Ryan Lawler

2 March 2020

3 min read

This video is a part of our ClassroomX educational series on the nuts and bolts of building a startup today. From defining your business model to growth, product strategy, and building your community, these 15 lessons by domain experts aim to equip young founders with crucial insights to transform their early-stage products into viable businesses.

How to establish a B2B SaaS pricing strategy

A good pricing model is a vital part of the go-to-market strategy for startups. It has the potential to increase both initial average revenue per unit and growth. Yet, software companies often struggle to find the right pricing.

What you'll learn from this lesson:

About Ulrik Lehrskov-Schmidt

Ulrik Lehrskov-Schmidt, the managing partner at Willingnesstopay.com, helps B2B SaaS companies with pricing and is the author of several books on the topic of pricing design. He holds an MA in finance from Harvard University.

Price the customer, not the product

"Trains and software actually have a lot in common," Ulrik told entrepreneurs at the program. Both trains and software take people on a journey — whether it's across a country or to better business outcomes. And both have customers with different destinations and prices in mind.

Call them the first-, second-, and third-class passengers, Ulrik suggested. "And if you approach your railroad pricing with the idea that you have to find the optimal or the best ticket price, then you're going to test out different things," he said.

Use fencing for customer segmentation

Ulrik advised entrepreneurs to use fencing strategies — segmenting customers into broad categories with different needs. This can be as straightforward as separating customers into B2B and B2C, or business and nonprofit categories, with different pricing for each.

But Ulrik also stressed that fencing, while good for many companies, won't work for every company. "If it feels awkward or contrived, or you have to get too creative, or your customers don't immediately understand it, don't do it," he said.

And while most customers will not jump their fence to other categories, customers can outgrow the features of one pricing tier and need to upgrade. That's when laddering comes into play.

Use laddering for pricing models

Laddering means creating pricing tiers for software features that solve increasingly complex problems.

While price laddering is a common approach, it's one that companies often get wrong. Companies typically bundle their advanced features into an expensive version and their not-so-exciting features into a cheap version. "That's the wrong way to do it," Ulrik said.

Instead, it works best to think in terms of solving specific problems for specific groups of customers and price accordingly. "This is basically where you upgrade a third-class passenger to a second-class to a first-class over time," he said.

Price value, not features

Companies also typically price their SaaS software by user licenses or company size, but that's often the wrong choice as well, Ulrik said.

Instead, it's helpful to think in terms of pricing the value a customer gets from the product. In the case of one of Ulrik's customers, the right pricing structure turned out to be based on the output of the software they were using.

The customer's software creates AI models. And those models produce the most value for customers in terms of models created. So, he advised pricing based on number of models created. "Get rid of price just based on features," Ulrik said. "Let them have all the users they want."

It was a win-win for everyone — more revenue for the software company, and greater value for the company's customers.

Finally, when considering types of market research, asking customers for feedback on pricing can be effective. "It's actually in their interest to answer truthfully because nobody wants weird pricing," Ulrik said.

While customers may not tell you exactly how much they will pay, they will give you feedback on your pricing model. And that, Ulrik concluded, can prove invaluable to B2B SaaS companies as a lynchpin for scaling their product in the marketplace.