[tweetmeme source=”pricingright”] There is nothing more profitable to a marketer than the ability to price the same product at each customer’s willingness to pay (and get away with it). The next best thing is to define one version for each customer with the right value-price combination. But there are costs to versioning, I wrote about the four costs:
- Product Costs- Cost to create the different versions
- Sales and Marketing Costs
- Menu Costs – Maintaining all those SKUs
- Customer Costs – Incurred by your customer. This is what it takes for your customers to understand your multiple versions
If your offering is SaaS based and your go-to-marketing strategy does not involve an expensive sales force, it is arguable that your first three costs are close to $0. It is very tempting to use the magic of software configuration to define and offer one version per customer. When the customer comes to your website to signup, if you can show them just the one version that is right for them and nothing else, then you have achieved the marketing nirvana – pricing at each customer’s willingness to pay. Since this ideal situation is not possible, you have to present them all your versions and let the customers self select.
Product costs, Sales and marketing costs and Menu costs are incurred by you, so you can control them and reduce them to $0. But the customer incurs the cost to select your versions. This cost is a double whammy:
- Presented with multiple versions, it will not be obvious to customers which is the right version for them. Your customers need to spend time thinking and evaluating these options and make a choice. That is a significant tax on them.
- While we should expect that once the customer picks a version and signs up, this costs becomes irrelevant (because it is now sunk cost), only it does not. Research shows these costs are sticky – customers remember and associate these costs with overall product experience.
So not only it is tiring for your customers to sign-up, the feeling lingers through out their lifetime (with you). Even though your product experience may be exceptional, its value to customers is reduced by the one-off buying experience. If the customers have to go through this process at each renewal instance, they are never allowed to forget the costs.
Sheena Iyengar, author of the recent book, The Art of Choosing, and a prominent researcher in consumer behavior writes in her 2000 paper,
Customers are more likely to make a purchase when offered a limited array of options than a wide range of choices. Subsequent customer satisfaction is higher if the selection choice set is small.
In addition, customers’ willingness to pay was higher when presented with fewer options.
So what should be your versioning strategy for your SaaS offering?
- If you can only present the same pricing page to all your customers then practice Goldilocks pricing. This is three versions, a low, medium and a high priced version.
- If you have a way to not show all versions to all customers – for example, enterprise version to SME customer – then offer three versions for each segment.
What is your versioning strategy?