Everything you wanted to ask about the pricing in B2B SaaS | Alex David (Corrily, Segment, Simon-Kucher)
The ultimate guide on how to think about pricing strategy for your B2B SaaS from the first principles.
Today, I had the privilege of speaking with Alex David, the founder/COO of the monetization growth engine startup Corrily.
Corrily is a Y Combinator (YC) 2021 company focusing primarily on price management and optimization for high-volume B2C and B2B businesses. Their primary target customers are companies with high transaction volumes, such as Linktree and Skillshare.
Alex is among the brightest minds in pricing I have met. He has over ten years of experience across various roles around monetization, including consulting with Simon-Kucher and leading Segment's successful usage-based pricing. We discussed a variety of B2B SaaS pricing matters, including the importance of pricing at different stages of a company's development, how to begin a career in pricing, how to structure conversations around Willingness-to-Pay, how to design products around pricing, and how to avoid price anchoring and pricing cannibalization in PLG. We also discussed how Corrily assists product managers in experimenting with pricing in a data-driven manner.
I hope you enjoy the conversation!
Career in pricing
Alex's career began with a background in mechanical engineering, and he initially aimed for a career in technical product management. However, after a few internships, he found himself drawn to the business aspects of product development, particularly pricing. He took an introductory pricing class during his junior year of college, which provided him with a holistic perspective on pricing, encompassing cost accounting, market analysis, customer understanding, and value assessment.
In his master's studies, Alex delved into complex topics like game theory modeling and understanding the psychology of behavior in pricing. Following his academic pursuits, he transitioned into the consulting industry. He joined Simon-Kucher & Partners, working with various sectors, from chemicals and parts manufacturing to fast food and software.
After Simon-Kucher, Alex had the opportunity to work at Segment, where he focused on pricing and go-to-market strategies. This experience allowed him to see the differences between pricing in large enterprises (which often involve numerous SKUs and complex enterprise contracts) and SaaS startups (which demand a more strategic and iterative approach involving close collaboration with customer success, sales, and product teams).
After his time at Segment, Alex returned to advising companies in the software industry while at Simon-Kucher. Eventually, he ventured out independently and joined Corrily, a pricing software company. Throughout his journey, he witnessed the growing significance of pricing as a function in the business world and how it has evolved over the past decade, becoming a central topic of discussion in the SaaS industry.
Work at Simon-Kucher & Partners
Firms must excel in client engagement and talent acquisition to compete with the "big-3" consulting giants (BCG, Bain, McKinsey). Simon-Kucher is well-known for its focus on pricing and extensive expertise, establishing itself as a trusted advisor to companies worldwide.
Simon-Kucher is relatively small compared to larger consulting firms with less than 2000 employees, but this helps it be more agile and allows consultants to focus on their work rather than constantly seeking projects. In larger firms, consultants often need to network and navigate their way onto projects. The firm's structure allowed for more responsibility and independence, even for junior consultants. Unlike some firms with an "up or out" mentality, where consultants must meet specific performance criteria or leave the firm, Simon-Kucher provided more flexibility. Alex stayed with the company for years, and the firm supported his long-term commitment.
Simon-Kucher & Partners is renowned for its expertise in pricing. The firm's founders and early members, including Herman Simon, were academics who initially focused on pricing theory. This academic background means their approach to pricing problems is rooted in a robust, well-tested, academically sound methodology.
Product-Market-Pricing Fit
Simon Kucher & Partners talked about this concept of Product-Market-Pricing fit by creating a product that appeals to the market and a price that provides sustainable growth and returns value.
Early Stage (up to $10 million in revenue)
Pricing may evolve rapidly, and the primary goal is to find what works. When you first start your company, your primary focus is on acquisition. Generally, there is a balance here. Giving your product away for free makes acquisition easy, but it's hard to truly validate PMPF (or even PMF) at that point since customers have no skin in the game. So you need a price that helps you make money but isn't getting in the way of acquiring customers, And at that point, you're just throwing whatever price you can out there to make sense of it. You should try raising your price until someone tells you you’re too high. All right, we’ve hit our first ceiling!
