- Do you know what's great about SaaS businesses?
The margins.
Once you build the software
and you deploy it into the cloud,
the net additional cost of bringing on more customers
from hundreds of thousands to millions is not a lot more,
at least not like any other industry.
Think about a restaurant or think about a factory
or think about a car service.
Any one of those things to bring on 10x more customers,
you're gonna have to do way more capital investments.
Whereas with software, you just turn on more servers,
and it scales.
That's the amazing part of SaaS Businesses.
That's why I love them.
But at the same time, there's a cost to this.
The cost is because it's negligibly so cheap
to add on more customers, we as SaaS founders,
we tend to undervalue our products and the software.
And we tend to underprice what we should be charging.
We tend to leave a lot of money on the table
and what happens is your business gets stuck.
So, if you're feeling like,
hey, everything should be great,
and we should be growing a lot faster,
but you're not quite getting there.
You can't quite cover your CAC to LTV,
and it's just not quite working,
your win rates are not quite there,
chances are your pricing model,
your pricing strategy may be screwed up.
It may be that you're thinking about your pricing strategy
on a cost-plus basis,
instead of a value-based pricing model.
In this episode,
I'm gonna walk you through the three principles
you absolutely need to know
so you can adopt a value-based pricing strategy.
But there's some common pitfalls to this that I fell into,
so we're gonna dig into those as well.
Intro!
(upbeat music)
(loud cracking) What's up, everybody?
Welcome to Unstoppable.
I'm TK, and on this channel, I help SaaS founders like you
grow your SaaS businesses faster.
If you are new to the channel,
I drop an episode like this
three times a week. (air whooshing)
So, be sure to hit the Subscribe button
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Now, if you're already part of our community,
if you're part of my SaaS Go-to-Market Coaching Program,
welcome back!
Super awesome to have you here.
Now, back at ToutApp, that was my last SaaS business,
pricing was something that amazed me.
When we first started out, it was just me.
I was a solo founder.
It was a self-service business.
And I was literally trying to figure out pricing.
Maybe you are because you're in the early stages.
And I thought, okay, let's just do, it's an email product.
You can't even bold an email. It's a simple text editor.
We were in the super early days of sales engagement.
Let's just do $9 a month.
And one of my friends, Lauren Gagnon,
I went to college with her.
We were talking about it.
She was like, "This is for salespeople, right?"
I'm like, "I think that's gonna be the primary use case."
She's like, "Well, if a salesperson gets one more deal,
that's like worth thousands of dollars to him,
and you get him more deals, right?
So you should charge it way higher."
And I'm like, "What? Really? I'm like, "Yeah."
But I'm like, "It's a simple email tool.
It's nine bucks a month."
She's like, "You should go higher."
So we started at $30 a month.
Now at that time, $30 a month for a prosumer product,
salespeople swiping their credit card, was unheard of.
It was blasphemous. It was crazy.
We weren't even CRM.
We were just an email tool,
but I put it at $30 and people started paying.
And on top of that, we said it was $30 a month.
And really it's about a dollar a day,
and it gets you more deals.
And people start paying even more.
And through the course of ToutApp,
we took that price from $30 a month to 49
to 79 to $125 per month per seat.
And the market kept buying and kept buying more,
which was incredible.
Now that aha moment that I had through the course
of that journey was the fact that people pay for the result,
not so much for what it costs you.
It didn't cost me that much to run a little web tool
in those early days with the text editor
and a template editor and just sending to track their email.
I could have charged five bucks a month,
and it would have still been profitable.
Because I charged at $30 and communicated the value,
everything changed.
And this is where value-based pricing comes in.
And then when you shift your pricing models
and think in terms of value-based pricing,
then everything changes for you.
And you can actually accelerate
the growth of your SaaS business
with the customers you're already acquiring.
So I wanna dig into exactly how to implement this
because there are some common pitfalls.
So I'm gonna dig into the three principles
that you absolutely need to know.
So if you're excited to dig in,
go ahead and smash that Like button if you haven't already,
and let's go to principle number one.
So principle number one is to embrace value-based pricing
and really have that mental shift
in your mind about why value-based pricing is important.
Let me explain.
So essentially when it comes to your customers,
they basically in their heads, say I use this software,
this is your software right here, to accomplish a result
in the business so that we can, in the business,
either make more money, save money, or reduce risk.
That's it. This is super important.
You can rewind this if you want to look at this again,
but I'll repeat it.
I use the software to accomplish a certain business result.
So that we can either make more money,
save money, or reduce risk.
If you can't slot in your software
into this simple sentence structure,
then there's something wrong.
Then you don't quite know what your value prop is.
You definitely don't know what your strategic narrative is,
and pricing is the least of your worries.
But what's important to do is really understand
that people don't buy software
for the sake of buying software.
They're looking to achieve a certain business result.
And that business result is usually tied to either
making more money, saving money, or reducing risks.
Those are the main reasons people buy B2B SaaS software.
So what you need to do with that first principle is
make that mental shift of,
it's not about what your software costs you.
