Transforming SaaS Pricing: Strategies for Value-Based and Outcome-Based Models with James Wilton

[00:00:02] We do talk about pricing strategies all the time, but often times we're coming up with the same ideas over and over again. I think there's changes going on in SaaS pricing, and James D. Wilton thinks so too. In fact, he's written a book, Capturing Value, The Definitive Guide to Transforming SaaS Pricing and Unshackling Growth, and we talk about what those strategies are, how they relate to services businesses, and go deep dive into some of the thoughts of how to implement value pricing.

[00:00:30] on this bonus episode of The Business of Tech.

[00:00:35] This episode is supported by Comet Backup. Whether you get hit with ransomware, hardware failure, or human error, there's nothing more heart-stopping than losing business-critical data. Backups are your final stand when a threat penetrates your layers of defense. That's where Comet Backup comes in. Comet is an all-in-one backup solution. Whether you need to protect computers, servers, virtual environments, emails, or databases, Comet Backup empowers you to manage backups on your

[00:01:01] terms. Visit Comet Backup.com to start your free 30-day trial today. Get $100 free credit when you sign up with the promo code MSPRADIO. Start running backups in 15 minutes or less. Comet Backup, the backup solution that MSPs trust. Well, James, welcome to the show. Thanks for having me, Dave. Happy to be here.

[00:01:26] Well, I'm excited to talk to you because you're an expert and have written a book now on SaaS pricing. And for listeners, what intrigued me here is thematically, I think SaaS pricing and services delivery pricing, if they're not the same, they at least rhyme.

[00:01:44] So I thought what I would sort of say is, hey, take a moment and talk to me a little bit about your approach to putting together SaaS pricing so that when we can start our follow-on conversation will be about applying that in services. Yeah, absolutely. No, I mean, I think the important thing here is that, you know, a lot of people talk about the differences between, you know, SaaS pricing and subscription pricing.

[00:02:07] I think the reality is that really the difference between SaaS and subscription really is it's mostly about the back end and the way that the technology is structured and so forth. In terms of the actual pricing strategy that you would build, it's not – the principles aren't really different. You might have some different options in terms of, you know, how you scale the price, how you package up your different offerings. But the principles you think about and the process you go through are exactly the same, right? It's all about thinking how much is your offering worth?

[00:02:36] Obviously, getting to that price level, how do you scale the price of the offering for different customers with different willingness to pay, different needs? What are the different options that you would create? Indeed, if there are any, are there different tiers? Are there different ways of buying it? So I think all of those structural decisions that you need to make a SaaS pricing strategy, you also need to make a subscription pricing strategy for anything else. Gotcha. And thus, I can extend it.

[00:03:06] I think it'll apply all the services. One of the things that you've covered now that I find really interesting is you've been looking at disruptive pricing models in SaaS. Tell me a little bit more about what you're seeing in sort of the disruptive models. Yeah, absolutely. I think there are, well, there are several things that are coming out now. I think a lot of what you're seeing in SaaS right now, there are, it's really been disrupted by AI, right? Probably pretty obviously. And you're asked to see some different models coming out around that.

[00:03:32] The one that everybody's talking about right now, which is also very relevant for services actually, is outcome-based pricing. Which is where instead of pricing in a traditional way and scaling by traditional metrics, like in a SaaS company, often by number of seats or in a service company, just by number of hours of different people. You are charging for something which relates to the outcome which the offering gets. So how much value is created charging based on that.

[00:03:59] But I will say that there is, it's interesting because outcome-based pricing has always been there. And it's always been held up as this thing, which is in theory, the gold standard of pricing. It's perfect, right? Because you can charge for exactly what kinds of value you are producing. But it's practically quite difficult to do because you need to be able to get the customer to agree that that's the right level. That's the right way to price for the beginning.

[00:04:26] Secondly, if you're measuring some kind of an outcome or some kind of metric, you need to make sure the customer believes that any change in this metric or outcome is being driven by you, the vendor, as opposed to anything that they're doing. And that can be difficult, the attribution. There's also baselining, which can be difficult, right? If this is a moving target, where do I start measuring performance from?

[00:04:48] And I think the other thing is if you are doing outcome-based pricing, you'll basically have to delay your revenue until the outcome has been produced, right? Which obviously is something that not a lot of providers are always happy to do. But it's disruptive, I think, because if you can do it, it's very related to value. And customers like the idea of it, even if practically it often gets turned down in favor of something a little bit more predictable and familiar.

[00:05:16] Now, this is really interesting to me because the code we've been using in services all the time is delivering business outcomes. I hear all the time now, right? You need to engage your customers and you need to deliver business outcomes. I'm confident you've given a little bit of thought to best practices or approaches, at least, to the way top performers are doing this. Can you give me a little bit of the kind of traits and things you're looking for that people are doing outcome-based pricing really well? Yeah.

[00:05:46] Yeah. I mean, I think firstly, the key beginning point is you have to have a very clear idea of the way that you create value for your customers, right? What is ultimately what's going to result in value for them? What are they looking to get? And that sounds like a trivial thing. It sounds like something that everybody should know. But I'll say it isn't actually that common that people have that very clear idea and are willing to go and do that.

