This post is by Amanda Kleha from Openview Labs
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Pricing is a crucial, pivotal element in any SaaS success story. It can be a game-changing growth lever. It can also create major controversy and unrest with customers. Most frustratingly, despite its central role in building and sustaining a company, it’s not a skill that’s taught in business school. For a lot of companies, especially startups and expansion-stage organizations, figuring out pricing involves a lot of trial and error. It’s also a good idea to learn what you can from others who have already traveled the road you’re on. I have had the opportunity to learn a great deal, both from others and through my own pricing experiments. As the first marketing hire at Zendesk, I underwent something of a trial by fire that proved to be a very valuable experience. I’ve also advised at Airtable and Outreach.io. In my current role as CCO at Figma—a collaborative
platform—I apply all my knowledge about the things that worked well and the things that went wrong. Both have lessons to teach.
War Story – The Price Change that Went Wrong (And What We Learned from the Experience)At Zendesk, we made a pricing change every year. Early in my time with the company, we made a change that ended up causing a bit of a customer relations challenge. It was a touchstone moment that made us realize in very concrete terms not only the importance of pricing overall, but also the importance of a clear and detailed communication plan to accompany any pricing change roll out. The situation was this: our engineering team was constantly innovating and adding new functionality. Month after month, we added new features to our existing packages, but didn’t increase the pricing. Eventually, we hit a kind of tipping point where we felt justified in charging a higher price in order to get a return on all the value we were delivering. At the time, the decision was based mostly on intuition and conversations with customers and employees. Ultimately, we made the final call to raise prices for new customers. Existing customers could keep their original price with one catch, they had to upgrade to an annual commitment. We had a number of customers that paid month-to-month. As you might imagine, many of Zendesk’s customers were not thrilled with this offer. Worse, they made their feelings known in a very public way. My job, once the bad feedback started coming in, was to figure out what the less vocal customers were thinking and propose a plan to move forward. I put together a survey and collected a lot of feedback, then we pulled company leadership together and locked ourselves in a room for a couple days. In the end, we decided to fall on our sword and grandfather existing customers into the old pricing with no caveats. The experience was fairly traumatic internally, but it was also a wonderful learning experience that set the tone for how we thought about future price changes.
That particular pricing “experiment” gifted us with three big takeaways:
- It’s critical to think the rollout all the way through.
The most obvious lesson was that we should have spent a lot more time making sure that the changes we were proposing would fly. We should have talked to many more customers beforehand, collecting valuable data that would likely have pointed us in an alternate direction and saved us (and our customers) a lot of pain and anguish.
- It’s a good idea to document your pricing philosophy and decisions.
We did two forward-thinking things at Zendesk to help us ground our pricing changes. First, we developed and documented a pricing philosophy that helped not only center us as a team, but also made it easier for us to onboard new employees who needed to get up to speed fast. As a complement to this, we kept records about why we made each pricing change. These were some of the most strategic and important decisions we made as a company. It was really beneficial to be able to give new hires a sense of where we’d come from and how we got to where we were.
- Don’t forget about the importance of infrastructure.
Being able to make fast and frequent pricing changes in a scalable way is one of the market advantages a company can have against competitors. In retrospect, I would have spent a lot more time brainstorming with our product and engineering teams to build an even more efficient and flexible billing infrastructure that was intentionally designed to support this kind of pricing evolution.
Big-picture Pricing Strategies – Good Ideas that Work for EveryoneAlong the way, I’ve picked up a few additional general pricing insights that can be applied pretty universally.
It’s important to regularly spend time on packages and pricing.Like any core piece of your business, pricing requires regular, intentional attention. While it’s easy to get caught up in urgent day-to-day matters, it’s critical to the long-term health of your business to schedule quarterly meetings for you and your team to do a deep dive on pricing and packaging. If your pace of innovation is high, you’re likely making some kind of pricing/packaging decision every six to twelve months. There are a variety of triggers for these shifts ranging from customer response (or lack of), competitor adjustments, or changes you’re making to your own product. Taking the time to check in on a quarterly basis will keep you one step ahead of the game.
Pricing accountability isn’t a one-person job.With pricing and packaging being such an influential part of any SaaS business model, how do you assign responsibility for this aspect of your product? In the early stages, it’s typical for the CEO to want to own pricing; but as the company grows and you learn more about your market, primary responsibility should shift to a partnership between a product leader and someone on the go-to-market side. Ultimately, pricing needs to be a priority across the entire organization. Getting buy-in from cross-functional teams is mandatory for success. To help ensure this kind of cohesion and continuity, we created internal decks to shop a pricing change around internally before we implement. This helps uncover and address the various effects a change will have across your company, which in turn makes it easier for everyone to get aligned around the shift.
Deciding on a price is the easy part. Rolling it out well is the hard part.As the Zendesk experience made clear, while coming up with pricing is not really a walk in the park, it can seem simple when compared with the delicate and sometimes complicated task of rolling new pricing out to an existing customer base. In general, customers don’t usually have a problem with reasonable price changes. They just don’t like to be forced into a change. Think carefully about making any changes that put your customers in a corner. Instead, consider alternative ways to charge more. If you have new features, you might make them an add-on or offer a new upgrade plan. These kinds of approaches are more customer friendly because they create customer autonomy with more options and control. Bottom line—be respectful of your customers’ feelings and opinions.
Two Common Questions – Freemium and the Self-serve/Enterprise ComboApart from understanding how to set your prices, change them without alienating your customer base and assign pricing accountability within your organization, there are a couple other questions that come up again and again:
1.When does freemium make sense?Freemium is a very effective strategy in a lot of instances, but you shouldn’t do it just because Slack is doing it. There are, in fact, a few clear indicators that can help you assess the situation. You might be a freemium-ready company if:
- Adoption of your product can start with an individual or a team rather than requiring an entire department or even the whole company to sign up
- Your product doesn’t require a lot of upfront set up
- Your buyer is also your product’s user
- You’re not trying to be a luxury brand
- You can provide enough value in a free version of your product to attract usage while still holding something back that’s worth a premium
- You want to foster faster adoption
- You’re willing—and have the resources—to sort out how to keep your marketing and supports costs in line