In conversation with Intuit Circles and Headstart, Arjun Pillai, Founder & CEO of Insent.ai, talks about how to think about the optimal pricing strategy for SaaS products in the overly-competitive B2B marketplace.
Arjun kicks us off with a, “It is not a standalone strategy.” Your pricing strategy affects multiple other strategies that you will work on, most prominently- your Product Strategy. For instance, if you are a self-service company you’re more market-driven as opposed to an enterprise. Different approaches will result in a completely different product. Your pricing strategy is an integral part of how you choose to run and operate your company.
That having been said it is important to understand that you may not get the pricing strategy right from the get-go. It is an important thing going forward, a change in your pricing strategy will result in other consequential changes. Remember, it is:
- A crucial competitive differentiator
- Helpful when trying to understand the timeline to release your product into the market
- A great indicator of the scalability of your product
- A key thing to remember when speaking to investors
In the beginning, it is normally the founder that sets a pricing model, and that is ideal. Customer discovery and selling processes should take place together to avoid confusion and inefficiency. As a founder, you have the best understanding of your product to enable a good product-market fit and also pricing strategy. ”So that customer discovery part is unique to a founder.” Arjun also recommends that when forming a pricing model it is probably for the best to not have the finance department weigh in on the pricing model initially, bringing them in at later stages is what you want to do.
He broadly categorised three pricing models:
- The Self-Service Model
A Freemium kind of model with a low annual contract value (<3000USD). Here, the Sales and Touch cycles are lower. It’s a marketing-driven go-to-market strategy.
- The Mid-Tier Model
This model has a comparatively higher annual contract value (>5000USD). Here, following an SDR and an account driven model is preferred. The Sales cycle will be dealt with in weeks as opposed to months.
- The Enterprise Model
This model usually has executives executing deals. With the highest annual contract value (>500,000USD), the Enterprise models usually target Fortune 500 companies. The Sales cycles will run into years as opposed to the other two.
When it comes to value-based pricing, Arjun was able to define products into two categories:
- Tool Product
- ROI Product
You should be able to categorise your product into one of the above two. The pricing strategy of a tool-based product is easier to explain- it’s easy, convenient, saves time, the usual. The ROI strategy is more value-based pricing, where you can claim things like ‘if you use this product, your bounce rate will come down by 80%’ or your ‘ACV will increase by 20%’
Now, the most important question- How do I arrive at my figure?
Arjun said there are a few factors you want to keep in mind when constructing an effective pricing strategy.
- Understand who/which market you’re selling to
- Set your margins in accordance with how much you’re spending to stay afloat
- Your Customer Lifetime Value should be 3x your Customer Acquisition– this formula allows you to have better unit economics and command a better valuation from investors
- Study your competitors and learn from them. That doesn’t mean that you look at only direct competitors but look at other companies in a similar domain to avoid having an unrealistic vision of the market.
He added that having an ecosystem of startups and having a community of like-minded founders really helps speed up a lot of things and helps you feel supported and motivated. Consider joining Intuit Circles!
Intuit Circles is a strategic startup ecosystem engagement initiative by Intuit, that facilitates business growth and knowledge for startups through smart-tech. It aims at powering prosperity for startups by providing for some of their biggest needs. If you’re a startup looking for a supportive community to help you grow your business, sign up on Intuit Circles today.
Watch and learn more about SaaS Pricing with Arjun Pillai, click here!
Join us next as we talk about Managing Cash Flow in Challenging Times. Till then, do read about the journey of our feature SMB, GaragePlug, here.