[00:06:14] And then I think if you are going to go and do that, you also have to be a company that is willing to take the short-term hit for the long-term gain, as we talked about. And you also have to be able to think about what is a reasonable ROI for that kind of a model, given that you are going to be selling value. Because obviously, if you're pricing based on value, you can't take all the value that's created. Otherwise, there's nothing in it for the customer, right? You have to take a portion of it.

[00:06:42] When you're doing outcome-based pricing, you can take a larger portion of the value that's created than you could do if you weren't using an outcome-based strategy because you're putting your own skin in the game. But how much is it, right? Is it half? Is it a fifth? You need to think very clearly about those. And I think companies that do this really well have a really good sense about where is the right sort of point to shoot for. Now, I have an idea that was offered to me by a previous guest.

[00:07:11] And I kind of want to give it to you and get your reaction to the premise. Because as you described this, it makes me think of what Anders Inns had told me, which is this idea of, hey, one of the models that could start emerging is the approach of particularly services providers. Could now view their customers as part of an incubation project. That, in fact, if you're a technology services organization, you could be the incubation space for these companies.

[00:07:39] I want to throw that to you and say, hey, react to that premise. Is it possible now to build services orgs that are incubators? There are services orgs that are incubators for future product development. How are you thinking about that, Dave? I'm intentionally left off the last bit because it's the determine how they deliver value. But if you're incubating investment in technology and you're outcome-based and you're helping a customer increase their value and you're taking a piece of that, sounds like an investor to me.

[00:08:07] And so if I think about it in those terms and think about it as an incubator, it feels like you're offering that, which is a little different. And I want to get your reaction to that thinking. No, I mean, it does make sense, right? If you're just somebody who's there and you're trying to create value for them from technology in general, I mean, it's obviously a great positioning for you to have. I think companies are definitely going to like that positioning and be something they want to pay for.

[00:08:36] I would say, though, I think it does start to throw up that baselining issue that I talked about, right? Because let's say I'm starting with a customer right now who doesn't, we'll say for want of, doesn't get any value out of their technology at all. And you're going to take on this role and you're going to create value. So the first year or two, you create a whole bunch of value and you charge them for that. Great.

[00:09:03] Now, at that point, if the customer dropped you from their offerings, right, they would still have that amount of value that is being created on an ongoing basis from their technology. That's probably not going to go away. So how do you charge them going forward? Because if you're still charging them from the baseline of zero, I mean, technically, that is the amount of value that you have created. But you know that they can just decide to not continue with you and they don't have to pay you anything else anymore.

[00:09:30] So really, if you wanted to create new value in this next year, you'd have to reset it versus where you are. But, you know, is it not fair that you get continually paid for the value that you've created from the beginning? So it really creates a lot of issues just in terms of how do you match what is fair to you, the vendor, versus what is like practical and fair to the customer. Well, neither one of us is going to solve that problem in a few minutes we've got.

[00:09:55] But in order to be even useful at this conversation, it feels like data is critically important. And I know you've spent some time thinking about, you know, the key steps of making data part of this. Can you walk me through a little bit about your thinking about the way to approach data as it applies to pricing strategies? Yeah, absolutely. I think a lot of pricing strategy decisions, honestly, especially in the services industry, because I operate within the service industry.

[00:10:20] And I think consultants are as guilty as this as anybody else, even pricing strategy expert consultants. There's less of a willingness, I think, to, A, go out and get data on willingness to pay and how your value differential is seen versus your competitors, so that you can think about charging that and use that to inform your pricing decisions going forward.

[00:10:47] And that's partially to inform your pricing strategy, so just how we should be pricing and what should be our price level. But also inform those tactical pricing decisions as well, like how should we be responding if we're going for a project and the customer tells us that we are 20% higher than this other competitor that we are competing against and is trying to get us to reduce our price.

[00:11:15] I would suggest that a lot of the time, the natural reaction of that service company is to say, oh, well, we'll match what they're charging. But, you know, do you need to match what they're charging? Are you literally like for like with this competitor and therefore if you don't match them, they're going to choose the other one? Or is there something about what you do which is more valuable, which allows you to command a higher value, and therefore you don't need to be able to reduce your price that much or even at all to be able to still win the deal.

[00:11:43] If you don't have that database to be able to fall back on and make sure that you feel confident in your pricing strategy, you're always going to have trouble capturing the value that you're actually creating for your clients. Now, it's interesting to me that you brought up price sensitive customers because literally I was thinking about that. I wanted to ask you about this is particularly as we think about value pricing, one of the pushbacks is that it could alienate those price sensitive customers.

[00:12:07] How do you balance that like trying to lean into high value delivery yet at the same time wanting to have some level of appeal to more price sensitive customers? Yeah, exactly. I think the real way to navigate that is to think about price differentiation, right? And price differentiation for anybody who's listening who hasn't come across that term is it basically means charging different amounts to different customers based on the amount of value that they create.

