For young SaaS companies clawing to maximize the value of every contract, evolving your product pricing organically is understandable, but it’s not strategic. And it’s certainly not scalable.

For many growth-stage SaaS companies, product pricing evolves organically. It is often driven by competitors’ rates, acquisitions, a rush to meet target investors’ criteria or simply what company leaders think they can get for their product.

While this pricing process is understandable for young companies clawing to maximize the value of every contract, it’s not strategic. And it’s certainly not scalable.

Frequently, these early pricing structures don’t correspond to the value of the product, but rather they are rooted in the perception of what the company can extract from the buyer. They fail to consider the buyer’s journey or the company’s broader identity and goals. This way of thinking also doesn’t allow for much consideration of the long-term client relationship.

At Relay Network, we recently spent several months conducting a rigorous review of our pricing model. This effort was borne out of our desire to better articulate our value, and to reflect that value in our product positioning and pricing. As part of this process, we took a hard look at our data, evaluated how our current pricing model was working, and categorized the pluses and minuses of that model.

The question is, which product pricing strategy best reflects your company’s values and can scale as you begin to achieve your growth targets?

We also looked at our new pricing model from several different angles, both internally and externally. This enabled us to ensure that it matched our company profile and reflected the knowledge and value that we offer to our customers. Here are a few of the key lessons I’ve learned through this process at Relay Network and as a product leader in other enterprise B2B software businesses.

4 factors to consider when determining a value-based product pricing strategy.

1. Know your company’s goals and values.

In deciding where to take your pricing model, it’s critical to look at how it will fit into your broader company profile. Every company has growth targets. They may center around top-line growth, new sales, net revenue retention, rate of return, or something else. Whatever those goals are, there are several different pricing models that may help you achieve that goal. But the question is: which pricing strategy best reflects your company’s values and can scale as you begin to achieve that growth?

At Relay Network, our company values revolve around building customers for life and true engagement. We wanted our value to derive from our ability to establish a quality relationship with our clients and offer them high-touch service to address their needs with little friction. As a result, we framed our pricing model to reflect that engagement and our ability to generate the outcome that clients want.

Clients should be able to see the link between your pricing and the value brought to them: They paid X for your solution, but they got a multiple of 20X-50X in incremental value from it.

2. Measure your product’s value.

Put simply, you cannot put a price on your product if you cannot calculate the value it brings. A major component in determining that value is understanding your clients and potential buyers, as well as the markets in which they operate. Look at the solution you’re offering from their perspective. What do they consider to be high-value experiences? And what are those experiences worth to them in terms of hard cash?

One of the simplest ways to garner this information is to ask your current or test customers; failing that, leverage your past successes to model out the return on investment that clients can achieve with your solution. This, combined with a survey of market pricing tolerance, can inform where your pricing should be, not just what you think it should be.

By going through this exercise, we identified all of the core, high-value experiences within each of our target industries and calculated their value for customers. This, in turn, has allowed us to assign actual cash values to our products and services.

3. Clearly communicate ROI.

Your product pricing strategy should be able to show customers how your product will deliver, or has delivered, ROI for them. As you do this, make sure that you’ve aligned how the product, value, and price are presented. Clients should be able to clearly see the link between your pricing and the value that it brings to them: They paid X for your solution, but they got a multiple of 20X-50X in incremental value from it. This can also facilitate new sales as well by showing the results you’ve achieved for a prospective client’s competitors.

At Relay Network, our pricing exercise has enabled us to demonstrate in hard numbers the value our solution will bring or has achieved for clients. We can approach a client and map out exactly how, based on our knowledge of the industry and our experiences with their competitors, we can consistently deliver 20X-50X dollar amount of value for them in revenue, cost savings and customer relationship value.

Take a deep look at your pricing model every 12-18 months to ensure that it’s still working as planned. If it is, move on. If it’s not, dig into where it’s falling short and adjust accordingly.

4. Test, track and adapt.

Finally, recognize that pricing models are not a one-and-done process. Even once you’ve established a well-thought-out model, it should be continually monitored to gauge how it’s performing against your goals. Inevitably, there will be fine-tuning along the way.

More broadly, you should conduct a robust review of your pricing model every 12 to 18 months to evaluate how it’s working. The software industry is fast-moving, and what may have worked two years ago may not work as well today. New competitors may have entered the market, and pressures may have shifted. Ask: “Is the model achieving what we hoped it would achieve? Do we need to make any change in course?”

This is not to say that your model should change dramatically every year or two — that’s far too disruptive and expensive. Rather, take a deep look to ensure that it’s still working as planned. If it is, move on. If it’s not, dig into where it’s falling short and adjust accordingly.

Relay Network is now nearly five months into our new pricing model; we’ve made some minor adjustments along the way based on early feedback. But we’re confident that our current pricing framework will support our growth goals and serve our clients exceptionally well in the years to come.

Here’s the bottom line.

Early stage-growth companies, particularly SaaS companies, often don’t spend much time on product pricing strategy, which leads to an organic model that can become confusing and unscalable. But by stepping back and taking the time to think about a longer-term, value-based pricing model that accounts for your company goals and reflects knowledge of your customers, the market, and how your solution adds value, young companies can create a thoughtful pricing model that is beneficial to you and your customers – and will scale with you over time.

This GrowthBit is featured in LLR’s 2022 Growth Guide, along with other exclusive insights from our portfolio company leaders and Value Creation Team. Download the eBook here.