What my purchase of this lobster art taught me about B2B SaaS pricing
Or: How to navigate pricing design for uneducated buyers like me
We bought some art!
Well first we bought a new home, actually, in the fall of last year.
We have a 14-month-old, you see, and his arrival has coincided with an onslaught of stuff. Pack-n-plays, toys, baby clothes, and all matter of other baby things that every parent knows well.
In the real estate office conference room where we signed our closing papers, there was a large, incredible print by an amazing local New Hampshire artist, Bill Paarlberg. The work is called “Save the Wentworth”, and depicts a lobster overtaking the historic Wentworth By the Sea hotel, a beautiful local landmark.
Ironically, we had just been talking earlier that day about how we needed more art to decorate the walls of our new house.
We decided we needed to find a print of this painting, and so we took note of the name of the work and the artist.
Some weeks later, after moving into our new home, we were out to lunch in our old town (Portsmouth, NH), and decided to stop by a local art gallery that we new carried prints of this work. We happened to find a much smaller, alternate version of the one we’d seen in the real estate office. After some gallery-browsing, and hemming-and-hawing over price, we decided to make the purchase, and it now hangs proudly in our house. Here’s a picture of ours:
Again: all credit goes to the amazing Bill Paarlberg for this work, called “Save the Wentworth”. Check out his stuff, visit Portsmouth, NH, and take something home. Seriously.
The “lobster art challenge” in B2B XaaS pricing
I was looking at this picture the other day, hanging proudly on our wall, and it spurred a thought about pricing, value, and willingness to pay.
When we saw the big version of this picture on the wall, and subsequently the small version in the gallery, I had no frame of reference for what I would be willing to pay for the painting. I knew we valued it greatly, but I had no idea what the price tag of that value would be - would it be equivalent to a nice dinner? A concert ticket? A PlayStation? Something else?
We were qualified buyers - “decision makers” in research parlance, and certainly target customers of this art gallery, as new homeowners seeking to outfit a home. But we were definitely uninformed buyers. We were largely unaware of the category (art) in which we were exploring and had no frame of reference on pricing.
So as we explored the gallery, we weighed the price of the lobster print by looking at other similar prints in the gallery and comparing the value-for-price of our treasured selection versus alternative options. We used a range of “comps” to ultimately decide that the price of the complex, hard-to-quantify good that we wanted to purchase was worth the price tag.
The holy grail in B2B pricing is a value-based pricing strategy. In complex B2B tech markets, including SaaS / XaaS, the hurdles to value-based pricing are becoming lower. Product-led growth (PLG) strategies lead to more customer data collection. As vendors harness customer data, they are able to more effectively enact pricing experiments and adjust pricing strategies to align to customer value.
From a researcher’s perspective, execution of a value-based pricing strategy often involves deployment of one or more customer research methods. Most notable is the elegant, simple and effective Van Westendorp Price Sensitivity Meter. A Van Westendorp approach usually involves an online survey that presents customers with representative product and/or service packages, and asks four questions:
At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)
The data generated from the results of these questions is used to model an optimal price range for the product(s) tested.
This approach is simple, works very well in many cases, and can be extremely accurate. We’ve used it many times in our research, and continue to advocate for its use in price strategy setting for new products. However, there are a few challenges to navigate:
In B2B tech, it can be difficult to fully explain an offering in the time available to conduct an online survey
It can get expensive quickly, particularly if you are chasing enough sample to create multiple buyer segments and weed out any chance of outliers
It over-indexes on the “quantifiable” or pricing, and less on the “art” of pricing that can be gleaned from qualitative research
It relies on the assumptions of buyers with varying degrees of knowledge and differing motivations
This last one is the “lobster art challenge” of B2B SaaS pricing.
New SaaS categories and sub-categories are emerging all the time. Category creation is becoming a hallmark of positioning strategy. These categories flood quickly with established and new players. The products themselves are complex, features are seemingly endless, and packaging models vary widely within any given category.
In this environment, even the most educated buyers may not fully understand the value of a product or service. PLG models, which seek to empower users through free editions and encourage enterprise virality as a path to monetization, help to address this challenge. This is the right path forward for many vendors and helps build value cases. But it doesn’t replace the need for a data-driven, market-aligned price that equates to the value delivered. Buyers at some point are going to have to justify a price to be paid for any job-to-be-done (JTBD).
If you are an educated SaaS decision maker, you likely have a general sense of what you should pay for a solution in any established category. You probably know what a CRM should cost per user, or what a GB-month of cloud storage should cost on AWS or Azure. You can then correlate that spend to the value received.
But in many new and/or evolving categories, it’s not so easy. If you’re looking to build a modern data stack based on Databricks, for example, understanding the value-for-price of a “Databricks Unit (DBU)” becomes a more challenging exercise.
Databricks has four compute types, three packages, and 25+ features listed on its website. Databricks uses a proprietary, derivative value metric (DBUs, as noted above) to price its product. It is a complex solution with multiple considerations.
Setting pricing for Databricks solely using a Van Westendorp survey may yield difficult-to-implement results. Prospective customers are unlikely to readily understand a Databricks Unit. The likely customer price anchors would be market-based - perhaps a competitor, or perhaps based on their current spending on data warehousing generally. A different value metric could be used in research design, or the concept of DBUs could be defined for the research, but then runs the risk of falling into the challenge traps I listed above. This type of study might result in estimated price ranges that reflect “what types of solutions do customers compare Databricks against” moreso than “what is the intrinsic willingness to pay for Databricks”.
This would have played out similarly if someone had fielded a Van Westendorp survey to test my price sensitivity to our lobster print. I would’ve had to base my responses on other entertainment and/or home purchases I’ve made, given my lack of knowledge of art prices and value. I might’ve compared it to a new appliance, or concert tickets, and decided my ranges accordingly.
So how do we address the “lobster art challenge”?
We address this challenge at both XaaS Pricing and TBR via a methodology that relies on complementary perspectives.
Van Westendorp and other quantitative customer research methods can provide significant value in establishing a pricing strategy.
But we find that these types of approaches are often a better second step to a market and/or competitor-based pricing analysis. This is particularly true in emerging or evolving B2B SaaS categories.
Market and competitive comps help define a field of play which deeper customer research can help refine for a specific use cases. Market and competitive benchmarking can be broad or specific, depending on the market. If few competitors exist, an “old way” exists that represents the primary competition. Understanding monetization approaches and customer TCO/ROI for the “old way” can be valuable in determining how to price for the “new way”.
In many of our projects, we use competitor or market analysis as a starting point in refining ranges to be used in fielding a Van Westendorp survey. Without this pre-narrowing, responses fall all over the map, and don’t reflect the known reality. One response may indicate an optimal price of $1, and another $1,000. This doesn’t mean the respondent quality is poor; rather, it reflects the challenges in asking customers to define evolving markets and complex solutions.
The bottom-line? Value-based pricing, and the customer research processes utilized to help enact it, are an essential cornerstone of a B2B tech pricing strategy, including in SaaS and XaaS more broadly. But these approaches should not discount or avoid upfront and ongoing market and competitive research. Market and competitive pricing research helps provide an overall frame for understanding value, and is likely the frame with which a customer will assess price-for-value. To understand market and competitive pricing is to understand the customer mindset.
And lastly - go support your local artists and community creators! You’ll be glad you did. You might take home a lobster print.
Until next time,