Pricing Analytics Guide For 2022
In this article, I will talk about Pricing analytics, why it is important SaaS and how you can better utilize it for your own business. If you want to learn more about using pricing analytics more efficiently, this is the article for you.
What Is Pricing Analytics?
Pricing Analytics refers to the metrics and software tools to calculate how your pricing can affect your business. These tools aim to help you determine which pricing strategy would be best for your business.
The tools aimed at helping you with your pricing analytics achieve this by running multiple experiments to conclude which pricing range would be best suitable for your company. By looking at the examples of other products, you can determine where your company is in its laffer curve.
Why Is Pricing Analytics Important? (For SaaS)
Although all companies need to calculate their pricing carefully, SaaS companies need to be extra careful. The main reason for this is that SaaS companies usually rely on subscriptions as a business model.
Many SaaS companies operate with a subscription model. What makes this model especially important for pricing analytics is that you will require your customer base to subscribe again and again for you to get a stable income.
Even the slightest fluctuation in your pricing range could result in your hard-earned customers unsubscribing from your services. Before changes are made, you need to consider how your customer base would react to a possible increase (or decrease) in your pricing.
This pricing aspect is similar to Laffer Curve, named after American economist Arthur Laffer. You can experience an increase in your income if you raise your prices, but going too far would result in your customers looking for alternatives, causing a fall in your income:
How To Interpret Laffer Curve for SaaS
Here is a shortlist explaining the different sports in the second picture:
- Point A represents the point where you are giving away your product for free. Although this means that you will have no income from selling your product, you can still gain revenue through ads or donations.
- Point B represents where you sell your product slightly lower from the golden ratio. Although this might bring you more customers than C, E, and D, your income will be lower than E and almost as same as C.
- Point C represents a point where you sell your product slightly higher than what it could be. Although an individual would pay more for your product, this method can result in a fall in the number of customers, meaning you will not get the most out of your customer base.
- Point D represents a point where your pricing is so high that almost no one will use it. This point is just the opposite of point A, where you got a lot of customers.
- Point E represents the sweet point where you get the most efficiency both from your product and your pricing. This point is what you should be looking for while deciding your business strategy. Do not forget that every different plan you present to your customers should be calculated differently by your team to take different user compatibilities into account.
What are the 5 C’s of Pricing?
There are five central C’s of pricing that will help you determine your pricing strategy. These are called Cost, Customers, Channels of distribution, Competition, and Compatibility.
Here are some short explanations regarding what they are and why you should take them seriously for your pricing analytics journey:
I know that this is the most obvious. The cost of your product directly affects your price, and you can’t determine your price without comprehensively analyzing your costs. This situation applies to both SaaS and regular businesses.
However, SaaS businesses have an edge over traditional companies in this subject. In traditional companies, costs can change drastically according to external factors. On the other hand, SaaS businesses have more control over their expenses since they are not dependent on external factors like conventional companies.
However, this advantage over traditional businesses means little, considering your product will likely compete with other SaaS products. Still, that does not mean that you should not look for ways to reduce your costs as much as possible.
Customers are your target audience when you are trying to market your product. The bigger the target audience you reach, the better. The more existing customers you retain through user activation, the even better. Your customers ultimately decide whether or not your pricing suits their needs.
To better understand what customers are looking for, you need to put yourself in their place. A detailed data analysis of your target audience might help you figure out what they are looking for particularly. Churn surveys are a great way to achieve this.
- You can conduct churn surveys through the mail, SMS, and interactive website add-ons.
3.Channels of Distribution
Channels of distribution refer to the medium through which you sell your product. This aspect is more of a problem for conventional businesses that need to find middle-man to sell their product. Having more middle-man means that you will have increased costs, which will raise the price of your product.
Fortunately, most SaaS businesses utilize their websites and reduce the number of middle-man to the minimum. For example, our website design in HockeyStack allows a pricing page through which customers can buy the product, basically allowing us not to need the middle-man.
Humans usually employ a comparative method before buying a product. This fact applies to SaaS businesses as well. Since many people learn about SaaS businesses while on board, they will first compare you to other companies in your field to determine your value.
Users usually compare the cost, the features, and the reviews. You need to convince them your product is what they need compared to your competitors. You can persuade them by building your brand around a specific feature like how cheap it is or how it increases the user retention rate.
This approach will attract new customers and allow you to have a customer base that will do your marketing.
Note that while calculating your pricing according to the competition, you should always take industry forerunners as an example. If you are a movie/show streaming platform, looking at the prices put forward by Netflix is one of the first things you should do.
As much as your customers choose you among your competitors, you also pick your customers. Your product and its structure will determine what kind of audience you appeal to. Although it is best to reach as many people as possible, conditions do not always allow that.
You can choose to reach a broader audience that cannot pay high prices but will bring you revenue through sheer numbers. This attitude is the best choice for companies whose target audience is plenty.
You can also reach a smaller audience that would pay relatively high sums to use your product. This method is most suitable for tailor-made products that appeal to a specific audience.
You can also try to be a jack-of-all-trades and find the middle point in between.
Whatever you do, the important thing is to stick with your strategy.
Understanding your company’s compatibility will also help you determine how to land in the best place in the pricing/revenue chart.
How Do Pricing Analytics Improve Sales?
In SaaS marketing, it is not enough to get the data about your customers and sales. It is crucial to analyze those to find patterns and utilize them to increase your sales.
This is the place where marketing analytics come in. Marketing analytics tools follow patterns in marketing and sales metrics and suggest which steps to take to increase your sales. Here are some pattern tracking options that will enable you to gain an edge over your competitors.
