The Ugly Truth About SaaS Pricing

By Jonathan Brown, Head of Market & Customer Intelligence at Zuora

Pricing a product or feature is complicated. There's no code to crack to find the perfect price or one-size-fits-all answer to choosing a pricing model for your business. 

Pricing is an ongoing, continuous process that requires flexibility, and even a seemingly simple pricing adjustment can have broader implications. I talked to some pricing experts to understand the recent trends and some common pitfalls to avoid when it comes to crafting pricing models for the enterprise.

Ugly truth 1: SaaS hasn’t really seen a macro environment like this before

According to a recent SaaStr survey, 73% of SaaS companies are planning to raise prices in 2024, which is up from 54% from the same survey in 2023. That’s a significant year over year increase. A quarter of those raising prices in 2024 are raising them by 15% or more. 

If you are not raising prices in 2024, you are in the minority.  

But just because everyone is raising prices doesn’t mean you can ignore the strategy behind a pricing change. 

I asked Brian Russell, VP of pricing at Mainsail Partners, and he recommends following these best practices when considering a pricing change, especially in today’s environment. 

Best practices to consider:

• Take a strategic approach to the timing and communication when rolling out price changes to avoid alienating your customer base and risk introducing churn.

• Consider building automatic price increases into customer agreements that apply at annual renewal. This allows you to avoid future price increase conversations after landing a customer by pre-negotiating the future price increases into the initial subscription agreement.

• Adopt a company culture that your products are “appreciating assets” that continuously improve over time. Price increases should be aligned with consistently improving customer value and your roadmap should deliver on that reality.

• Closely monitor changes to your competitor’s prices and have the tools and processes to quickly make those changes.

Higher borrowing costs put the spotlight on pricing payment terms

Brian also notes that buyers are putting an increased focus on the tradeoff between monthly, quarterly, and annual upfront paid subscription pricing as a result of higher interest rates and borrowing costs. Making an adjustment to your payment terms can have a positive impact for your customers. 

Best practices to consider:

• Explore adding payment flexibility. Set payment terms that meet your customer’s needs and evaluate introducing new flexible options if your customers are facing economic challenges.

• Monitor what payment terms competitors offer. Customers may view competitor’s more flexible payment fee schedules as a differentiator that lowers their switching costs.

• Drive the right incentives between payment options. Adjust your pricing to account for the value of different payment terms and to drive the right behavior.

The buying landscape is quickly evolving requiring software companies to adapt 

There are many factors contributing to the evolving software buying landscape – one being that customers are getting smarter at buying software.

According to Pendo, between 2018 and 2020, the average number of software as a service (SaaS) apps a company used increased 30% and the average enterprise-level company now uses over 270 apps in its portfolio. 

Best practices to consider:

• Closely monitor the evolving pricing landscape in your market – especially as an incumbent with more exposure to disruption.

• Increase curiosity and willingness to explore alternative pricing approaches even if it may deviate from the norm.

• Establish a dedicated pricing function in your company early in the growth journey.  

Think of pricing as a process, not just a project, says Brian. It continues to evolve and pricing flexibility is a key component to long term business success. 

Ugly truth 2: Most of the features product managers think are monetizable…aren’t

There can be many conflicting priorities that go into a pricing decision, and launching new products and features can lead to an internal tug-of-war between product managers and pricing strategy managers. 

Differing perspectives and objectives can lead to friction, but this tension is essential for crafting successful products, according to Shah Choudhury, Senior Manager, product and pricing strategy at Salesforce.

Shah emphasized that product development should be based on true monetization potential, and that fostering open dialogue between PMs and pricing managers can create innovative features that are not only marketable but also sustainable. This balanced approach leads to long-term growth and a stronger product portfolio.

When I talked with Shah, he shared an example of a time when a PM approached him about pricing a new advanced analytics feature. This tool allowed users to create custom dashboards and receive real-time updates. The PM proposed a separate add-on, sold on a usage-based model. Although the rationale made sense at first glance, Shah dug deeper. 

A separate add-on made it easy to track credit and attribution for the feature, which would give the PM full credit if things went well. Competitors are also successfully using an add-on model for similar features. 

However, what's good for a single feature might not benefit your overall portfolio or the company’s long-term strategy. Here’s where my broader perspective as a pricing manager comes into play, Shah explained. 