Growth Stage ($10 to $100 million in revenue)
We need to start applying more methodology to the pricing practice at this stage. Different customer segments, packaging options, and pricing strategies are now part of the equation. We are also continuously adding additional value along with price increases. You need to work fast but efficiently - speed is essential, but you cannot constantly pivot. Doing your homework and analysis before pulling the trigger becomes critical here. Your product will have changed several times during this time frame. This means having somebody spending time on your pricing, at least part-time, to ensure you are extracting appropriate value winds up paying off. This can be a Growth Product Manager or someone from the Product Marketing team.
Scaling Stage (beyond $100 million in revenue)
This is when a startup should seriously invest in pricing, potentially hiring a dedicated pricing person. You’ll likely deal with complex use cases, diverse enterprise usage, and various pricing components that require careful consideration. This individual will need to spend time across product, sales, marketing, finance, and leadership to ensure cohesion of strategy and efficient execution. Ideally, they are senior enough to have decision-making authority and are positioned in the right part of the organization to affect change.
Who owns pricing
There's no one-size-fits-all answer for where the pricing function should sit in a B2B SaaS organization. The ideal placement of the pricing function depends on the organization's culture, business model, and go-to-market strategy. Alex mentioned three main areas where pricing can be situated:
Sales: In companies that heavily focus on enterprise sales with high-value contracts, having the pricing function closely aligned with the sales team can make sense. This approach allows for creating custom pricing strategies and contracts tailored to individual customer needs. This might make sense if you have many ELAs (enterprise-license agreements). Just make sure incentives are aligned appropriately.
Product: More and more companies are placing the pricing function within the product team. This is particularly relevant for product-heavy organizations. Pricing experts within the product team can help align pricing strategies with the product roadmap, prioritize features, and ensure that the pricing model complements the product offerings.
Finance/Operations: In some cases, pricing sits within finance or operations, ensuring that revenue and margin objectives are met. This structure can be seen in organizations that strongly focus on financial control and compliance.
Each placement has its pros and cons. For companies with ARR less than 100 million, aligning pricing with the product team makes the most sense, as it ensures strategic alignment with the company's growth trajectory.
Pricing experiments
Cadence of Pricing Changes
Finding the right balance for the frequency of pricing changes is crucial. Constant changes can lead to operational challenges, especially for the sales team. A stable pricing strategy simplifies operational processes, but more frequent changes might help optimization. That creates unnecessary friction and pressure on the sales team and impacts client relationships.
System Flexibility
Focus on making pricing systems flexible, especially in the early stages. Hardcoding pricing elements (prices, packages, metrics, etc.) makes it very hard to shift customers in the future, and you wind up with significant tech debt on your billing infrastructure. Having flexibility allows for easier price adjustments without imposing significant operational burdens.
Pricing models should account for the company's sales channels. Strategies may vary for salespeople, self-service models, and partnerships. Product-led growth, for example, allows you to test pricing strategies and gain insights into market dynamics. Each item needs its own pricing model, but the prices must fit together.
Methodology for Pricing Tests
Obtaining sufficient sample sizes for statistical significance in B2B pricing experiments can be difficult, especially when serving multiple segments. Companies often rely on surveys and market research methods such as Van Westendorp, Gabor-Granger, or Conjoint Analysis to gauge customers' willingness to pay and assess product value. The lack of public pricing in some go-to-market motions limits experimentation or may be deemed too risky.
It's often more practical to seek "directionally good enough" insights to provide a general understanding of how pricing changes may perform in the market. For example, if there are multiple segments to sell to, with a representative sample from each being 50-60 respondents, you will need 200-300+ respondents in the survey. It can take weeks to get this sample and may cost 50-100 dollars per person.
Testing Major Changes:
If you want to change your pricing metric, you need to completely rethink how you're communicating the value of your products, tracking and measuring, and building for it. More robust research is crucial here.
