Is your Enterprise software rightly priced ?
One of the most important decisions of a newly formed SaaS company is to determine a pricing strategy. There are two important facts that I wish to share here when it comes to pricing your Enterprise/Flagship product.
Most often the 3 most common pricing strategies used by SaaS companies are as follows,
- Feature based Paywall.
- Per- user based Paywall.
- Cost based on depth of usage.
So much is written about pricing strategies, however I would like to focus on the Enterprise / flagship offering of a new company and the science behind the difference in pricing.
The Veblen Effect :
The tendency to find a product desirable because it has a higher price is called Veblen effect.
In Economics, the price and demand of commodities are inversely related, a relationship known as the law of demand. The law of demand predicts that given two equivalent products, a lower price will increase demand and a higher price will decrease demand. The Veblen effect is an exception to this law of demand. The economist Thorstein Veblen observed that in some cases increasing price can increase demand and decreasing the price can decrease demand.
The Veblen effect in marketing and pricing results in the cost of the end products being incredibly overpriced. Consider the case of Zendesk, as described by Tomasz Tunguz in his blog and how they increased demand for their Enterprise offering by taking advantage of the Veblen effect.
The Veblen demand curve isn’t limited to the purchasing patterns of luxury goods. It also manifests itself in SaaS sales processes. Bill Macaitis, the former CMO of Zendesk, described Veblen goods behavior when he and the Zendesk product marketing team began to address enterprise customers to complement their booming SMB (small-and-medium business) business. The product marketing team initially charged a modest premium for the enterprise product. But the experiment failed. Demand was immaterial. As they experimented with other price points, the team discovered demand surged as the price ballooned.
Today, the Zendesk enterprise plans cost 10x as much as standard plans.
Enterprise buyers, like Veblen’s luxury class, exhibit different buying preferences from other segments. Because their willingness to pay is substantially higher than smaller businesses, these buyers often equate price with quality. At a very small price point, they ask a natural question: Since the product is so inexpensive, is it a a toy or true enterprise solution?
Enterprise buyers, like Veblen’s luxury class, exhibit different buying preferences from other segments. Because their willingness to pay is substantially higher than smaller businesses, these buyers often equate price with quality. At a very small price point, they ask a natural question: Since the product is so inexpensive, is it a a toy or true enterprise solution?
While this idea worked for Zendesk, it may not be the case with your product. Most companies today price their Enterprise / flagship edition based on this idea and sadly startups adopt these methods without ever realizing how much new business and value based customer additions they can make(increase LTV) by not conforming to Veblen effect.
This begs the question as to what is an alternate approach to fixating the cost of Enterprise software. Look no further than Basecamp.
The Van Westerndorp Price Sensitivity Meter:
The founders of Basecamp despise the idea of overcharging their products and came up with an alternate idea to price their products properly. One of their earlier methods was to use a Van Westerndorp price sensitivity meter to survey and gather insights to understand the value of their product from an SMB perspective. Below is an example of the survey screen and the expected results on this survey shown below,
The intersecting points help determine the Range of Acceptable prices which will help us gauge the cost of the product.
The Van WesternDorp PSM is Common in consumer goods industry, one of the major drawbacks of this survey however is the tendency of people to undervalue a product because of Anchoring effect the existing price has on the survey.
However, proper segmentation and aggregation of data will point unilaterally in a direction where the cost range of product can be equated to customer approval. This method helps Basecamp and many other companies stay their course when it comes to pricing their products sensibly strategy.
The Veblen pricing trajectory may sound more practical from the point of expansion and revenue but sometimes the high cost of the product eclipses the problem the product solves and more importantly shuns smaller companies from using the software which is so much customers lost definition.
SMB’s are more profitable in a company’s active business and it is recommended that your products don’t shun them away due to Veblen effect.
On a closing note, there are 9 types of company brands as given below and we can categorize any company into the following
The Veblen effect is the driving force of major luxury brands.
Business software in my humble opinion should never be a luxury to use. Its an essential commodity in todays world and startup companies should orient more towards value based offering than luxury or working with the notion of being a populist brand ,
In the end, the secret of creating a value based pricing rests in the maxim
“Charge customers what only you are comfortable paying yourselves for”
lokesh-kannan 