This article is based on the video "Use The Three Cs To Set Your SaaS Price Points" from Monetizely's YouTube channel. In this educational video, the speaker shares a straightforward framework for establishing effective price points for SaaS products by focusing on three critical factors: Customer, Competition, and COGS (Cost of Goods Sold).
Beyond the Price Point: Setting the Context
Before diving into price points specifically, it's important to understand where pricing fits in the larger product strategy. As the speaker notes in the video: "It's not just about the price point. You first have to think about the offer, the packaging, right? How are you going to set the right offer for the right segment because you're going to make the most amount of money there."
The speaker emphasizes that proper packaging and selecting the right pricing metric that aligns your offering with customer needs should come before determining specific price points. However, once you've figured out those elements, you can focus on setting the actual price.
The Three Cs of Price Point Setting
The video presents a refreshingly simple approach to pricing: "I'll give you very simple hack, no 10,000 strategies, only three Cs to setting the right price point. Customer, cogs and competition."
Let's explore each of these components:
1. Customer: Understanding Willingness to Pay
The first C focuses on determining how much your customers are willing to pay for your solution. The speaker recommends two primary methods for gathering this intelligence:
Van Westendorp Analysis
For products that are relatively straightforward and easy for customers to understand, the Van Westendorp method is recommended. This approach involves surveying potential customers with specific questions:
"You can do something like a Van Western of analysis, which is very simply said, asking customers the maximum that they would be willing to pay and beyond which they cannot foresee paying for a product like this and the number below which they would start to question the quality."
This method helps identify the Optimal Price Point (OPP), which the speaker describes as "a price at which the same number of people consider the product too expensive or too cheap. So it's where you maximize your market."
Conjoint Analysis
For simpler offerings like subscription services targeting consumers or SMBs, conjoint analysis is suggested as an alternative method. This more sophisticated approach helps determine not just price sensitivity but also how customers value different features and combinations of your offering.
2. Competition: Understanding the Alternatives
The second C involves researching your competition, but with an important caveat. As the speaker warns, "The problem with direct competitors is you may have a wide open market, you may have more of a blue ocean market, and you may not have many competitors… The moment you say, hey, I'm really worried about the competition, then you start to actually get in their frame of business."
Instead of fixating solely on direct competitors, the speaker advises considering all alternatives available to customers, including:
- Direct competitors with similar offerings
- AI-powered alternatives that may replicate your product's functionality
- Internal solutions customers might build themselves
- Simple tools like spreadsheets that often compete with software solutions
The key is to "estimate how much effort the customer is going to want to spend on finding an alternative. So that would be the price that they would pay for that alternative."
3. COGS: Understanding Your Costs
The final C is Cost of Goods Sold, which includes both:
- Fixed costs that went into creating the product
- Ongoing costs to deliver the product
While many businesses focus only on marginal costs, the speaker recommends considering both: "I would advise you take both into account, especially if fixed costs are very high, as in the case of building foundation LLM and AI products."
Making the Final Pricing Decision
With data from all three Cs in hand, setting the actual price point becomes a judgment call. The speaker explains:
"Do you want to be priced closer to where most of your customers are? Do you want to be priced at a little bit of premium? Where do you want to be relative to the pricing for alternatives and competition? And you probably definitely want to be at a certain level above your cost of goods sold. Is that a 30% margin, a 40% margin, an 80% margin?"
The answer to these questions will depend on the information gathered about customer willingness to pay, competitive alternatives, and your cost structure.
Segment-Specific Pricing: Where the Real Money Is
Perhaps the most valuable insight from the video is that this analysis should be performed separately for each customer segment:
"You have to do this exercise for each and every different customer segment because there are some customer segments that don't have a lot of willingness to pay. But there are… a thin sliver of customers that tend to have a very high willingness to pay."
The speaker points out that certain segments—like government contracts, healthcare businesses with compliance needs, or enterprises with security requirements—might have 10-30x higher willingness to pay than other segments.
"You really need to do the price point analysis by understanding your customer segments and doing this across your customer segments well, because that is where you will find the delta in willingness to pay, and that's where you end up making most of the money."
Conclusion: Simplicity in Pricing Strategy
The Three Cs framework offers a refreshingly straightforward approach to what can often feel like an overwhelming pricing challenge. By focusing on Customer willingness to pay, Competition and alternatives, and your COGS, you can make informed pricing decisions that maximize revenue without overcomplicating the process.
As the speaker concludes, "In a very simple way, trying to figure out price points, customer competition and cogs, then figure out and go from there."
For SaaS executives looking to optimize their pricing strategy, starting with these three foundational elements can provide clarity and direction, helping to ensure your pricing aligns with both market realities and internal business objectives.