PLG and cannibalization of pricing
Successful Product-Led Growth (PLG) implementation depends on clear use cases and a good fit with the product, which only applies to some businesses. Here are the key takeaways:
Packaging is Crucial
The cannibalization problem between self-service and sales-led likely results from poorly designed packaging. Feature gating and separating offerings between self-service and enterprise plans can address this challenge. The goal is to guide customers to the right plan based on their needs and feature access.
Different Audiences
In some cases, enterprise and self-service clients may have little to no intersection. Only some businesses follow a linear growth path. Instead, it's essential to understand these audiences' different use cases, needs, and characteristics and create tailored strategies for each. Determine any overlap between personal and business use cases for your product. If there isn't any, focus more on trials and make marketing and brand awareness initiatives sales-led.
Not All Businesses Suit PLG
Simply adopting PLG for the sake of it may not yield the desired results. Companies must be intentional about using PLG tactics and tailor their PLG strategy to their specific business, product, and customer base. PLG works best when there's a clear path from self-service usage to enterprise adoption. It aims to accelerate the buying process and lower customer acquisition costs. However, PLG may not be suitable for every business, especially when product use cases are too distinct or when the purchase process remains complex and consultative.
PLG's Role in Brand Awareness
PLG can enhance brand awareness by allowing individuals or small teams to experience and adopt a product, potentially leading to broader adoption within enterprises. It contributes to increased market visibility.
Price anchoring
Customer perception and the value you communicate to the market play a significant role. If you're introducing a new product or concept, you may need to educate the market and create perceived value. It's also crucial to differentiate your product from competitors.
It's essential to understand the concept of economic value assessment when setting prices, particularly when entering a new market. Regardless of whether you are competing with established players or creating a new product category, your pricing should reflect the value you provide. Imagine entering a market with a product similar to Slack; if you have a unique feature (XYZ) that Slack doesn't offer, you should assess how much that feature is worth to your target customers. If XYZ provides an additional $3 worth of value, you could charge $8 plus a fraction of the $3 per seat instead of the $8 that Slack charges (assuming all else equal).
When introducing a new solution in the market, your goal should be to understand the problem your product solves and what people are currently paying to address that problem. Suppose businesses are spending, for example, $10,000 per month on various solutions, travel expenses, and space rentals to solve this problem. In that case, you can introduce your product as a more cost-effective and efficient alternative. You can offer substantial savings by charging $150 per month per user. The key is to recognize the existing expenses associated with the problem your product solves and to position your offering as a better, more cost-effective solution.
Rational buyer in B2B
In B2B pricing, both rational and psychological factors come into play. Rationality often prevails when it comes to procurement teams and larger companies, as they are highly incentivized to seek discounts and drive prices down. They may not be as concerned with the product's actual value. Dealing with such hyper-rational buyers can be challenging, and strategies may include building multiple champions, reaching the right budget holders, and navigating complex procurement processes.
On the other hand, price psychology still plays a role in B2B pricing. For example, customers may prefer to avoid signing deals that end in clean numbers or may assume that prices that don't round to a familiar figure have already been discounted. Setting prices just below a threshold (e.g., $9,783 instead of $10,000) can affect sales velocity.
Moreover, customers often have price anchor points in mind, shaped by previous experiences and expectations. Even without competitor pricing, customers may still form an initial impression of what a product should cost. To manage this, some companies use pricing pages to frame customers' expectations. SDRs may employ "price shocking" during initial conversations to help customers understand a range of possible prices and avoid misunderstandings later.
Corrily
Corrily offers optimization solutions that often involve experimentation. Businesses can run pricing experiments to determine the right balance between factors such as acquisition, conversion rates, and the monetary value of different pricing strategies. These experiments help companies fine-tune their pricing strategies to achieve their desired outcomes.
