Continuation of episode 24. Today we continue the conversation from episode 24 on pricing and packaging. We begin with an examination of freemium vs. try buy and their specific use cases. We address how to set a price and where to start. Lastly we discuss price increases for SaaS products.
If you enjoy the episode, check out Stijn's new book. Coming soon.
Hello and welcome to episode 25 of B2B SaaS Marketing Snacks. I'm your host/introduction giver, Richard. I work on the product team here at Kalungi, alongside Mike. And today's episode is going to be a continuation of episode 24, where we talked about pricing and packaging. So we're just continuing that conversation. Feel free to listen to episode 24, if you haven't already, but also feel free to stick around even if you haven't. This is a great episode on its own. Today's episode is actually in the true spirit of the podcast when it started, that meaning that it's snack sized. This episode is only going to be about 11 minutes. So that should be great. But without further ado, today we're talking about freemium versus try-buy and what they are really and how to use them, how they're different.
And then we're going to be talking about how to actually come up with a price for your SaaS offering, so how to get to that first number. And then lastly, we're going to be talking about price raises. So how do you deal with incremental price raises? Should you raise your prices? Why should you raise your prices and when? And I'll give you a hint, you definitely should be raising your prices. And it's a good thing to do. So without further ado, I'll hand it off to Mike and Stijn and I hope you enjoy the episode.
Okay. So, earlier you mentioned both freemium and try-buy. What are the differences between those two?
Yeah. I only found this myself years into doing SaaS marketing. I was often putting those on the same heap and they're fundamentally different if you really get behind what they are supposed to do. A freemium premium model works really well if you have an established category, where the market has commoditized partly, and there are multiple solutions that can do the same things. But you want those users, you want those customers, because you don't want them to start using a competitive product. And that's where a freemium product is a fantastic way to do so.
And you have to of course, be very careful that that freemium service is not very expensive for you to deliver, because you don't want to make a big loss on that. But what you want to do is get those customers who otherwise, maybe would try a product from a competitor. And then you now have them on your service and you can try to upsell them to your premium plan. Which of course has to add, it has to generate a lot of unique value that maybe is not available from your competition. So that's freemium premium.
Try-buy is very different in the sense that when you do try-buy, you don't want them to experience the product that is not your best. That you want them to start in your hero packets, to get the full value-
As soon as possible.
-as soon as possible. And especially when you're in a market where you're creating the market, you're creating the category, you're trying to prove that this is an important solution for them. You want that to be a great experience, including all the value. And then of course the trial period has to match the time it takes for them to actually experience that value, because you don't want the trial to take too long. It's typically onboarding plus value realization. And then the trial has to turn into a very concerted effort to have them pay, because they have now experienced so much value they don't want you to take this solution away. And that could be 30 days. It could be a three days trial. It could be a couple months if needed, depending on the type of product.
But freemium premium, we don't really do that. If it's freemium premium, you're actually okay if it's all of these customers that keep using your freemium product for a long time. There might be other ways you're monetizing that, you might be selling the data that you get from your freemium users, or use that to improve your products. There might be other ways to monetize that, but it's definitely not the same as a try-buy where you really want to sell that premium product right away.
So how do you land on the first version of your actual pricing? So when you think of the pricing tiers, let's say the basic version is $10 per month, the premium is $30 per month, and the pro is $50 per month. How do you actually get to those numbers? How do you put an amount on each one of those?
Yeah. It's really important to go through a real MVP stage with your product, Minimum Viable Product. And when you do so, you have very intimate contact with the people who are using the solution that you've created. And you really want to understand what amount of value gets created and what they're willing to pay for that. And that really requires you to actually ask, “what is this worth for you?” And once you've done that and you get to Product Market Fit, then you start tweaking that, of course, based on real experiments. That I think is really important to just ask.
How would you go about raising the price after, let's say you've gotten to product market fit, and now you're trying to increase the average revenue per unit. There's probably going to be some friction with existing customers, when you do decide to raise prices. Do you have any thoughts on how you can navigate that scenario?
Yeah, Mike. I think you should always have a constant evaluation of, can I raise my prices? Can I get away with that? Because you're constantly improving your product.
The essence of being a SaaS is that you have the obligation to your customers to constantly create more value.
And that's partly because they're going to pay you again in the future, but you're typically also allowed to ask them to pay more. Partly also because of inflation.
So how do you do that? I think what's really important is that when you raise prices, that you provide choice, or at least the perception of choice. So you can say, "Hey, we're going to raise the price," and you do it in a way that is predictable. You do it in a way that you give some advance notice. And then you allow your customer, for example, to lock in the current price if they don't want to pay, for multiple years, maybe. But then of course they have to commit. They have to commit for the current... And that provides a little bit of choice. Right, they can choose either to commit now and lock in that price or to pay more in the future.
I think it's really important to make it almost feel like a benefit for them as existing customers, that they're able to lock in the price. Versus new customers will have to pay that new, higher price. But a three to five percent price increase yearly is very normal. I've seen companies also bake that in their contracts, this is automatically happening.
Escalator.
Just like with storage units. There's many other examples out there. And then your customers will have to determine whether the friction of switching to something else, or maybe canceling, and then maybe the chance to have to come back later, is worth it. And usually five to 10 percent price raises are far easier than people think they are. Of course, then you have to execute them with good communication. Don't be sorry for raising prices. It's pretty normal. It's just basic economics, but have good communication. Make sure that your partners, your customers know first, before your sales team starts charging them more. That they have the good advanced notice.
It's also important that your customer success team is always managing client relationships, so that when there's a price increase it's not the only thing they hear from you. But in the end, it's also not very different from the rent that gets raised automatically almost for some people. And that's not a big deal. It's not fun, but people understand it.
Well, at the end of the day the idea is to make it so that people are getting so much value from the product that when you do say, "Hey, we're raising prices." They say, "Yep. That makes sense, actually. And that's not a big deal." I think back to, recently last month or the month before, Figma changed their entire pricing model. They changed their pricing unit actually, which meant that it hamstrung a lot of the people who were using the free product. And even then, now we have to pay a lot more to use it. It's a little bit of a pain, but at the same time, the product is so good. I wouldn't even consider looking at a different one, because we get so much value from it. It's so much better than everything out there, that they could keep increasing prices and I would say, let's keep paying for it, because it's worth it.
And back to also, when you communicate it, that the customer has the feeling that they have choices. There are many things you can provide of value in exchange for the price going up. There are many things you can provide when you raise your prices that allow them to give you something else. So that the price may not go up, but they give you something else of value that replaces that. If they want to do some pre-pay, another form of a commitment. If they want to maybe go from monthly payments to quarterly payments, which reduces the amount of time or cost off of invoicing. Is there a liability or another part of the terms of service that you can lower, where you can lower your exposure of risk in exchange for maybe the price not going up. There are other things you can do to make a customer feel that they have a choice. And I think that in the end is the most important part, is you make them feel empowered that they're behind the decision. And including also they can leave you, which is fine. And that often, by the way, doesn't happen as much as people are afraid it does.
But yeah, the bottom line, you should on a regular basis, consider raising your prices.
How often do you think?
If you haven't done it for a while then do it now. Otherwise, do it every year at least.
Okay. Good stuff.