Pricing: if you’re a business owner, chances are, you have to set prices. If you have a store, you have to worry about mark up. If you’re a service, you have to be able to make a living. But what guidelines can we use to help us define our price point? How do we be fair and at the same time be profitable?
What, in essence, is the right price for something?
What should a gallon of gas cost? How about an apple? How about an Apple Computer? What about an hour of business consulting? How about the monthly cost for software-as-a-service (SaaS) products?
Each of the above examples has its own characteristics that help define it’s price point:
- Gas: market forces
- Apples: market forces, weather
- Apple Computer: Primarily psychological pricing
- Business Consulting: Market price / perceived-value based
- Software-as-a-Service: ???
The key to pricing Software-as-a-Service: Lifetime Customer Value
Lifetime Customer Value (Lifetime Customer Value) is the amount of money that a user spends with you during their lifetime as a customer. It’s the metric that matters. If a widget maker estimates sales based on the number of widgets sold, a SaaS business thinks of the same thing but in terms of the Lifetime Customer Value. Once this is calculated, the SaaS owner knows how much each new client is worth.
As long as your LCV exceeds your cost to acquire a customer, you have a shot at making money. You’ll have revenue to pay the bills.
There are now four main factors that influence how well your business does:
1. Business costs
2. Customer acquisition cost
3. Number of users
4. Average Lifetime Customer Value
You can increase your profits by lowering your operating costs, lowering your customer acquisition cost, increasing the number of users, or increasing the average lifetime customer value.
It’s unlikely that you can cut your business costs past a certain bare minimum. Increasing users is tied to the customer acquisition cost and will probably only go up if the customer acquisition cost comes down. This leaves increasing the average lifetime customer value as the most likely way to increase revenue.
There are three ways to raise your Lifetime Customer Value:
1. Keep the user around longer
2. Raise your prices
3. Sell more to existing customers
All three of these methods have their place.
1. Keep the user around longer: If you have a month-to-month service, you can easily raise your LCV by getting the average user to stick around longer. How? Either make your service more useful, get creative with your payment options, or find out why people are quitting and fix the problem. An easy way to raise your LCV is to offer discounts to people buying semi-annual or annually rather than paying monthly.
2. Raise your prices: It could be that you’re underpriced. It could be that you’d benefit from psychological pricing. It could be that you just need the revenue. But quite simply, you can always raise your prices. Especially if you think your market will bear it. If you can’t raise prices, think about tiered pricing. Offer a premium service or a basic service. This can help you raise revenue without looking like you’re raising prices.
3. Sell more to existing customers: This works well if you have other complimentary items you can offer. For example, the SaaS bookkeeping tool LessAccounting offers a time tracking solution called LessTimeSpent that users can easily integrate into their program. This gives LessEverything the chance to develop two revenue steams from the same user. Smart!
When working on budget projections, push your LCV with these techniques. It’s money.