In a recent YouTube video titled "Why Most SaaS Pricing Fails Without Understanding the PPP Hierarchy," Ajit Ghuman, founder of Monetizely and author of "Price to Scale," shares critical insights on why many SaaS companies are losing millions in revenue due to flawed pricing strategies. Ghuman introduces a strategic framework that flips conventional pricing approaches on their head.
The Costly Mistake in SaaS Pricing
Most SaaS founders and product leaders make a fundamental error when developing their pricing strategy: they start with the price point. As Ghuman points out in his video, "Most founders and product leaders get this completely backward. They jump straight into the price points."
This backward approach leads to missed opportunities and undervalued products. But what's the right starting point?
Introducing the PPP Hierarchy
Ghuman introduces a framework from his book called the PPP Hierarchy:
- Positioning
- Packaging
- Pricing
This hierarchical approach completely reframes how SaaS companies should think about monetization.
"Most pricing problems aren't actually pricing problems," Ghuman explains. "They're actually positioning problems that are manifesting in the pricing that you're able to extract from the market."
Why Positioning Must Come First
Positioning forms the foundation of effective pricing. According to Ghuman, "Positioning is about carving a place of influence in your buyer's mind. It's about figuring out who your benefits you bring to them and how you solve their problems better than alternatives."
This foundational step is where many companies falter. Without clear differentiation and a strong position in customers' minds, price sensitivity increases dramatically.
Ghuman offers a powerful example from the marketing classic "Mad Men":
"Lucky Strike cigarettes didn't really have any differentiators from their competitors. But what was their genius? Their genius was positioning themselves around one aspect of tobacco manufacturing was that their tobacco in the cigarettes were roasted. In reality, all cigarette companies roasted their tobacco. But by claiming this position first, Lucky Strike created a perception of differentiation by which they could charge a premium."
The lesson is clear: "positioning comes far before pricing. It always does."
The Role of Packaging
Only after establishing positioning should companies consider packaging. Ghuman defines packaging as creating "the right offers with the right combination of features for each market segment."
He offers an illuminating analogy: "Think of packages like the vehicle of your positioning." Just as BMW has both a brand position and distinct vehicle packages (like the 3 Series), SaaS companies need tiered offerings that align with their positioning and appeal to different customer segments.
"For each customer, different customer segment, you want to create the feature set that solves their specific problems that map to their willingness to pay," Ghuman advises.
Setting the Right Price Points
The final step—and only after positioning and packaging are established—is determining price points. This includes selecting the right pricing metric (seats vs. usage), model (linear vs. tiered), and actual price points.
The Common Mistake SaaS Companies Make
Many SaaS companies take a shortcut approach to pricing: "Software companies are thinking, hey, I have X customer, they're selling something for $10, I'll also sell something for $12. Are you making tomatoes? Tomatoes are commodity products and even tomatoes can be differentiated, so why are you not differentiating?"
This commoditization approach leads to price wars and compressed margins. By skipping proper positioning, these companies immediately handicap their revenue potential.
How to Implement the PPP Hierarchy
Ghuman offers practical advice for implementing the PPP Hierarchy:
- Start with positioning: "Who is your ideal customer? What pain points are you solving for them? How are you uniquely better?" Get inside your customers' minds.
- Create packages: Develop feature sets for each customer segment that directly address their specific problems.
- Determine pricing: Only then select your pricing metric and set price points.
Final Advice for SaaS Founders
Ghuman concludes with a powerful observation for SaaS leaders: "Before you hire expensive consultants that rip apart your pricing model, first make sure you nailed your positioning. If your sales team is constantly getting pushback on price, it's likely more because your positioning isn't differentiated enough."
The PPP Hierarchy—Positioning, Packaging, and then Pricing—provides a structured approach to maximize revenue and valuation. By following this framework, SaaS companies can escape the commodity trap and build pricing power that reflects their true value.
As Ghuman emphasizes, "Remember the PPP hierarchy, positioning, packaging and then pricing on top. Get this right and you'll maximize your revenue and valuation."
For deeper guidance or support on pricing strategy, we recommend connecting with Monetizely. You may also feel free to schedule a call with the founders.