SaaS Pricing Fairness: The Critical Contribution to Software Success

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If you purchased a product that was the same as your neighbor’s–with the same configuration–would you expect to pay about the same price?

Probably yes, right? If not, one of you might feel ripped off.

Yet when it comes to software, buyers frequently pay different prices for the same product, a situation that can diminish a seller’s credibility, negotiating strength and ongoing revenue stream.

The Market Fairness Principle

I believe there is a principle called Market Fairness that is relevant to most software companies. In a nutshell, Market Fairness can be thought of like this: if two customers buy the same set of products and services from you, they should pay the same price or rate.

Software companies are particularly vulnerable to violating the Market Fairness principle for several reasons. For one, they may think that each implementation of their complex product is unique enough to justify a different price, helping them “get away with” charging different prices. Also, many software companies are hyper-focused on growing their customer base as quickly as possible and are therefore willing to make whatever deal is necessary. And because of ownership structures heavily weighted with outside investors, software companies practically invented the end-of-quarter discount rush.

I am not implying that software cannot be discounted based on the situation. I am implying that Market Fairness cannot exist without structured and consistent discounts. And that the penalties for ignoring Market Fairness can be severe.

“Market Fairness cannot exist without structured and consistent discounts…the penalties for ignoring Market Fairness can be severe.”Chris Mele, Software Pricing Partners, LLC

Why Market Fairness Is So Important

Even if it were true (which it almost never is) that no customer would ever find out what another customer is paying for your software, adhering to Market Fairness principles turns out to be in your best interest. Here are some of the very important things that can happen when Market Fairness is part of your company’s pricing philosophy:

  • Shorter sales cycles: Customers learn over time that there is not much progress to be made in pressuring for special discounts, so the conversation shifts to what counts–applying the appropriate products and services to a pressing problem the customer is trying to solve.
  • Elimination of the end-of-quarter mad dash: There is little incentive for prospects to wait until the end of the quarter to engage with you if the price remains the same regardless of when it is purchased.
  • Protected MRR: With Market Fairness principles, salespeople have a powerful wall to lean against when combatting price nibbling or negotiating a request for an unscheduled discount. It protects your core recurring revenue stream from erosion.
  • Higher sales team confidence: When your sales team clearly understands the parameters of discounting, they are much more confident in the integrity of the pricing they offer, and more capable negotiators.

Conversely, companies that do not inject Market Fairness into their pricing tend to struggle with maximizing profitability over the long-term, as customers inevitably become adept at navigating through the cracks.

Prioritizing Market Fairness in your pricing is a strong step in the right direction for your software company. Without it, getting paid fairly (and consistently) for the value you deliver becomes unnecessarily challenging.

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About the Author

Chris Mele

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Chris is a software monetization and pricing expert and former CEO of an award-winning SaaS company. An avid scuba diver, Chris should probably move closer to the beach.

Comments 4

  1. Nice post, Chris. I think Rusty is right to focus on the buyer. Another important reason market fairness is vital is for “customer satisfaction.” We live in world now where small/mid-sized customers especially talk to each other before making important purchase decisions. Information flows much more freely than ever before. SaaS vendors, therefore, need to be able to explain to their customers/prospects why their price might be different from another customer’s. And discounts have to be rational and consistently applied.

  2. I agree with you Chris. I think the primary driver of inconsistent discounts is the absence of a solid, well-reasoned, and effective pricing framework.

    In its absence, a vast number of (internal and in-market) variables result in an equally vast variety of pricing outcomes. Competition is only a single variable in that complex equation.

    And I think William was interpreting “market fairness” as an ideological market objective, when it’s really (I think) referring to price integrity, or the ability of an organization to hold firm to a structured pricing model.

    One of the results of price integrity is market fairness, or the ability of two customers, under like conditions, to receive the same price, and for the organization to have a defensible explanation for how each came to be.

    I would even add others benefits to your list Chris.

    It also establishes a market perception of “absolute value”. When people make a purchase where the process has been negotiated, then no matter what the outcome is, and no matter what you’ve given up to close the deal, it often leaves an emotional residue of doubt in the buyer. “Could I have gotten a better deal?” “Did I get taken advantage of?”

    And all that emotional overhead experienced after a deal closes deprives the buyer of the full ownership pleasure that comes from knowing, without question, that you just acquired something valuable, even if at great cost. (It’s a behavioral economics principle explored brilliantly in the bestseller “The Paradox of Choice”).

    In fact, the psychology of buying suggests that the more you had to sacrifice, the more invested you feel in your purchase. That investment creates an emotional connection to the brand, because there’s a strong correlation between what you have to give up to acquire something and the level of commitment you feel to it.

    What’s more, that feeling of investment creates loss aversion, or the powerful psychological motivation to behave in ways to maximize your investment and not lose value.

    Personally, I think that the loss aversion an invested buyer feels after making an un-compromised purchase results in a lift in the perceived urgency to implement and use the product/service.

    In fact, I would be interested to measure correlation between price integrity and urgency to implement. Based on the psychology at work here, my (untested) suspicion is that when you compromise on price, you damage urgency to implement.

    Either way, price negotiations result in a perceived “shaky foundation” of value that can disproportionately impact the resulting brand impression (because of primacy bias, how the first events in a sequence have a disproportionate impact on what we remember).

    The moment you compromise on your value integrity, you contaminate the entire value landscape for everything you offer now, and in the future. And the next time you go to manufacture perceived value, you’ll first have to clear away all that rubble, because you’ve now established a precedence of compromise.

    Whatever your “actual value” is, the lack of price integrity does irreparable harm to perceived value.

  3. No mention of the C-word? Competition is the primary driver behind inconsistent discounts, especially in a win-at-all-cost market with little incremental product cost (on-premise software implied in your e-mail, not the SaaS mentioned here).

    Who says there is a “market fairness principle”? is that anymore a truth than “health benefits are a human right?” or “life begins at conception”?

    Good negotiators win greater value, which may not always be “price”.

    1. Post
      Author

      You bring up a good point about competition, but we wouldn’t necessarily agree competition is the universal, primary driver behind inconsistent discounts. Even in highly competitive markets, competition is one of many factors that influence sales rep behavior. As you pointed out, salespeople come in all sorts of flavors when it comes to their abilities to defend value and they also come baked in with a variety of things that motivate them—including a wide variety principles they believe in.

      You are, of course, correct that there is no universal “fairness principle” but we believe it is always wise to treat similar customers similarly when it comes to pricing. But we very much believe that customers purchasing the same products, under the same terms and conditions, should pay equal prices. Most customers will tolerate minor inconsistencies in pricing.

      While you may not strictly adhere to Market Fairness, most Favored Nation clauses and GSA contracts will legally demand it and hold you accountable should you violate it. How do you handle this at your company? If salespeople can indeed charge what they believe the value is – and therefore charge differently for similar customers who consume the same solutions at the same volume, doesn’t that create all sorts of legal issues for you (not to mention dissatisfied customers)?

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