Companies that effectively implement SaaS pricing and packaging have the distinct advantage of being able to provide their customers with a high level of value at a reasonable price. And, they’re able to do it in a way that is profitable and worthwhile for the business.
The problem is that packaging and pricing SaaS products is anything but simple. There are a lot of variables involved in deciding on a SaaS product’s pricing strategy. The sheer number of ways to configure pricing packages means that SaaS businesses must often make several difficult choices without much baseline for comparison against similar products on the market.
Some companies attempt to set packages and pricing based solely on profit margins: If it costs $X to build the software, then the company must sell Y units at $Z price in order to offset those costs and generate a profit.
Traditionally, this was handled by sales and finance departments. Engineers had little to nothing to do with making pricing decisions, because their expertise lay elsewhere. They simply weren’t needed.
But this traditional model does not translate well to the SaaS world.
It isn’t like a customer is visiting a store and paying a flat fee for an object of fixed value, such as a candy bar or a new pair of pants. Each combination of product features provides varying levels of benefits for customers and could have hugely different implications for business expenses and the bottom line.
This is why, unfortunately, there is no one-size-fits-all SaaS pricing guide that will tell you how much to charge for each feature and how you should bundle your services.
The answer is to give engineers a seat at the table when it comes to making pricing and packaging decisions.
The Vital Role Of Engineers In Planning A SaaS Pricing Strategy
Who better to understand the benefits and drawbacks, the value provided, and even the costs associated with the services behind every separate feature than the men and women who designed and built those features?
The perspective of the engineering team can’t be replaced by even the most talented of sales departments.
It’s important to note that engineering alone cannot determine the correct pricing strategy. This task should not shift from the sales and finance teams onto the desks of engineers. Engineers should, however, be granted a seat at the table for these discussions because their specialized knowledge fills in a few important pieces of the overall puzzle.
The following are five concepts that could have major impacts on revenue, and that engineers are uniquely positioned to understand.
1. The resources required to support each feature
Engineers know how much time and effort it takes to develop and maintain each feature. They are also likely to have a deeper understanding of the pricing for services that support each feature and the resources consumed when the feature is used. Put all that knowledge together, and suddenly your team has a clear picture of which features cost the most per customer.
Let’s say for example that your company initially plans to charge $100 for each user account.
However, when your engineers bring their data into the discussion, you realize that it’s actually most expensive to support the uploading and storage of large image and document files. You could potentially be losing money on accounts with only one or two users who take heavy advantage of the photo storage feature.
Whether the costs come in the form of employee hours, cloud service expenses, or any other costs isn’t important yet.
At this stage, simply sort features into lower-cost and higher-cost categories. If you plan to have multiple pricing tiers, you may want to include categories for the gray areas in the middle or the extremes at either end.
This initial sorting is not enough to determine a pricing structure. Elements that are expensive for your company may not intuitively match up with the services customers want from you. But once you have each feature categorized according to its cost, you can begin to see how to lay out your pricing tiers.
2. How different features and products scale
Some features scale linearly and others do not. Your engineering team might be able to point out occasions where a low-cost feature turns into a high-cost feature (or vice versa) when used heavily.
If scaling seems like it could be an issue, one solution is to cap some features for lower pricing tiers and provide unlimited service at higher tiers.
3. Which metrics are already trackable and which could be adapted for tracking
You may be thinking of charging for the number of messages sent by customers on each account. If your system is set up to track the number of messages sent, that pricing model could work well.
However, the engineering team might point out that there is not currently a way to track the number of messages sent. Instead, they have been tracking the total amount of data used by each account.
With that information, you can either have a discussion on whether it’s feasible to start tracking the number of messages sent or if you’d be better off using a metric that’s already measured.
4. Which features could be discounted or put into a free demo
Let’s say the marketing and sales departments want to put certain features into a demo bundle that users can test out for free.
Without the input of engineering, they may pick features based solely on their departments’ information that says customers are most interested in a certain feature set. On the surface, it seems like a great idea to lure new customers in with a handful of features that are in high demand.
However, with the cost information provided by engineering, it may turn out that those highly sought features would actually be too expensive to bundle into a free demo. The company could lose a lot of money if a few big customers signed onto the free demo all at once.
5. How to balance all of the above with value for the customer
In the ideal SaaS pricing model, users can pick and choose the value they want, and those choices align well with the goals of the business. However, this isn’t always possible.
For example, your company may have a call center that is expensive to support but engineers insist, based on usage data, that the service is necessary for an optimal customer experience. Your customers will balk at the idea of having to pay for call center minutes, so it isn’t a feature for which you can charge extra.
However, knowing these details will help you balance these two aspects whenever customer goals and company goals fall out of alignment.
Cost Intelligence Gives Every Team Insight Into The Profitability Of Each Feature
It’s tough to predict the potential profits of each feature unless you know in adequate detail what the costs of that feature will be.
For example, it may be relatively quick and easy for engineers to develop a system for customers to perform a given transaction, but if your cloud services provider charges an exorbitant cost for each of those transactions, you’d need to know that ahead of time to understand that the feature belongs in a higher pricing tier. Otherwise, you may be relying on rough estimates that could turn out to be wildly off base.
The cost intelligence solutions offered by CloudZero can help every member of your team, from engineers to finance team members, understand and predict the true costs of doing business. With our platform, you can dig deep into the unit economics of each dimension you’d like to track and use that information to develop the pricing and packaging models that will work best for your business.