- SaaS pricing power comes from the relationship between list and net
- Why software companies often obscure list prices
- Problems with hidden list prices
- Advantages of known list prices
- Problems with random net prices
- Advantages of predictable net prices
- When and how to reveal your list price
- When and how to reveal your net price
- The business case for transparent software pricing
SaaS pricing power comes from the relationship between list and net
Is list price or net price more important in B2B SaaS and other software sales?
Common wisdom says net price is more important since net is what software buyers pay and, thus, what they care about most. In fact, many software sellers never even reveal list prices to prospective buyers, preferring to keep how they maneuver from list to net obscure. The advantage supposedly is greater freedom for salespeople to negotiate and close deals.
We don’t see it that way. At Software Pricing Partners, our industry research, observation and experience tell us that both list price and net price are significant—and the relationship between them is a powerful lever in software sales:
- Transparency about the relationship between list and net is key to building buyer trust, naturally closing deals with less friction, expanding sales beachheads and increasing customer lifetime value
- The ability to manage the relationship between list and net is essential for accurately forecasting revenue streams, maintaining profit margins, effectively segmenting customers and developing successful product packaging strategies
What’s the difference between list price and net price?
All buyers purchasing the same software and service packages should start with the same list price.
Net price is the price buyers pay after earning discounts (such as, in volume pricing, by making a larger purchase).
All buyers purchasing the same volumes of the same packages of software and services should recieve the same net price.
That’s why we often encourage our clients to “sell like your prices are stapled to your forehead!” (not, as is more commonly done, by having various prices up your sleeve).
Why software companies often obscure list prices
A frequently cited reason for keeping list prices under wraps is to keep prospective buyers from getting hung up on price before they can be engaged in a discussion about the software’s value. Sell them on value, the theory goes, before you tell them how much it will cost them.
Another justification is to prevent competitors from knowing your pricing and trying to undercut you.
Very often, however, the primary reason for obscuring list prices—although few software companies would admit it—is that it facilitates discretionary discounting and one-off deals.
Should you put pricing on your website?
But before we get to those considerations, here’s the uber question: How well does your pricing plan align with your pricing reality?
In other words, are you following your plan? If the alignment is off, publishing a price list is meaningless. And doing it on your site puts your salesforce in an indefensible position.
Imagine the reaction of long-time customers who discover they are paying more than your published prices because they were never migrated to or even informed about a new pricing model. Or the prospects who view your pricing page and know their competitors are paying much less than what is published. How much respect will they have for your company, and how much trust in your pricing fairness?
If pricing plan and execution are well aligned, here are some considerations for publishing prices online:
Customer fit. Your pricing detail should be a mechanism for prospects to recognize their fit to your solution. One way to accomplish this is to illustrate price in sample configurations (maximum of three) that give prospects a feel for their costs.
Level of specificity. If your model includes multiples variables affecting price, like profit/non-profit, U.S./non-U.S., length of term, upfront payment, etc., you will want to communicate those variables in a way that helps the customers understand how the pricing applies to them. Keep it simple; don’t confuse and frustrate prospects with unnecessary detail.
Impact on sales process. If you typically introduce pricing toward the end of the sales cycle, publishing prices online has implications for your selling process. As discussed in this blog, there are good reasons to reveal list and net prices sooner, but the potential effects should be vetted with your sales team and pilot-tested before rolling out.
Problems with hidden list prices
When prospective buyers don’t know your list price, you can pull any net price out of your sleeve. Buyers have no way to judge whether or not the “great deal” you’re offering them is, in fact, great. They cannot know if they’re being charged the same price as another buyer purchasing the same thing.
Such conditions aren’t conducive to building customer trust. When trust is lacking, buyers often resort to defensive tactics. These might include requesting quotes for many different configurations and scenarios to see if they can trip you up, find holes in your pricing and exploit them for a better deal. Buyers may also take risk-mitigating measures, such as starting with a pilot or purchasing less than initially intended.
Another problem is that when presented solely with a net price, many buyers will assume it’s a starting place for negotiations and push for discounts from there. You can tell them the price you’re offering has already been substantially discounted, but they probably won’t believe you. (Maybe they’re thinking of how some retailers hike the price of an item before putting it on sale.) Likely they’ll press hard for a more favorable deal.
Advantages of known list prices
When buyers know your list price, they know the true starting place for deal-making. They can see exactly how good a deal you’re offering them. And if, as we recommend, you’re using a structured discounting framework, they understand what they need to do to earn that deal or an even better one.
Under these conditions, buyers become partners in a collaborative sales process. They work with you to explore various options for purchasing the software and services they want at a fair price, given the business value they expect to derive from them. Buyers trust you to understand their requirements and treat them fairly.
Problems with random net prices
If you don’t have a structured discounting framework or aren’t adhering to it, your net prices are largely random. Unfortunately, many software companies’ sales books are predominantly made up of discretionary and bespoke deals or custom packages—even for everyday sales configurations that shouldn’t require special treatment.
As a result, customers purchasing the same products or services may pay unjustifiably different prices. (When I joined Philip Ideson for his Art of Procurement podcast, he mentioned seeing price differences of as much as 10x for the same software product sold to different buyers. I’ve personally seen even more.)
