Why Are Founders Still Ignoring This Easy Way to Boost Profits?
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It’s not every day that you stumble across a truly surprising statistic, but this one should shake any entrepreneur in their boots. The average SaaS company spends just 6 hours determining its pricing strategy. Now, that isn’t 6 hours every month or even every quarter. That’s 6 hours over the entire lifespan of a business. Ask any founder how long they spent choosing fonts and layouts or adjusting the logo’s size in the document’s header. The answer will, without a doubt, be orders of magnitude longer.
Not devoting time to pricing means entrepreneurs miss out on a crucial part of optimizing their business. They already work to optimize everything else, and pricing strategy can significantly affect their company’s bottom line. The investment required to optimize it is minuscule relative to spending hours and wasting labor on choosing the perfect font.
Related: How SaaS Is Changing the Way We Work
A widely quoted Harvard Business Review piece published thirty years ago already made a case for optimizing pricing models, and still, founders haven’t caught up. In the article, aptly titled “Managing Price, Gaining Profit,” the authors assessed how much an increase in price affects the average company’s bottom line compared to an increase in volume. Price won out by almost four times as much.
With such high leverage on price, even if a company’s managers are spot on in their pricing 90% of the time, there is a big payout for improving that to even 92%. Even though these results were corroborated years later in a McKinsey study, it seems founders are still coming up from behind on this issue. It also bears to note that pricing is a double-edged sword — if a 1% rise in price can improve your profits by a significant margin, then a 1% price cut can damage them.
What does the price reflect?
Companies often look at price as simply what the customer will be willing to pay, but that might be a mistake. That approach fails to consider the thousands of moving parts that need to seamlessly work in unison, almost like magic, to provide value. The price should reflect that.
Researching pricing can be overwhelming because the sheer number of pricing models, strategies and tactics available is gigantic, so it’s almost impossible to know where to start. And frankly, there is no shortage of the mistakes you can make, i.e., pricing based solely on undercutting your competition, not segmenting customers, not trying enough price points, overcomplicating pricing presentation, and dozens more. But thankfully, in the world of tech, a conversation about pricing is brewing, and there are some surprising and exciting developments out there.
One group of products notoriously difficult to price is legal cases. If a class action lawsuit has a 50% chance of reaching a verdict or settlement worth ten million dollars, the case has an expected value of five million dollars. However, valuations of commodified legal cases usually run on gut feelings and lawyers drawing from their own experience.
Pricing and valuation is virtually a neglected field regarding the commodification of legal cases. An AI-powered justice intelligence platform called Darrow has seized on this and developed an algorithm that uses big data to value legal cases accurately. This platform finds a fair price and opens the door to a new suite of investment opportunities.
As Software-as-a-Service is a relatively new concept, it makes sense to step away from old-fashioned pricing models. We’re no longer in the ’90s, and the SaaS buyer experience needs to reflect that. Software company Stigg, for example, has built software and API that gives companies fine-tuned control over what can be priced and packaged separately, helping businesses ship better plans to their customers.
The irony of using software for pricing is that management will likely not spend more than 6 hours deciding between freemium, trials, subscriptions, usage-based pricing, etc. But at the very least, a program is doing the thinking in the executive’s place. Such software can serve executives particularly well today as companies cut costs, slow hiring, and search for ways to boost productivity.
Thirty percent of CFOs are considering layoffs, and most expect a recession to come, according to a new Grant Thorton survey. Considering the state of the economy and rising inflation, companies can no longer afford to keep hires on board that aren’t holding their weight, and decisions to make certain pinpointed cuts make total sense. But sometimes cuts — especially in layoffs and reduced benefits — tend to hurt morale.
Finding ways to maximize profit before resorting to cuts should be a top priority, and updating pricing is an excellent place to start. Pricing is too important to simply be left up to ad hoc decisions and gut feelings, and industry leaders would benefit from remembering that.
Related: Don’t Try to Maximize Growth and Profitability at the Same Time. It’s Impossible.