[00:12:35] And I think in the services industries, there's a real reticence to use value-based pricing, right? Because most of the time we all use cost plus because we think, you know, there is we're in a business where there is there is a lot of costs, right? Like having a service industry when you're paying for people and people's time is there is a lot of cost to it. And therefore, our main priority is making sure that our costs are covered and we are able to be profitable. So we tend to think this is how much it costs me to deliver this.

[00:13:04] This is a reasonable markup. I will charge that. But I would suggest to you that you can still kind of do that by you can still do that cost plus idea, but still make it value-based by varying the plus, right? Like you might say that I want to, if for whatever strategic reasons, I want to be able to serve a company that is that is smaller and doesn't have the willingness to pay and isn't going to be able to pay a huge premium when I'm doing, I might make that plus smaller.

[00:13:32] Or if I'm serving a company which is much bigger and is going to be able to scale the services we are given over a much larger revenue pool and get a lot more value out of it, I might be able to make the plus significantly higher. And I'd still be able to sell to both of those profitably, but just make sure that I'm capturing the right amount of value across both of those situations. And of course, there's also packaging as well.

[00:13:58] I mean, I think this is something that people are more familiar with, but varying the level of service for different situations as well, so that customers can say either I'm fine taking a kind of reduced scale down service because I just need this piece of it versus somebody who might say I need everything that you guys offer and I'm willing to pay more for it.

[00:14:18] So thinking about that, what we would call a price structure, which defines how much customers are going to charge based on what kinds of offerings they are picking and how much you charge for those different levels based on those different customer characteristics. If you can do that, I mean, it really night and day changes your ability to capture value from your market. And I mean, you brought up packaging because that was exactly where my head was going at.

[00:14:45] It's one of the ways to approach this is repackaging your service offerings so that they are, you know, you eliminate a lot of like for like comparisons when you have different packages that allow for different approaches to that. You don't necessarily have to overwhelm a customer by presenting your entire a la carte menu, but instead have it available to me. So talk to me a little bit about the way you put together effective packaging schemes to address these kinds of challenges. Yeah, absolutely.

[00:15:11] So I think first point to make is that some packaging is better than no packaging, right? I think we tend to we always want to give our customers simple choices, don't we? I mean, to make it easy for them to pick. And sometimes companies will over rotate on that and say, well, the simplest choice is just literally, hey, here's our offering. Do you want it? But when you do that, customers don't have any way of kind of weighing up whether it's what they want or need or whether it's a fair price

[00:15:36] because they haven't got any kind of benchmark to compare it against unless they go to your competitors, which you probably don't want, right? If you're able to give them, here's a few different levels of service that we can give you, and they all have different price points. They've got a frame to be able to think about where do I want to be within this, right? What is the right sort of price to value relationship for me and what do I want to pick? Just giving them those couple of simple options is going to make them more likely to actually make a buying decision. And I think a lot of people don't realize that.

[00:16:06] It breaks down quickly. You should know as well. I mean, once you get too complicated, then obviously they start to become less likely because it becomes overwhelming. But this is why that idea of good, better, best or tiers is so prevalent is because it does allow this simple choice that allows customers to be able to do that. And when they come to it, they can at least come with an idea of, hey, I'm thinking about buying this. And then you can start working through their needs and customize it. Exactly.

[00:16:35] It also helps with the price differentiation pieces I was saying before, because if you come with a, here's our offering, would you like to buy it? Then the customer, if they, if they just say, well, I do want to buy it, but I can't pay that much. I can only pay 20% left. If you haven't got a way of sort of scaling the value of your different offerings, the only thing you can pull on is price. Right. So you end up just giving away what you were going to give away anyway, just for a lower price point.

[00:17:00] If you have that kind of tiered system or some form of packaging where you can take things out, you can say, well, I can give you a 20% lower price, but to do so, I have to take out X, Y, and Y. And therefore it's a slightly lower, lower value offering. So customer, if you are really only interested about, about the price point, that is probably the right option for you. But if you care about all this extra, extra value, you're going to get from this higher level service, the price is this level.

[00:17:27] And it's a really good way of defending against yourself against what Reed Holden would call poker players, right? They're people who are actually value buyers or relationship buyers, but try to convince you that they're price buyers in order to get a lower price at negotiation. Well, that piece of advice is where we're going to end this. James D. Wilton is a leading expert on SaaS pricing strategies with over a decade of experience assisting startups and high growth companies in optimizing their monetization approaches.

[00:17:55] He's a managing partner and founder of Monovate, a premier pricing and monetization consulting firm for SaaS and tech companies. His new book is Capturing Value, The Definitive Guide to Transforming SaaS Pricing and Unshackling Growth. James, this has been fascinating. How do people get in touch if they're interested in learning more? Yep. Best way, Dave, is probably through my LinkedIn profile, which is James D. Wilton. You can also reach us through the book's website, which is capturingvalue.com. Thanks for joining me today. Thanks, Dave. Good to be here.

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