Optimization in the context of Corrily typically involves improving specific pricing-related metrics. This could range from optimizing conversion rates to enhancing customer retention or maximizing monthly recurring revenue (MRR) and annual recurring revenue (ARR). The specific metric a company focuses on depends on its strategic goals and objectives. The goal is to empower product managers, marketers, and growth teams to take control of their pricing by providing user-friendly functionality that enables them to address their monetization challenges effectively. The goal is to make pricing strategy and optimization accessible to a broader audience rather than being confined to a select few experts or consulting firms.
Corrily integrates with its customers' pricing and billing systems to enable real-time dynamic pricing adjustments. It can control what prices are displayed to users based on various parameters, and it tracks user interactions and conversions to analyze pricing trends and the impact on customer acquisition costs and lifetime value.
Pricing B2B SaaS in Emerging Markets
One of the first product hypotheses in Corrily was to provide better pricing optimization for SaaS companies in emerging markets.
It's crucial to consider the company's overarching strategy for global expansion. If a company's local market is plateauing, exploring new high-growth markets like India or Southeast Asia makes sense. Usually, the users in emerging markets have unique needs; therefore, the target market's preferences are vital. Maybe you don’t need to provide the entire product, or can you offer a scaled-down version at a lower price?
There are several key factors to take into account:
Different Willingness to Pay: Offering lower-tier products with lower prices can provide upsell potential, and it helps cater to markets with lower pricing thresholds.
Preventing Arbitrage: Be cautious about potential pricing arbitrage, where users might take advantage of lower pricing in different regions. This can affect the revenue you generate from each market.
Long-Term Objective: Your pricing strategy should align with your long-term objectives for global expansion. If you're looking to grow significantly in new markets, optimizing your pricing for those regions becomes a critical component of your strategy.
No-code builder for pricing pages
Corrily has introduced a "no-code" builder for pricing pages. This tool allows users to create and customize pricing pages without extensive engineering work. While the primary goal is not just conversion rate optimization on the pricing page, this tool can significantly aid in optimizing conversion rates in several ways:
Customization: Users can create and test various pricing page designs, structures, and packaging options quickly and easily. This flexibility allows for tailoring of the pricing page to different target audiences, regions, or user segments, which can positively impact conversion rates.
Audience-Specific Offers: The builder enables the creation of audience-specific pricing configurations. For instance, you can customize the page for users in different regions or for users who have recently churned. These audience-specific offers can be optimized for improved conversion rates.
Recommendations: The tool can provide recommendations based on user behavior or specific conditions. For example, it might suggest offering a lower-priced package to recently churned users to entice them to return. Such recommendations can be based on data and insights, further enhancing conversion rates.
Faster Iteration: The "no-code" builder streamlines creating and testing pricing pages, allowing for more rapid iteration and experimentation. You can implement changes and updates quickly, helping you adapt to user preferences and market dynamics in real time.
Data network effects
I'm generally skeptical about the idea of network effects through data, but when it comes to companies like Corrily, it could greatly benefit their business model. Although it might take time to hit the mark for critical mass to capitalize on the network effect of data, the potential for more powerful flywheels grows with it.
Increased Data Volume: As more customers join and use the platform, the volume of data increases. This larger dataset can provide a more accurate representation of market trends and customer behaviors.
Market Insights: With a broader customer base, the platform can derive insights about specific markets, industries, or audience segments. For instance, trends in the EdTech market or price sensitivity of customers in North America can be identified.
Benchmarking: Having a more significant number of customers allows for benchmarking. Companies can compare their performance and pricing strategies to industry peers, helping them understand where they stand and what optimizations can be made.
Predictive Analytics: With a rich dataset, you unlock predictive analytics. For example, suppose the platform observes that the willingness to pay of customers is trending upward. In that case, it can predict that companies in that industry or segment may want to experiment with higher pricing.
Recommendations: The platform can provide more accurate recommendations based on a larger dataset. For instance, it can suggest price adjustments or package configurations that have been successful for similar businesses.
Conclusion
Book recommendations:
Final thoughts: There are many people with a lot of advice out there regarding what to do with pricing. The best thing I can leave people with is this: The most costly pricing mistake is inaction.