It's not about how cheap you can make it.
They're looking at the price.
They're looking at the time they have to spend
to use that software.
And they're comparing it to that business result.
And therein lies the difference.
If you're doing cost-based pricing,
you're essentially looking at your software,
and you're saying, okay, cool for this piece of software
and the servers that I need run, what do I need to do?
What's my costs?
What are my service costing me or my engineers costing me,
and lets us price it according to how many customers
are we gonna get?
Whereas when you're thinking about your pricing strategy,
you should actually look at the business result
and think about what kind of value they're getting.
How much are they willing to pay?
And once they pay that and they achieve this result,
the thing pays for itself.
So it becomes an investment.
This is a mind shift that we all have to make
especially as early stage founders.
It's not about what it's costing us to run the software.
It's more about what is the value they're getting
and what the price is.
So they start to think about it more as an investment.
Now, sure, I could have put ToutApp at $5 a month.
I could have given it for free, but because I said, "Look,
it's $30 a month dollar, $1 a day, and you get more deals,"
they start thinking when I communicated that price,
"Oh cool, if I pay $30 a month,
my commission on one extra deal is this.
Then I can make that money back. This is nothing."
On top of that, the $30 communicated
that this is a valuable product worth their time.
Not some 1.99 little app that they're never gonna use.
That's probably not constructed well.
So you can start to see how value-based pricing
not only just helps the consumer conceptualize what value
they're gonna get out of your software
and why it's important and the weight of it,
but it also helps you really convince the consumer
why they should buy your product.
Then you're already catching on.
That's the first mental shift that you have to make,
value-based pricing versus cost-plus.
It's not about the software and the cost around it.
It's a business result and the value they get out of that.
So that's principle number one.
Let's move on to principle number two.
This is another mindset shift I have to make
to actually adopt value-based pricing
and think about the pricing strategy in the right way
so I could grow my business.
One of the toughest things to do as founders, as CEOs,
especially as your company starts growing really fast
as you start to do more deals is you have
a mental barrier around money.
I'm not turning this into a self-help thing.
You just literally have a mental barrier around your money.
Let's just say, pick an amount, pick any amount.
Pick a big amount in your mind.
And let's just say in your mind
you chose $50,000 or $100,000.
Now I don't know what your financial situation is,
but it almost doesn't matter.
I want you to imagine yourself
when you were graduating college,
and let's just assume for a second
you didn't have a trust fund.
If someone were to wire transfer in $50,000
into your bank account, what would you do?
How would you feel?
You would feel like, "Oh my God, that is a lot of money!
Let's go party," or let's go invest it,"
depending on where your values are.
$50,000 is a lot of money
when it comes to your personal bank account.
If it just shows up, you're like, "This is awesome!"
What are all the things I can do with it?
However, for a business, $50,000 is nothing.
Especially for large businesses,
$50,000 is a rounding error.
There's some businesses that spend
more than $50,000 on spoons.
This is a difference that you have to adopt
when you're thinking about your pricing strategy,
when you're thinking about actually charging people,
and when you're thinking about actually asking
for money on deals.
Businesses think about money
way differently than normal people do,
and rightfully so.
And so you have to understand the difference
between my money, which is you, and the business's money.
So my money, the way it works generally,
and again, I don't want to turn this
into a personal finance thing, but generally speaking,
you're thinking about earning money, saving money,
paying for things that you want, paying for stuff,
and then hopefully you start investing that money.
But that's the order that most people operate in.
Now, businesses, they only have one model,
at least the great big ones,
or the mid-sized ones or the successful ones.
You wanna invest a dollar and get $2 back.
And the more money they have, they're like,
"How do I invest this dollar and get $2 back?
And if there's ways I can invest a dollar
and could get $2 back, I'll do it all day long
because that's my purpose as a business."
That's it. That's what businesses are for.
Now, we, in our own lives,
choose to use our money differently.
Maybe we give to a great cause.
Maybe we save the money for our kids' college educations.
Maybe we take that vacation, get some R-and-R.
Maybe we spend it on education.
And we essentially earn the money, save the money,
and then we pay for stuff.
But the scale at which we operate
versus a business is wildly different.
And the model that we operate in is wildly different.
This is something that you have to internalize
because of two reasons.
Number one is that businesses are essentially
looking at your software tool and saying,
"If I pay you a dollar, will I get $2 back?"
Which goes back to this first principle
when they're looking at it, they're really looking at,
what's the result I'm gonna get,
and am I gonna get $2 back out of this based on the cost?
That's how they're thinking about it.
The second thing is the amount, $50,000, $100,000.
What you're comfortable with
will have to be challenged and changed,
and the easiest way to do that is recognize
your money is different than a business's money.
Businesses operate at different scales.
$50,000 is probably a rounding error.
And yes, a dollar is a dollar,
but a dollar is not a dollar when it comes
to between your bank account and a business's bank account.
And this is something you're gonna actually
hit a head bound on.
