A Little Less About Pricing. A Little More About Deal Size. Please.

If you look on Quora, or almost anywhere people are talking about web services, you’ll see endless threads on pricing.  Should I price my SaaS service at $19.99 or $20.00 a month?  Bill bi-monthly, bi-quarterly, tri-annually?  Offer a 13.2% discount or a 14.1% discount for prepayment?  Run my pricing page from cheapest to most expensive, or most expensive to cheapest?

I mean, yes, pricing is important.  But the thing is, unless you only sell one seat at a time, and always only ever will — then pricing is just one variable in deal size.

>> Deal Size = Price Per Seat  x  Number of Seats.

It’s not that this is rocket science.  It isn’t.  But if you haven’t lived it, understand that Deal Size is the single most important factor in your SaaS business model.  Because it will completely define how you do sales and marketing, and to a just somewhat lesser extent, prioritize feature development and product/engineering.

A rough overview:  If your average annual/annualized deal size is:

  • $60-$1000 Average Annual Deal Size:  then you won’t be able to hire any true sales people, or do any 1-1 marketing.   Salespeople will either be too expensive, or their comp will consume 100% of the deal.  And marketing will be too expensive to do anything 1-on-1, and it’s too early for TV ;)  Basically, you’ll need either a freemium business model, or a word-of-mouth/viral model, or in any event, a model where you spend almost nothing on marketing, and the website just takes the order, with some human support from product specialists/customer service as necessary.  E.g., from inception to 2012/today, Intuit has acquired 80%+ of its customers from word-of-mouth and zero-ish cost marketing.  Think about that … that needs to be you here.
  • $1000-$5000 Average Annual Deal Size: then you’ll be able to make a very efficient inside sales team work, and do limited 1-1 marketing.  Adwords may work here.  You can’t have a field sales team, or much out-bound work, but you can have a high-volume inside sales team.  Your marketing costs per lead have to be pretty low.
  • $5000-$20,000 Average Annual Deal Size: then you can do a little of everything.  You’ll primarily have an inside sales team, but you can segment your sales team by deal size, and have some field sales coverage.  Your marketing team can afford to do a lot of 1-1 marketing, including roadshows, non-critical events, paid webinars, and expensive $1-$2 per click Adwords and other direct online marketing.  You can also afford to do plenty of prospecting and outbound sales, and hire a whole team to do this.
  • $20,000+ Average Annual Deal Size.  You are now firmly enterprise-ish, with an inside sales and a field sales component.  You can afford to spend $4,000-$5,000 in marketing costs to get a customer.  You’ll be getting on a lot of planes.  You’ll consume a lot of capital, but your top line will grow faster.
  • Above $100k:  Pure Enterprise.  Suits, ties for everyone.  SMB falls away.

>> Notice no mention of pricing per se.

Your deal size will define your product (yes, there’s something circular in that statement) — and your entire company.

_______________________

Interesting summary of different SaaS companies range of deal sizes below, from Marketing Sherpa:

Pricing bear from TunnelBear pricing page here.

5 comments

  1. Brendon Cassidy

    Agreed on almost all of it. I don’t think “Get on a Jet” has ever worked as a central strategy to building a SaaS company. Ever. In history. Salesforce=No. Netsuite=No. Box=No. Marketo=No. Eloqua=No. EchoSign=No. Docusign=No. I think any investor putting his dollars into a SaaS company pitching their ability to scale on “Get on a Jet” would be better off just burning the cash in their lobby. At least it wouldn’t create false expectations.

  2. For sure. Actually I just wasn’t being eloquent. My only point was as the average deal size grows past $20k, say to $50k … you can afford to go visit customers, and they’ll want to be visited. Not for prospecting, or cold calls — but as part of the sales and/or post-sales process of at least some deals, the larger ones if nothing else. And not on every deal, for sure. {At $1m, it’s probably every deal, and you have field sales offices anyway once you’re at some scale.}

    But below that $20k-$100k tier, you simply can’t afford to get on a plane. Even putting cost aside, the deal velocity needs to be too high and you just don’t have the time.

  3. Pingback: A Little Less About Pricing. A Little More About Deal Size. Please. | WikiCloud

  4. Good post Jason.
    To build on it, I think there is value in segmenting your business, if your product applies to different size customers (in general, ASP is correlated to customer size). There is benefit of being able to leverage the strengths of various segments: small deals=>revenue predictability, large deals=>credibility and scale – blended model=>predictability + credibility + scale.
    While there are public SaaS players that are single-threaded, most tend to have SB and Enterprise segments (each with different weightings). It also provide competitive protection (no room on the low end for disruption, no caps at the high end to limit credibility).
    The one should apply your deal size models to each segment, and structure multiple sales teams/processes/channels to address each. Hopefully keeping the product & messaging leverage-able across the segments.
    The risk is lack of focus, becoming master of none.

  5. Absolutely. That would be the natural follow-up post.

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