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SaaS companies are heading into 2023 in ‘hard mode’. All the evidence points to another tough year for the economy. Funding will be difficult to access, and with many businesses tightening their belts, growth won’t be easy for SaaS companies that will find every new customer that much harder to win.
The focus is shifting from rapid growth to efficiency. Already, CFOs are carefully examining contracts to identify potential cost savings: 57% of IT teams say they’re under pressure to reduce their SaaS spend, and the trend is likely to escalate in 2023. It’s up to SaaS vendors to anticipate this: Only those demonstrating real value and flexibility to their customers will survive.
But in spite of all this, growth is still possible in 2023 as leaders take the opportunity to revisit previously overlooked levers for growth. Pricing is one of the most important and will become an ever more significant focus for SaaS companies as they look to reduce churn while maximizing value from existing customers.
With insight from SaaS pricing experts from across the industry, here’s how to make the most of your own pricing strategy in 2023.
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1. Consider pricing as a lever for growth
Although pricing has historically been a neglected growth lever for many SaaS leaders, now is the time to look at it with fresh eyes. When times were good, everyone was focused on growth as their first priority and pricing just had to be “good enough.” But the fundamentals are more important now, and many businesses are in survival mode. If you weren’t already, now is a good time to experiment.
The most obvious place to start is with an assessment of your current pricing strategy, and an understanding of where you have room to innovate.
James Wood, SVP at Insight Partners, recommends taking a look at how much pricing power you have as a company: “If you haven’t touched your pricing for three or four years — and you’ve built up a large amount of pricing power through product improvements, delivering value to customers or having some really successful use cases — it’s time to review how to completely change the game on your pricing.”
2. Keep customers at the heart of your pricing
The pricing strategy that will work best for your business depends on your customers. Don’t risk any changes until you have a strong, data-driven understanding of their needs, priorities and how they’re using your product. Once you have this, keep it in sharp focus as you assess new pricing models.
Usage-based pricing (UBP), for example, can be unsettling for customers who want to know their costs in advance. If it’s something you plan to roll out, you need to be deliberate about taking customers on the journey with you, addressing their concerns and showing them how they can benefit from UBP in a recession.
Use your tech stack to give full visibility over usage and spend, so customers can better manage spend and you can drive revenue growth.
“With the increase in usage-based and private pricing, there will be demand from customers for better pricing visibility and predictability, which needs to be reflected in the tools they use,” said Christian Owens, founder and CEO of Paddle.
3. Make pricing strategy a team effort
As pricing turns into a C-suite priority, it’s something that more people become responsible for, from the CFO to the CMO. Rather than working in a silo, the most successful innovators bring more people and functions into the process when planning and implementing new pricing models.
For example, involve your product teams to understand which features customers are willing to pay a premium for, and which usage metric is best for you and your customers. Your customer success team, meanwhile, can assess customer needs and responses as new pricing is implemented, so you can adapt as you go.
“For any pricing project, you’re going to have a ton of people who are interested,” said Wood. “When people work together and stress test and use the stakeholder concerns, they have a better, more structured and higher potential project at the end of it.”
4. Think carefully before raising prices
In 2022, SaaS companies raised their prices at a rate four times faster than global inflation. But in the expected market conditions in 2023, customers will be less able to tolerate such significant pricing inflation. We’re also in unknown territory: Software businesses have never had to operate in an inflationary environment like this.
So, while it’s important for companies to look again at their pricing, there’s an art to this, and SaaS businesses need to tread carefully in the context in which they’re operating.
Think about whether your product is sticky enough and your customer relationships are strong enough to warrant a raise in prices. One way to do this, according to Owens: “As a general rule, if NPS is greater than 20, you have an opportunity to raise prices.”
Remember that there’s a careful balance between extracting value from your customers and scaring them away. Owens advises that “if you do raise prices, it may also be prudent to introduce methods to take the sting off, like ‘pay in advance for future usage,’ to help customers manage their costs.”
In 2023, many customers will be grateful for SaaS companies that provide ways for them to reduce their spend, rather than dropping out completely in response to price increases. Usage-based pricing can be another good option here and a valuable pressure valve. The customer can naturally adjust their spend without having to negotiate with, or even speak to, you — they can just use less.
5. Consider flexible pricing
If you anticipate that your customers will want to cut back in 2023, there are a variety of ways to hold onto them, from discounts for commitment to bespoke pricing. You can also choose to combine pricing models in a hybrid way — something that is likely to grow in popularity across the SaaS ecosystem in 2023.
“In the past, people got scared that it was one or the other — usage-based pricing or legacy pricing — or that it required a ton of changes to make the switch,” said Kyle Poyar of OpenView Partners. “Now it’s clear that isn’t true, especially with hybrid models.”
By exploring a hybrid model, you can test a new strategy in a gradual and controlled way. You may even find that a hybrid solution is the ideal (and lasting) pricing strategy for your business.
Whatever you choose, 2023 is not going to be straightforward. In spite of that, though, neglected levers are worth your attention. If you think creatively about pricing, growth is still very much on the cards.
Griffin Parry is CEO and cofounder of m3ter.
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