Editor’s Note: We’ve got a fantastic lineup of speakers on tap for GeekWire’s Startup Day, taking place Saturday, Sept. 22nd at Meydenbauer Center in Bellevue. Among the entrepreneurs on the agenda are Box CEO Aaron Levie; Zulily CEO Darrell Cavens; and many others. It’s going to be an informative and high-energy day for those in the midst of building their startups (or those unsure about taking the plunge).
As Startup Day approaches, we’re highlighting some of our favorite talks from past events. This talk is from Twilio CEO Jeff Lawson, who demystifies how to price your Saas product. Do you go with a cost-based approach? What if you’re running on a low -ost per customer system? How do you quantify the value you’re creating? He covers all this and more in this amazing talk from StartupDay 2010.
Here are a few key takeaways from his talk:
SAAS is nice because it’s simple: “So you’ve decided that you want to make your living on SAAS and I think it’s time we had a little heart to heart here an chatted about this. The first thing that’s really nice is, I believe that theres a simple universal pricing formula for Saas that generally goes like this.
1.You create value for somebody.
2.The amount of value you create minus a little bit of discount and that’s what you can charge them.
If the value that you create is equal to the price you’re charging them then there’s no reason for them to buy it but if there’s a discount to it then they have a reason to buy it. It’s pretty straight forward and simple.
How to determine price: “Start here, do you generate value? If the answer is no, then ok let’s go back to the drawing board. If the answer is yes, great. Now we just have to figure out how much. There are a few different models that we can use to evaluate how you should determine that price. Again, I always come back to this overarching idea that it’s a function of how much value you’re generating for the customer, but there are a few different methods of backing into different pricing options.
1. Go with a cost based approach: “Essentially you’re looking at your costs for delivering the service. You’re going to have a margin and you’re going to come up with a price. To drop in some science here, a margin is your profit over the price you charge (there are a few ways to calculate margin but this is the way that I’ve always done it) so it’s always going to be between 0 and 100. In case you don’t know, your profit is the price you charge minus your costs, duh. Then you end up with this formula if you do the science- Price=Cost/1-margin. Simple math but that’s how you do it if you want to try and figure out what your margin is. So if you have a product where you do have these hard unit costs with what you’re delivering, this is a clear starting point with how you should think about your business. Twilio, we’re like this. We’re in the telecom space where there are hard unit costs. We look at this quite a bit.”
2.What if your unit costs are practically zero?: “This is the case with a lot of web-based SAAS products right? Maybe your costs are two web servers and a MySQL machine for about $200 a month. You can serve a whole lot of customers on just those three machines! Well then it’s like, my unit costs for each customer is 30 cents so I just charge them 30 cents? No, there are probably better ways to estimate the value that you’re generating for them.
That’s where I’m going to focus on some other ways on calculating your price. This is where I like to talk about value based pricing. Trying to figure out how much value you’re generating and therefore how much you should be charging. Look and ask, are my customers saving money by replacing an existing solution with mine? How much money are they saving by using you as opposed to some sort of legacy solution. Another way that they might save money is by gaining efficiency. Somehow the company became more efficient by adopting your product and that’s how they’re saving money. Again you’d have to ask the question, how much more efficient are they and how much money does that represent? And that is your value prop
Another way to look at it is, are they generating more revenue because of you. So you increase the top line and by of course how much. If you’re able to figure out how adoption of your product effects one of these three things and by how much, you’ve now sort of quantified the value you’re generating and you can now price accordingly.
Look for more talks from the Startup Day archives in the coming days, and make sure to join us Sept. 22 for Startup Day 2012!
Editor’s note: Twilio is a sponsor of this year’s Startup Day.