Recently, I’ve been working more than usual on projects related to clients’ pricing policies and pricing lists for both Software-as-a-service (SaaS) companies and product-based businesses. Casbeg clients tend to underestimate pricing, though it shouldn’t be, as it can completely transform a company’s profitability.
Pricing Mistakes #1: Lack of Standardized Discount Policy
One common mistake companies make in their product pricing is the absence of a standard discount policy. Consider a company that executes 100 transactions a year. Each transaction is worth 10,000 USD, with a 30% margin and a profitability of half the margin.
100 * 10,000 = 1 million USD in revenue
1 million * 30% margin = 300,000 USD
300,000 USD * 50% = 150,000 USD profit
What happens if, by leaving discount decisions to individual salespeople, we apply a 10% discount that increases sales by 30%?
– 130 * 9,000 = 1,170,000 USD (Salespeople start calculating commissions from increased sales!)
– 1,170,000 * 20% = 257,400 USD (Something doesn’t add up…)
– 234,000 * 50% = 128,700 USD (Ouch!)
A seemingly harmless 10% discount, even if it boosts transaction volume by 30%, can lead to a significant 14.2% decrease in profit. This underlines the importance of careful pricing decisions to avoid potential profit loss.
Pricing Mistakes #2: Lack of Correlation Between Value and Price
A fundamental issue in product pricing is defining a value metric. In SoTrender, it’s the number of monitored profiles. In Unbounce, the price depends on the number of domains, website traffic, or conversions. For Netflix, the value metric is video quality.
I often encounter situations where product companies use multiple unrelated value metrics. It’s a mistake. Worse, some customers receive significantly more value than they pay for, while others overpay compared to the value they receive.
Pricing Mistakes #3: Incorrect Pricing in the Wrong Business Model
I most often observe this situation in early-stage SaaS companies. Two factors usually indicate its existence. The first is an irregular application usage pattern. If your customers use your solution once every 2-3 months, charging them monthly usually makes no sense.
The second factor results from the first: because the SaaS model doesn’t make sense in this scenario, you observe a high churn rate among customers, many of whom desire to return to the solution.
This mistake can also occur in reverse. If you see that your customers work with you regularly, consider offering them a subscription service or creating a recurring revenue bundle. It’s worth working on your service’s ‘stickiness’ in every scenario so customers use it more frequently. ‘Stickiness’ refers to the ability of your product or service to keep customers engaged and coming back for more. This can be achieved through regular updates, personalized features, or a strong customer support system.
Pricing Mistakes #4: Misalignment of Product Value to Price
Sometimes, customers say, “I’m not buying because it’s too expensive”. After all, the product does not provide adequate value relative to the price. If your customers have enough money to buy your product but refuse to pay, assume that’s the case and focus on improving your product’s value rather than just tweaking the pricing or discount policy.
Unfortunately, the reality is not simple; not all pricing issues originate from the pricing structure.
Another problem variant arises when customers familiarize themselves with your solution and decide they like it but don’t buy because they have more pressing matters. Usually, it turns out that the customer’s calendar remains complete, and they “don’t have time” for your solution. If this is your issue, consider whether you would be welcome if you called this customer and said you wanted to bring them 1,000 USD to their office. If so, there’s a risk that your product addresses a problem that isn’t significant enough, and you should focus on something more critical (or a group of customers that feels the pain you’re solving more acutely). As startup folks say, it’s better to sell aspirin than vitamins.
Pricing Mistakes #5: Lack of Pricing for Additional Services
Many companies could charge their clients for professional services on top of everything they do for them – but don’t. While this is a scalable and focused approach, many SaaS companies that serve businesses find that a significant portion of their revenue comes from services such as consulting or training. These companies sometimes profit from these services; other times, they might incur losses (though indirectly, they gain by reducing customer acquisition costs or churn), but they should always price these services. In early-stage startups, 10 000$ in services revenue can cut your burn in half, which might be the difference between the life and death of the company.
If you advise or train your clients, consider creating a pricing list for additional services. Many software companies that have overlooked this aspect will likely acquire consulting and training firms to develop their professional service departments.
Pricing Mistakes #6: Pricing Not Tailored to Target Audience
A prime example of this issue is the tutoring business in large metropolitan areas. If they work hard, an average tutor in New York can earn up to 100,000 USD annually at 50-100 USD per hour. Meanwhile, tutors teaching children of the wealthiest 1% of New Yorkers have skyrocketed their rates to the point where their earnings reach… 500,000 USD. Is there a way to narrow your clientele similarly in your market? For instance, a software company targeting small businesses might find it more profitable to focus on larger enterprises with higher budgets, even if their product suits both segments.
Pricing Mistakes #7: Lack of Upfront Payment Options
Companies must remember that the annual upfront payment model is the norm in the software sales market. Sometimes, this requires a discount; sometimes, it does not. Sometimes, it is the only acceptable payment option, as the company does not allow monthly payments. Take advantage of this. It’s nice from a capital-intensive business perspective and for those needing to gather additional funding rounds to pay today’s bills with tomorrow’s money. Not offering upfront payment options can lead to cash flow issues and missed opportunities for investment or growth.
Interesting fact: At Casbeg, we pride ourselves on never giving a discount to a client in the company’s history. This policy is convenient because I don’t have to worry about whether client X will talk to client Y, who pays us three times less for the same service and feels cheated. Nonetheless, we have clients who like to pay us upfront—this represents cost savings during very profitable moments and allows them to transfer funds all at once instead of monthly.
