The 7 Essential Considerations For Selecting The Right Pricing Metric
Did you know that the average SaaS company spends around 6 hours over their entire life cycle on pricing? That’s less than a workday’s worth! Nailing your pricing model and evolving your pricing strategy as you grow may be the most important consideration for your success.
Kevin Christian, presently with Infoblox, is an industry leader with wide exposure to pricing strategy and operations. Through his long presence in the industry, he has been a witness to the transition of the IT infrastructure industry from a licensing regime to a consumption/metered one. As part of his insights shared in author Ajit Ghuman’s book, Price To Scale, following are his views on what attributes can prime you for pricing success.
The pricing model consists of the pricing metric, the list prices, and the volume discounts and rules around how the price is applied. The pricing metric is a part of the pricing model. The pricing metric is the quantity you count in order to come up with a price. It could be user, CPU, Mbps, GB/day, it could be anything that makes sense for the particular solution being sold. For a pricing metric to be successful, it has to have three attributes:
- Simple: The Simple attribute implies that one can explain the pricing metric during an average elevator ride. This is very important because many companies cannot. This is the kind of attribute that VCs care for deeply. No one has the time to spend on 10 slides explaining the pricing model - at best it can be one or two slides.
- Measurable: In the SaaS world, Measurable means that you should be able to count or measure whatever you are charging for. For example, it serves no purpose to price on a per user basis if you do not have the ability to count unique users by, for example, unique login IDs for users.
- Scalable: The Measurable and Scalable attributes are related to each other. The Scalable attribute means the ability to capture more returns from a customer when the perceived value for the customer scales. A large company or a company that gets a lot of value from the solution should pay a relatively higher price, and a small company or company that gets less value from the solution should pay a lower price.
Beyond these three core attributes, we can list four more to ascertain if the pricing model is effective:
- Predictability, as seen by the customer: The customer wants to be able to budget, so they want to be able to predict how much they’ll have to pay and when.
- Flexibility: This means having the ability to adjust for unusual use cases.
- Whether it is operationally easy to implement in terms of the tools you have: For example, Salesforce or CPQ or another commercial platform. This is an internal consideration, not from the point of view of the customer.
- Fairness, as seen by the customer: For example, a pricing metric might be perceived as unfair if it is a percentage of the customer’s revenue. It might make sense to you as the vendor to charge this way, but a customer is unlikely to be willing to pay this way, because they might perceive the pricing as unfair.