Know your lowest possible price

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By Kirk Averett

A new leader took over a healthy and growing SaaS division and, after meeting his team, quickly started running the numbers on the business. It had been a while since a real P&L view was available, but he met with the finance team and others to develop a solid financial perspective.

Together, we generated a clean per seat per month view of revenue, expenses, and margins. I immediately thought, "uh-oh." The largest customer was paying a price below the cost. There were other customers in a price range that made me uncomfortable. How did this happen?

"I immediately thought, 'uh-oh.'"

Sales teams are motivated and incentivized to close deals. Price pressure from prospects grows as deal sizes get larger. User count X price per month X 12 months can generate sticker shock for a customer's budget. Sellers often need to generously apply their selling skills to their own finance team to negotiate a lower price for a prospect. I think this is healthy and normal.

It falls to CEO's, CFO's, GM's, and sometimes product managers to ensure that every price quote is a good deal for the business. As a growing business, it is sometimes difficult to understand product costs and how they relate to different customers. Some 3rd party software licenses scale simply with user count, but most do not. Some customer types use more storage, while others use less. It is frequently tricky to understand customer acquisition costs.

Well, I dug into every detail of this exceptional customer. Per-user, they used the Support team very little. They had a small footprint in actual system utilization. When I re-ran the numbers on this specific customer's costs, we were close to breaking even. Our trend lines on several system costs were already heading downwards. No need to panic!

"No need to panic!"

But the new leader knew it was time to create a pricing "floor." My team took on the task, and we generated new, more thoughtful pricing schedules. It was especially helpful to develop a view of the absolute rock bottom price for the product.

"It was especially helpful to develop a view of the absolute rock bottom price for the product."

The process of creating rock bottom pricing requires that every single cost component is thoroughly understood relative to per-unit pricing. Having this prepared well before a demanding prospect knocks on the door removes urgency that engenders mistakes. You will learn a lot from working through the exercise, and it will shape future business decisions. There were a few lessons we discovered that you might want to consider.

1. Be careful in reducing a cost line item to zero. Every customer contributes to the average on a product P&L. Some customers cost more than average, some less. What is the minimum charge that should apply?

2. Support costs for B2B SaaS products often scale more closely with customer count than with users. Support policies may require, or convenience may dictate, that users speak with an internal expert before reaching out to the SaaS provider.

3. Some large deals come through executive relationships or other means that don't utilize standard sales and marketing resources.

4. SaaS marketing usually aims to generate a large number of leads, not necessarily a large number of users. Again, this means that cost allocations may be per customer and not per user.

5. If the customer pays by invoice and not by credit card, then credit card fees will not apply.

6. If the customer is large and trustworthy, a bad debt cost allocation may not make sense.

Once you have a clear picture of the bare minimum costs in every regard, creating a custom price for a new prospect is no longer a frenzy. Asking key questions to understand how they will use systems will provide the inputs necessary to update the existing model. Decide the minimum margin you will accept, and then you have a quote ready to deliver.