Random net prices exacerbate the trust problem that begins with hiding list prices. Imagine one of your customers has lunch with a friend whose company just bought your software for a whole lot less! The result could be not only an immediate call from an angry customer but the gradual erosion of your brand reputation for trustworthiness and fair business dealings.
As word gets around that you play fast and loose with pricing, prospective buyers become warier. They enter the sales process from a position of distrust and put you through more hoops. They use your wide-ranging net prices as data points to argue for deeper discounts. That undercuts efforts to sell on value, drags out deals and raises sales costs. In all these ways, random net prices become an ongoing source of revenue leakage.
Advantages of predictable net prices
Predictable net prices remove friction from the sales process. Buyers who understand how your pricing works and trust your integrity are less likely to try to wear you down with all kinds of possible scenarios, playing with volume, packaging and creative combos just to see what discounts they can get. They’re more forthcoming with information and more likely to quickly get down to the business of working with you to define their real range of needs and explore options for best meeting them.
Deals close sooner when buyers have the transparent pricing information and confidence to promote and defend the purchase within their organizations. Often they’ll become strong champions for your software, exerting crucial influence for further deals and relationship expansion.
Other advantages of predictable net prices are stronger lead flow and higher success rate. Customers deriving value at a fair price from using your software are a great source of referrals. Their recommendations send you leads who already trust you and thus are easier to develop into sales.
You also have reliable data for analyzing what’s working in the sales process and propagating it across teams. As new learnings are gained, they can be shared so everyone evolves at the same pace to even higher performance.
When and how to reveal your list price
Move pricing up toward the beginning of your discussion with a prospect. It doesn’t have to be on the first call, but very soon in your interaction communicate that your pricing is transparent and fair.
Explain that, unlike many other software providers, you don’t hide your list prices and discounting framework. Ask the prospect if you can give them a quick hypothetical tour of how your pricing works so it will be clear to them when you begin exploring suitable packages and options.
Maybe something like: “We’ll explore which packages best suit your needs, but just as an example, let’s pretend that this one, Package X, is of interest. Here’s our list price for this package. Discounts off of list price are earned through the size of your commitment in dollars. For example, here’s the net price you would earn at this quantity, and here it is at 2x that. So you earn a larger and larger discount as you buy more units, add modules or choose more comprehensive packages. As your relationship with us grows, our pricing scales in the form of better and better pricing for you.”
When and how to reveal your net price
Once prospects understand in broad outlines how your pricing works, it’s time to explore a range of options that might fit their needs—exposing actual net prices along the way.
Even if the prospect has already zeroed in on a particular tiered product offering, you can compare the offer at various volumes and with different configurations of add-on modules. For example, say they’re curious about a security logging/reporting module, so you show them how adding that module would enable them to earn a larger discount, changing their overall net price. Maybe they decide they’re not all that interested in the module, so you take it out. The additional discount disappears, and the net price snaps back to where it was.
You could also mix additional incentives into the deal to achieve a lower net price. These might be a programmatic discount for paying annually in advance, a contract length incentive or some sort of deal desk promotion the buyer qualifies for. Show them how it would change their net price. If there’s no interest, remove the incentive(s), and the net price snaps back again.
Whatever options you explore together, the math always lines up. By showing prospects their net prices for larger or smaller commitments, you reinforce the messages of pricing transparency, equal opportunity to earn discounts and the advantages of thinking bigger. Buyers see your pricing has logic and fairness to it, building trust. This exploration process also subtlety trains buyers to understand they cannot game your model. Once that’s clear, deal-making proceeds more smoothly.
Salespeople who do this ranging process well have something we call pricing fluency. Tools and training are available to help your entire sales team achieve it.
The business case for transparent software pricing
In addition to the advantages I’ve discussed for the sales process, transparent pricing broadly benefits software companies.
While random net prices undercut the effectiveness of company leadership by making it difficult to predict revenue streams, this approach provides predictability. Where randomness clouds visibility into how customers perceive and derive value from the software—and what it’s worth to them—systematic, transparent pricing generates abundant, reliable data. It also reveals early signs of shifting value perception and customer mix.
This increased visibility fuels continuous improvement efforts. With transparent pricing, software companies can measure the effectiveness of current pricing and packaging, and predict the impacts of changing them.
The transparent approach also enables reliable analyses of customer willingness to pay, firmly rooted in how customers behave (not just what they say). Through controlled incremental price changes, companies can better understand and push the boundaries of demand elasticity for customer classes with similar usage and derived value characteristics. It can help you answer questions like “Are we seeing the first signs of price resistance?” and “Do we need to be spending this much to achieve our target growth rate?” and “What is our optimal price point for maximum revenues and profits?”
In addition, pricing transparency helps you harmonize pricing with the rate of new value creation from your product roadmap. Customers expect increasing value in B2B software, especially if subscription-based. So another way to think about this is that you’re taking pricing validation steps in a journey that keeps you on the safe side of the razor’s edge of being paid fairly for your software’s value.
To find out more about advantageous software pricing practices, keep reading this blog, or contact me: firstname.lastname@example.org.