In Part 1 of the article, I discussed WHY implementing value based pricing strategy isa must for AWS SaaS partners. I highlighted the benefits of implementing a value-based pricing vs. cost-based pricing. I also provided three compelling reasons why value-based pricing is essential for AWS software partners:
Firstly, by focusing on the value that your product provides, you can differentiate your product from competitors who are simply listing product features. Secondly, selling perceived value attracts more customers and thirdly, it allows you to increase your revenue by charging a fair price for your product based on its perceived value to the customer.
As someone who has worked with many startup founders to scale up their GTM operations, I can attest to the importance of defining a pricing strategy that keeps their long-term growth story in mind. In Part 2 of my blog, I will be discussing how to embed a value-based pricing strategy and target the AWS ecosystem more effectively.
Real-life example to make the case for value-based pricing
One would be surprised that building the value-based pricing strategy isn’t a high priority action item for SaaS startups that are scaling up. The ease of cost-based pricing lulls the Growth leader or product leader into false sense of security. For instance, I worked with a an AWS SaaS startup that decided to list their solution on the AWS Marketplace to reach more customers. However, they only had one pricing for their SaaS solution, which was not ideal for delivering targeted value to different personas. Although the company was open to providing flexible pricing if the customers asked, they did not have multiple packages with fixed pricing to offer upfront. Being a technically forward team they understood unit costs easily but didn’t understand the power of value-based targeting, which is a strength in commercially driven companies.
We recommended the partner to immediately develop specific personas that they would anyhow need for their marketing efforts. By completing this, they had a better understanding of the needs & unmet jobs of the different buyers they target. Using the personas developed they customer needs created three packages that offered varying levels of functionality and value. This allowed them to better compete in the crowded AWS ecosystem. They were able to attract a wider range of customers with different needs & able to reduce the sales cycle by replacing the pricing discussion phase with the faster 3 pricing packages.
1. Customer Personas
In the world of SaaS, understanding your customers is key to creating a successful product. One way to better understand your customers is by developing customer personas. It includes demographic data, customer goals and needs, current frustrations and pain points, channels that influence purchase decisions, and more.
To create customer personas, you can conduct research through surveys, interviews, or focus groups. These can help you gain insights into your customer’s pain points, preferences, and behaviors. You can also use data from your existing customer base through your customer success managers & account engineers to identify common characteristics and trends. Once you have a clear understanding of your customer personas, you can align your product development efforts to meet their specific needs and preferences.
2. Feature Analysis Research
Once you have identified your customer personas, you need to determine the value of your product features. Using a relative preference analysis method rather than a scoring method can help you calculate the value of each feature. This method forces respondents to make a choice between their most and least preferred features. To calculate the value of each feature, use the following formula:
(No. of times most preferred – No. of times least preferred) / No. of total respondents
This dataset can then be segmented by the customer personas you have derived and aligned against the qualifying questions in your survey research.
3. Willingness to Pay Research
Knowing the value of your product features is only half the battle. You also need to know how much your customers are willing to pay. Van Westendorp’s Price Sensitivity Meter is a simple but effective tool that has been used for the past four decades to determine willingness to pay. The tool asks four questions:
- At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
- At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
- At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
- At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)
The results of this research can help you set a price that is attractive to customers while also being profitable for your business.
4. Identify and Validate the Value Metrics
Customers are billed based on their use of a value metric. Examples of value metrics include widgets, API requests, the number of users, the dollar value transacted through the service, addon integrations required, and more. Choosing the right value metric is crucial to the success of your SaaS business.
The right value metric should be easy to comprehend, align with client requirements, and grow as the customer grows. It is essential to use a relative preference scaling method to research which value metric(s) work best for your customers. This method involves presenting respondents with a list of different value metrics and asking them to choose their preferred options. You can then calculate the relative preference of each option and identify the value metric(s) that resonate most with your customers.
To validate the value metrics, you can conduct A/B testing to determine which value metric(s) lead to better customer retention, revenue growth, and profitability. You can also gather feedback from your customers to ensure that the value metric(s) are accurately reflecting their usage of your product. By choosing the right value metric(s) and validating them through testing and customer feedback, you can create a pricing model that aligns with your customer’s needs and preferences.
Implementing a value-based pricing strategy can be challenging, but it’s essential for AWS SaaS partners looking to provide value to their customers while remaining competitive. By developing customer personas, conducting feature analysis research, determining willingness to pay, and identifying and validating value metrics, SaaS companies can set prices that align with the value they provide to their customers.
In conclusion, SaaS companies must keep in mind that pricing is a constantly evolving process. It’s essential to keep track of customer feedback, market trends, and competitor prices to ensure that prices remain competitive and fair while still providing value to customers. With these strategies in place, SaaS companies can establish a value-based pricing strategy that meets the needs of their customers while ensuring the profitability of their business.