1.Learn More About Your Customers
As I have mentioned with the compatibility section in the last part, it is crucial to determine which customers are prone to make purchases. Pricing Analytics allow tracking which segments of customers are most or least profitable. This feature will enable you to determine your price according to your business strategy.
To learn more about your customers’ behavior, you can utilize software such as HockeyStack to analyze their patterns. Hockeystack can track what your customers usually look for in your website, allowing you to strengthen your strong sides while fixing weak ones.
2. Learn More About Your Competitors.
Competitors are always an essential part of your pricing strategy. Pricing analytics allow you to track your competitors’ pricing strategies and how they affect your target audience. By checking out your competitors’ prices, you will find the median price in your sector. Learning the median price will enable you to set your prices accordingly.
Top Pricing Metrics To Track
Without understanding the basic terminology of pricing analytics, it is not possible to use your pricing analytics most efficiently. Here are some fundamental metrics you should track to maximize the efficiency of your marketing campaigns.
1.Revenue per plan
Revenue per plan sometimes referred to as RPP, refers to the average revenue you get from a plan you provide for your customers. Here is what needs to be done to calculate your Revenue Per Plan. You need to multiply the number of customers who chose a specific plan with the price of that plan. The result you get is your RPP.
Revenue per plan allows you to which features are and price range are more suitable for the customer base you are appealing to. This plan is a great way to find the most efficient way to market your product.
In addition to providing your customers with pre-determined plans, you can also create customized plans that customers will decide the features of. This sort of customer relationship is bound to improve your brand loyalty. Trying out the usage-based and tiered pricing models is a great way to achieve this.
ARPU, often referred to as average revenue per unit, is an indicator of profitability that you will gain over the sale of every unit. This number can be fluctuating if you experience seasonal booms.
ARPU is usually calculated by dividing your total revenue by sales made. This calculation is a straightforward process that can be carried out easily so long as you know your metrics. However, pricing analytics software tools can calculate this metric between specific periods and save you the hassle by giving you notifications.
This calculation is often carried out every month, and comparisons are made between the current result and other reports made throughout the year.
- Please note that ARPU is not a GAAP measure, although it is mistaken as such often.
3. NPS per plan
NPS, abbreviated for Net Promoter Score, is a customer loyalty and satisfaction metric that you gain through asking your customers how likely they are to recommend your product. This metric is directly related to your customer’s brand loyalty towards your product.
This metric is usually calculated on a 10 point scale. 0-6 represents “detractors” that are not only unlikely to recommend your product but would also try potential customers not to try it. Your aim should be to keep the number of detractors to the smallest amount.
Users who fall between 7 and 8 are called “passive.” These users can talk to other people about your product positively and negatively. These users have no strong feelings towards your product and usually prefer to stay indifferent.
Finally, the users that fall between 9 and 10 are called “promoters.” These users strongly support your product and usually suggest your product to potential users. You should want the number of promoters of your product to be as high as possible.
Conducting churn surveys are a great way to calculate your net promoter score. You can also put interactive sections on your website to measure the quality of the user experience. Answering user reviews and solving the problems they talk about is a great way to increase your net promoter score.
4. Lifetime Value
Lifetime Value (LTV), often referred to as Customer Lifetime Value(CLTV), refers to the profit a customer provides you through the entirety of your relationship with them. This metric is also a great way to calculate how important it is to retain your customers.
Lifetime Value is significant for companies that appeal to a specific customer base. Since few people are looking at your product, it is essential o make the most out of people who need it.
However, the lack of customers will also mean a lack of companies operating in your sector. This condition means that you will be more independent about dictating the price of your product.
5. Willingness to pay
Willingness to pay (WTP), often called price sensitivity, is the top limit a customer is ready to pay for your product. This metric is determined mainly by the 5C’s of marketing like your customers, costs, compatibility, and competitors.
Willingness to pay is easily the most important metric you should track. Without understanding how much your customers can spend, you will not get the most out of your marketing strategies.
This metric is directly affected by your compatibility. If you are appealing to a specific audience with higher capital, this audience would be more likely to use your product for higher prices.
What are the different pricing models?
Companies utilize different pricing models. These are called value-based, tier-based, usage-based, and competition-based. Here is a short list of them with their explanations:
The value-based pricing model determines the price depending on how much value the user attributes to your product. This strategy means that your product’s price will depend on how much the customers value it.
Tier-based pricing models aim to create multiple versions of your product with different features, allowing customers to choose whichever they prefer. This model is one of the most common models utilized by SaaS companies like Dropbox and Protonmail.
Usage-based pricing model, as it can be deducted from the name, calculates the price depending on how many services are utilized by the customers. This model is a great way to create customized plans for your users.
The competition-based pricing model aims to set the product of your price according to the price chosen by your competitors. This model is a great way to determine your price if you are a newcomer in a field. You can utilize this method with other models mentioned in this part.
In this article, I have defined what pricing analytics is, why it is essential and different metrics you should keep track of to achieve success in your pricing strategy. Although there are multiple methods to calculate which pricing works for you, do not forget that you need a pricing analytics tool to begin this process.
If you want to learn more about operating your SaaS business, do not forget to check out the HockeyStack blog and documents shared on our website.
There are four main pricing models for SaaS. These are called value-based, tier-based, usage-based, and competition-based.
NPS stands for Net Promoter Score. This metric calculates how much your customers are prone to suggest your product. This calculation is an important metric to track if you want to reach new customers through your existing ones.
The answer to that question depends entirely on your product, target audience, and marketing strategy. There is no simple answer to this question.