Here are the considerations Shah took into account when evaluating the pricing strategy for this feature: 

• Long-term benefits: Will this add-on drive long-term growth and create upsell and cross-sell opportunities?

• Portfolio strength: Will it enhance or fragment our product portfolio?

• Company goals: Does it align with our strategic objectives?

In the end, what happened?

The analytics feature was identified to be table stakes, highly valuable but not something customers are willing to pay for based on market and competitive trends. As a result, it was added into the existing solution to increase its value for customers. 

PMs don’t always consider the broader implications when it comes to determining pricing. Instead, we should base product development on true monetization potential, says Shah. This is all an important part of the product development process. 

Steps to monetizing innovation:

• Identify target segments. Understand the customer segments you aim to target.

• Understand customer needs. Research customer needs and purchase drivers.

• Assess willingness to pay. Evaluate willingness to pay in light of market trends and competition.

• Have a clear understanding of cost to serve and your competition. Is the cost to serve expected or considered normal in the industry and what are competitors doing to tackle this through their pricing and packaging?

By following these steps, you can ensure that product development is market-driven and commercially viable from the start.

Ugly truth 3: There’s no such thing as a “simple” pricing change

I asked Evan Scott King, Process Lead, quote-to-cash at Zuora, to help explain what happens when a company wants to make a pricing change. 

“In my experience, there’s no such thing as a simple price change. Pricing should not just be reactive, or limited to a new product launch. Pricing, when you do it right, can be a big part of how you establish yourself as a leader in an industry. Even seemingly mundane changes like a CPI uplift are more complicated than you might think,” says Evan. 

As we’ve seen, buyers are getting smarter, there are economic headwinds impacting SaaS, and foreign exchange considerations for businesses operating globally are causing increased scrutiny on price in every negotiation. Plus, as shared earlier, the majority of SaaS companies are increasing prices in 2024. 

At Zuora, we recognized that, in addition to all of these factors, managing a CPI update on an ongoing basis was becoming strategically important to the business.  

There’s a lot of planning that goes into trying to implement a process that will scale, Evan says. 

We began with creating a targeted timeline, which for us given our sales cycle length, buyer behavior, and revenue requirements, made sense to choose the start of the fiscal year to make the changes. 

Once the target date was set, the next big milestone was getting leadership alignment on a target uplift across our portfolio. 

So, how do you decide on what the rate increase should be?

“At a portfolio level, I feel it's easy to fall into the trap of ‘analysis paralysis’ and this goes back to what we’ve discussed with pricing being a process rather than a project: do your research and then just make a decision on a rate you can support. If your process around these changes is solid, you can adjust and react as needed,” says Evan. 

It was important to be able to make this kind of pricing uplift repeatable, which required getting a sense of the data to try to build a model that we would replicate any time we wanted to go through this exercise, says Evan. 

Zuora has a lot of data available within our product offerings, with 115 product SKUs leading to around 18,000 price points across the currencies we transact in. That level of complexity makes it challenging to create a repeatable process. 

Evan explained that he was able to build certain assumptions into his model, such as using USD as the basis rates, that made it possible to see the impact of proposed rate changes and evaluate if those changes met the desired objectives for the year, and to share that information back with the leadership team. 

This “simple” inflation-based pricing change process began over 4 months before the target launch date at the start of the fiscal year. 

“You need to orchestrate the relay race with the teams involved in deploying these kinds of changes. A big part of the process for us was publishing deadlines centrally, identifying champions within each function, and leaning on them to help with the enablement rather than having our head of pricing and myself get distracted managing the details ourselves,” says Evan.   

Operational rigor and having a process you can document and log approval at each step is crucial. 

The main takeaway here is that everything about Q2C system design needs to be about proving exactly what gets changed, by whom, and when. When you do this right (like we do at Zuora) testing cycles are shorter, deployment is faster, and sales gets back to transacting in just a couple hours, including validations for your auditors, says Evan.

As you can see, there is a lot of ugliness out there when it comes to SaaS pricing and many competing priorities to get it right. Grounding yourself in a deep understanding of customer value, while also remaining flexible to exploring new pricing models is a great place to start, while ensuring you have the process and technology in place to support the changes.