Don’t Go Chasing Waterfalls: The Dark Side to Pricing

T-Boz, Left Eye, and ChilLi formed the famed female group TLC. Their smash hit “Waterfalls” was considered one of their biggest successes on the charts. With deep life meaning laced over every lyric, “Waterfalls” reminded us to avoid chasing waterfalls, or in more direct terms, negative habits and reckless behavior. The song sends a powerful and sobering message.

We now know the true goal of pricing to value in SaaS is increasing your enterprise value with an attractive growth story built on value delivered to customers. This takes hard work and patience, but not everyone is willing to make the sacrifice and resort to shortcuts or unsustainable tactics to get results.

That’s the point of this track, to remind you to keep it real. Pricing is a powerful tool at your disposal that must be used with integrity and grounded by the real problems your business will solve for real customers to create real value.

In tech, there are countless articles and podcasts telling us to be bolder, take risks, try new things, fail fast, and break everything. In this track, we’ll cover why it’s valuable to take your time when making decisions about pricing. Moving too fast can lead you down the wrong path and the next thing you know, you find yourself veering into the dark side of pricing.

Wait, what? There’s a dark side to pricing?

Yup.

There’s a lot of misinformation about pricing in SaaS today. If you create a pricing strategy and model with reckless abandon, you can kill growth and kill your business.

But don’t worry. It doesn’t take much to see the light and get back on the right track. You just need to stay focused on aligning to your current reality by pricing based on your provable value, actual position in the market, and data-driven willingness to pay from your customers.

Some companies get excited about a new pricing model they’ve derived during some offsite retreat, a new model that will “change everything!” But without data research, customer feedback, or analysis, there’s nothing to ground the new model in reality. Only after an abrupt pimp slap from a drop in sales or customer tweet uproar do they realize they’ve entered the dark side of pricing.

Don’t let this be you. If you are not careful, rushing out a new pricing scheme without validation is a risky bet that could drive your business off a cliff, and cars can’t fly (although I suspect Elon Musk is working on that).

Whether it is holding on to the market of the past or not acknowledging how you really stack up against the competition, avoid slipping into the dark side of pricing. Keep it real by pursuing a proven total addressable market (TAM) with ideal customers that need your product badly. Highlight the obvious differences in your product that make it more valuable compared to alternatives, and cultivate a sustainable business model to open a path to growth and profitability.

Here are two checklists to make sure your pricing is based on reality and that you are not chasing waterfalls.

Is your value proposition based on reality or hype? It’s based on reality if:

•  Your Net Promoter Score (NPS) score is high (50+).
•  You consistently deliver high-quality releases with low defects.
•  You can measure your positive differentiators versus the competition.
•  You continue to take market share from the competition.
•  Industry analysts rank your product as a top solution in your category.

Is your new pricing model achievable in the real world? It is achievable if:

•  You can update packages, price levels, and your pricing page with low effort.
•  You’re able to capture critical pricing data to measure the impact of changes.
•  You can update sales compensation or introduce incentives (like spiffs).
•  You have automated pricing exceptions for review and approval.
•  You can train sales and customer success on the new pricing with low effort.

Do you remember the subscription movie service MoviePass? They came up with a subscription model for watching movies in theaters similar to a gym membership, relying on high-volume signups but limited usage in order to be profitable. The value of the subscription was in having access to watch movies in theaters for a fixed price that was lower than the traditional pay-as-you-go model. Sounds good on paper, right?

Their one-size-fits-all pricing model brought in a ton of subscribers but closed off any paths to expand customers or align the right value with the right buyers. They priced based on a dream that they could amass a large-enough paying subscriber base to muscle their way into the middle of the movie distribution ecosystem and profit on both ends from a cut of the ticket and concession sales to selling consumer data back to Hollywood.

The big lesson here is to always price based on reality—not a fantasy waterfall that lost over $100 million. Stick to charging for the value you can prove with real customer feedback and understanding the operational constraints to capture value over time.

EXCERPTED FROM STREET PRICING: A PRICING PLAYLIST FOR HIP LEADERS IN B2B SaaS.

Written by Marcos Rivera.
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