibly adapt to new pricing models and business logic. By investing in systems and infrastructure that is built for flexibility, companies can stay agile and responsive, making adjustments as needed to capture the most value from their market.
Pricing is more than just a number — it's a tool that should be as dynamic and evolving as the product itself. By keeping pricing models simple, aligning them with product evolution, and investing in flexible infrastructure, SaaS companies can better communicate value and remain competitive in an ever-changing market. In a world where customer needs and market conditions are constantly shifting, a flexible and thoughtful approach to pricing is not just beneficial; it’s essential for sustained growth and success.