Torben Friehe
No matter the circumstances, SasS pricing is always challenging and always will be. Underpricing your product, using a pricing model that is not working for your ICP, not offering self-signup or offering the wrong features as add-ons — all of these pricing and packaging issues (and many more) can cost you a lot of revenue.
But the economic downturn has added another element to the mix. Common wisdom tells SaaS founders to adapt their pricing according to changing market conditions, but is that actually helpful advice for SaaS founders? As far as I can see, it isn’t for most.
Undeniably, the economic downturn will change buying behaviors and decision-making processes for some of your potential customers. But it’s wrong to assume that this means you are overcharging for your product in the current market.
In reality, most budget cuts right now, unfortunately, are the big ticket items (staff). SaaS is comparably just a drop in the bucket. However, that doesn’t mean SaaS is totally safe either. Companies are looking to trim the fat on their teams, often reconsidering entire workflows, and weighing which software can help fill in the gaps. This is especially true of low-code/no-code products where customers can make do with fewer pricey engineering resources. In this sense, SaaS products are just as much a part of the equation.
When you see your numbers not picking up (or maybe plummet) it can get very tempting to frantically start changing your pricing, offer discounts or second-guess your strategies. But before you embark on a price-slashing journey, do some careful analysis. If your sales numbers are lagging behind what you expected, there is another question to ask: What’s actually wrong with your SaaS product or its pricing?
It’s important to make a distinction here. Does the real problem lie in how you’ve valued (priced) your product? Is it the market’s impact on your product’s demand? Or is there a problem with the product itself? Each of these are entirely different diagnoses with different prescriptions.
If the problem is how you’ve valued your product
This is a more endemic and chronic issue that’s probably plagued your top line (and your conversion and churn rates) for a long time. Overvaluing your product, certain parts of it or misaligning the features that are truly valuable will lead to customers finding a more fairly priced solution or getting frustrated due to overpricing. They will try to find ways to, for example, share logins or “hack” your pricing model in some other way.
So if you’ve never worked to understand which parts of your product are most valuable to your users and why, the economic climate today just happens to be the straw that breaks the camel’s back. You probably need to make some changes.
Here’s the kicker: If your product’s value is so high that it saves your customer costs elsewhere, its price should actually go up. For example, if they’re able to cut two other tools and manage with only yours, you’ve saved them money, and the relative value of your product is now greater for them. This adverse economic climate may actually be a time when you have more leverage and can demand higher prices for your product.
This is why any smart SaaS company will tell you that now is not the time to cut any product people and instead to keep investing in your product.
If the problem is with the market’s impact on demand
This isn’t an unforeseen outcome. Many businesses were just created during this time of milk and honey and this is the first time they’ve had to confront a downturn.
The product is doing what it’s supposed to, which is responding to the market. Some industries are being hurt, but these are not related to pricing — it’s because the value of the product is fundamentally tied to the economy in some way.
For example, a fintech with a transaction-based pricing model will be affected by a downturn if its customers aren’t able to transact as much because they have less cash on hand. It probably failed to align price and value in the past, but it did not matter to most of its customers.
Thinking through a pricing and packaging change right now can help you flourish when things are better again. It can even help you retain more customers when the next downturn comes around.
Finally, if the issue is with the product itself…
Any CEO or founder will tell you that if they’re considering cutting costs, they won’t be cutting Zoom, Slack or Atlassian. Firstly, those services cost a smidgen of all their other costs. More importantly, these tools are likely essential to maintaining the business and keeping their employees productive.
The keyword here is “essential.” If your product isn’t actually essential to your customers, it’s probably going to be disposed of, if it hasn’t already. The downturn is just the forcing function.
So if your SaaS product has survived budget cuts so far, chances are high that it is essential to your customers in some way. That’s great news, because it already survived one or two cuts, and you should probably increase your price rather than consider reducing it.
I’ve spoken to more than 700 SaaS companies about their pricing and packaging. Based on 50 conversations with founders over the past three weeks, I can tell you that during this downturn, some SaaS companies are growing like crazy while others are struggling to even get their first few customers. If you belong to the latter group, you shouldn’t jump to the quick and easy solution of cutting prices. It may seem like it will solve your problems, but it won’t resolve the underlying issues.
Rather, I’d urge founders and CEOs to spend some time thinking about the value their product actually provides. Could a change in your sales narrative help illustrate the value of your product? Could more targeted messaging for your ICP ensure that important customers feel better understood and see more urgency in buying from you? Should you evolve your initial sales playbook so that recent knowledge informs the way you approach calls with customers?
It is tempting to assume that reducing your prices will solve your sales challenges. However, talking to your customers, understanding their pain points, refining your ICP, shipping the right product and aligning pricing with the value you provide will be more important for growing your revenue. And that’s just as true for a bear market as it is for a bull market.
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