When we were raising prices
on the sales side of the business,
when we were moving from $49 a seat to $79 a seat
to $125 a seat to a minimum platform fee of 20K,
our actual sales reps had a mental barrier on it.
It's like, "Oh my God, that's a lot of money.
How can I possibly ask?"
I'm like, "Listen, you have to start thinking about it
in terms of the money and the bank account."
I know that if I were to wire transfer
$50,000 from the bank, from the business bank
into your personal account, you'd be very happy.
But that's not how businesses think.
And there was a mental barrier
of them thinking about what is a big deal,
what is an appropriate price to ask,
but it's really easy to break through
if you start to think about the result you're delivering
and the difference between how businesses think about money
and how normal people think about money.
You guys starting to get this?
Now, before I go to principle number three
to break through some
of these barriers and actually adopt value-based pricing,
here's the thing about value-based pricing.
The concept is easy, but the mind blocks
and the mental shifts you have to make
as a founder is actually harder.
This is not a difficult concept
but shifting is actually hard,
which is why I'm giving you these three principles.
Now, if you're getting value from this
if you're starting to get some shifts already,
if you're starting to see how value-based pricing
is important, but there's some traps in there
and you're starting to see how to overcome it,
can I just get a yes in the comments below
(air whooshing) so that I can hear from you?
I'd love to hear it from you.
My team loves it when we get comments from you.
Also smash that Like button for the YouTube algorithm.
It means the world to us.
If you are building out the growth strategy
of your SaaS business, if you're trying to figure out
all the levers to turn, including pricing,
I also have a five-point SaaS growth strategy guide.
It's completely free.
It includes a lot of resources
on how to create a growth strategy.
I'll link to it below.
You don't have to go right now.
Let's go into principle number three.
Principle number three is as you start to think through,
what is the value of delivering, the business impact,
and how do we price based on that?
I recognize that there's a difference
between my money and the business's money.
You're gonna have to codify all of this
into a cohesive pricing strategy.
Now, the easiest thing to do is just say,
"We're gonna charge X," right?
But a proper pricing strategy
actually looks at specific things.
So when you build your pricing strategy,
you wanna think about packaging.
What are the tiers that you have,
and how do you structure those tiers?
You'll also want to think about price.
Now, is it doing $29 a month, $30 a month, $32 a month?
It varies.
Maybe it's a minimum platform fee.
There are some questions there.
Also, you want to think
about optimizing for certain metrics.
You wanna optimize it for net revenue retention.
You wanna make sure your CAC to LTV ratio is right,
and you really want to make sure you're charging
as much as possible because the more you charge,
the better quality customers you're gonna get,
the more money you're gonna make,
the more you can invest in growth,
the more capital you're gonna be able to raise,
the more success you're gonna have.
It all feeds together the higher you charge,
believe it or not.
So all of this needs to come together
into your pricing strategy.
Now you might be wondering, how do I figure all this out?
I'm committed to value-based pricing.
I did an entire video on how to build
(bubble popping) a pricing strategy
for your SaaS business.
I kind of give you the overview
and the core components (bubble popping)
so you can dig into it a lot more.
(upbeat music) So can check out that video.
You don't have to go yet. I'll link to it below.
So to recap, value-based pricing is where it's at.
Understand why value-based pricing is important,
what the business result you're delivering is,
and what the value associated with that was
and priced accordingly.
Number two, make that shift, know the difference
between your own money and the business's money,
how businesses think about money
and how you think about money.
And there's probably more to be covered on that.
I don't wanna turn this into a personal finance channel.
Yes, I know you should invest your own money.
You should think about yourself as a business,
but that's neither here nor there.
But just know the difference
on how businesses think about money.
And number three, build out your pricing strategy.
I'll link to that video below.
If you got value from this video,
be sure to smash that Like button.
(light squeaking) If you have a team member,
(button clicking) a fellow co-founder,
if you're a part of a group of other SaaS founders,
please share this video.
It'll just mean the world to us.
We put a lot of effort into these videos.
We put a lot of love into these videos,
and we wanna spread it as far and wide
to as many SaaS founders as possible and impact their lives.
Also, if you're building out the growth strategy
for your SaaS business, and you want a process to follow,
go ahead and download
my five-point SaaS growth strategy guide.
Inside of it, I give you the key pillars
that builds the growth strategy for a SaaS business,
additional resources, and a one-page template
on how to build out a growth strategy.
It's all included in there. It's completely free.
Just go to getunstoppable.com/strategy,
or just follow the link below.
And lastly, I drop a video like this three times a week.
So if you're not subscribed already,
be sure to hit the Subscribe button and that Bell icon.
You will get notified every single time
I drop an episode like this.
And mention in the comments below
if there's specific questions you have
around value-based pricing or pricing strategies.
I respond to every single comment.
I'd love hearing comments from you guys.
So that would be awesome as well.
And lastly, remember, lastly, lastly, lastly remember,
everyone needs a strategy for their life and their business
but when you are with us, yours is gonna be unstoppable!
I'm TK, and I'll see you the next episode!