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.