As explored in the last post, SaaS companies should learn from their experienced B2B counterparts to strive for value-based pricing and avoid spiralling into a price war. So how exactly does a modern SaaS company stand on the shoulders of these B2B pricing giants?
The short answer: Don’t tolerate being treated as a commodity – prove differentiated value to ease pricing pressure, which is the essence of value-based pricing.
Why is it so challenging to convince B2B SaaS buyers to pay for differentiation in the market? Because so-called superior value has been (over-)promised but not proven. A global high-tech digital transformation executive mockingly commented to me that if all his software vendors delivered on their promised cost-savings, his P&L would have zero cost next year!
So let’s take a lesson from the B2B giants. GE Infrastructure Water & Process Technologies has a tagline: “Proof, not promises.” SKF Documented Solutions says “Real world savings – and we can prove it!” These slogans are commitments to measure and document success at the customer-level, not only hyped-up success stories during the sales process. In turn, this value measurement helps these B2B companies to gain trust, understand their differential value and craft value propositions that resonate with target customers.
Why does value measurement matter for SaaS specifically?
Reason 1: To achieve higher price realization – documented value provides an objective basis to refuse excessive discounting. The measurement process also allows for an intimacy to develop between the SaaS company and its customer, gaining trust and credibility to build resistance against aggressive competitor pricing.
Reason 2: Customers don’t buy your solution once – the era of the perpetual software license is over. Quantified value is the safest passageway through the subscription renewal and re-pricing decision.
What needs to be done to measure value in the sales and trial process?
First ask the question – what are the client’s KPI’s? And lead this dance – what KPI’s can the technology reliably influence? Many SaaS companies take an ego-centric view of value estimation: Return on Investment (ROI). No SaaS buyer’s bonus is based on achieving an ROI target from a piece of tech – it’s based on hitting their org’s KPI’s. Even in B2B buying decisions, selling is still person-to-person, and the results need to align to the buyer’s personal targets. To provide an example from the Configure-Price-Quote (CPQ) SaaS space, “efficiency gains of X% leads to an ROI of Y” is fuzzy at best and difficult to measure. This can be broken down into three constituent value drivers. In this case, they might be (1) a reduction in average cycle-time-to-quote, (2) a reduction in sales operations time spent on deal approvals and (3) an increase in cross-sell rate. These are hard metrics which can be quantified, relate back to business performance and can make the buyer a hero within their organization.
Next, define a measurement methodology: Agree upon the metrics as above and take baseline measurements before the solution is live. When the rollout is phased, opportunities to conduct a test vs. control may exist. Then launch and measure results, taking a solemn oath with the customer “thou shalt apply common sense to results measurement.” Statistical purists crave a perfect two-sample t-test to measure uplift, cringing at seasonality, business and macro-economic changes that flaw measurement. However, the guiding principle is not to run a scientific experiment but to generate new knowledge about customers’ high-value use-cases to inform a value-based pricing strategy.
Lastly, design trials accordingly. Try-before-you-buy can work well in limited circumstances where use cases are straightforward with few adoption or value hurdles. For the rest of us in the real world, Proof-of-Concepts (POC) often devolve into user testing and IT milestones with value cast to the sidelines. A correctly scoped POC should define objective success criteria for the predefined metrics in an appropriate time-frame to measure results. For smaller or private SaaS companies, a POC structured to trigger a full contract upon value achievement (or a gain-share pricing model, though exceedingly rare in practice) is a contractual possibility. For larger companies with greater revenue recognition constraints, a limited term license with strong executive commitment against the measureable POC success criteria should suffice.
Who is required to lead the value measurement process?
There are a range of value measurement techniques to apply that can vary based on the duration of the company’s sales cycle, term length and the skillset of the sales and delivery teams.
On the light end, a series of stakeholder interviews and high level assumptions can suffice, run by an industry-fluent pre-sales or sales lead at acquisition, and revisited nearing renewal. With limited time and resources, a value discovery process should drill down to the economic impact of the individual use-cases (i.e. revenue increase; cost savings; risk mitigation) to identify the business drivers behind the investment decision. The output should be a customer-specific key performance indicators (KPI) forecast, tailored to the relevant use cases with informed ranges and assumptions.
For organizations with million-dollar plus contracts at stake, a deeper quantification exercise can be justified to estimate initial uplift and to measure benefits 6-12 months after go-live, led by internal consultants and/or data scientists. Furthermore, in these complex B2B sales settings, continuity is key; the pre-sales dazzler who won hearts and minds with a detailed KPI forecast should not vanish into thin air after the champagne is popped. The methodology should persist from pre-sales for forecasting to post-sales for milestone measurement and back to pre-sales or to customer success for renewal. The entire customer-facing team should speak the language of value to justify initial and renewal pricing.
The Other Half of Value-Based Pricing: Pricing Architecture
Resisting pricing pressure with proven value is only half the battle. What if list prices and pricing architecture are flawed to begin with? How should SaaS companies think about their pricing architecture to achieve true value-based pricing? More on that in Part 3 of the series.