The Multi-Million-Dollar Question: How Much Will Your Enterprise SaaS Customer Pay? Tested Strategies to Determine WTP for SaaS Product Managers

Tldr;

• Willingness to Pay (WTP) is the highest price a customer is comfortable paying.
• 50% of companies have never run pricing studies per a recent survey, However, a study suggests that a 1% improvement in pricing can increase profits by up to 11%. This is why determining WTP becomes important for product managers.
• I’ve identified 7 challenges in getting WTP right: multiple decision-makers, complex value propositions provided by enterprise SaaS products, and a continuously moving target are at the top. ??
• There are many scientific methodologies that can be applied to determine WTP, however the two I’ve seen used most are the Multiple Price List Methodology and Conjoint Analysis.?
• There are some practical ways of testing WTP for product managers, key amongst these are looking at past sales data, researching competitors (where they exist) and running user surveys, amongst others.?
• Ultimately, for sellers who are at the front line assessing WTP directly with customers, it is key to understand customers' motivations and applying thought architecture to pin down the willingness to pay.?

Imagine you're at a bakery, eyeing a delicious cake. Now, let's say you decide to buy the cake. How much are you willing to pay for it? Willingness to pay is the highest amount you'd feel comfortable spending on something that brings you satisfaction or happiness. Suppose you think the cake is worth $12.50 to you; that's your maximum willingness to pay. If the cake costs $10, you're getting a deal because you're paying less than what it's worth to you. But if it's priced at $15, you'd likely walk away because it doesn't seem worth it anymore.

In the scenario above, it's easy to determine your willingness to pay for a cake.?

However, this can get very challenging in the world of enterprise B2B SaaS, where the users are not the final decision makers and have little incentive to tell you what their max willingness to pay is.?

Challenges in Assessing WTP in Enterprise SaaS

Several unique challenges complicate the assessment of WTP in a B2B context ??

Challenge 1: Multiple Decision-Makers

In enterprise sales, the decision to purchase software typically involves multiple stakeholders, including IT, senior management, end-users, and procurement departments. Each group may have different priorities and perceptions of value, complicating the consensus on the product’s worth and the maximum price the organization is willing to pay.

Challenge 2: Complex Value Propositions

SaaS products often have complex features and integrations that can be difficult for potential buyers to evaluate in terms of direct monetary value. Determining how much these features are worth to a business can be intricate and subjective.

Challenge 3: Value can be a moving target?

Willingness to pay is a constantly moving target, as an interval per Emanuel Martonca , Founder of Soft Fight and Pricing Strategist.

Challenge 4: Customization and Scalability

Enterprise software typically requires customization or scalability to meet specific business needs, which can affect the pricing structure. This variability makes it harder to set a fixed price that reflects the value across different organizations and use cases.

Challenge 5: Economic and Competitive Influence

Macroeconomic conditions and competitive dynamics (Head-dizzying changes in the AI space) can swiftly alter a company’s spending capability and willingness to invest in new software. Keeping up with these changes in real-time is challenging but essential for accurately assessing WTP.

Challenge 6: Measuring ROI

For many enterprises, the decision to purchase SaaS products is heavily dependent on the expected return on investment (ROI). Demonstrating clear, quantifiable ROI can be challenging, but is crucial for justifying the cost to buyers.

Challenge 7: Long Sales Cycles

B2B sales cycles can be lengthy, involving demos, trials, and negotiations, which may shift the perception of value over time. Initial WTP assessments may change as stakeholders gain more familiarity with the software, or as organizational priorities shift.

Addressing these challenges...

...often requires a sophisticated approach, including thorough market research, flexible pricing models, and ongoing engagement with all levels of stakeholders within the prospective customer's organization.?

A Survey run by Irrational Labs shows that many software companies lack experience with pricing studies. 50% of respondents said their companies have never conducted pricing studies, and only 25% reported having even A/B tested a pricing change.

However, a McKinsey analysis suggests that a 1% improvement in your pricing can increase your profits by up to 11%.

For this reason, many larger SaaS companies have dedicated pricing strategists who can support product managers with pricing new and existing products.?

There are numerous scientific ways to run a willingness to pay study and many comprehensive resources are available online like this one from Kristen Berman , this paper from Randy Yang Gao , Simon Huang , and Minah Jung among others.?

Quantitative Methods for Assessing WTP

Below I present to you quantitative methods and my take on them ??:

1. Van Westendorp

This method uses four open-ended questions to explore price points at which a product is considered too cheap, a bargain, expensive, or too expensive.

? Pros: Simple and straightforward, providing detailed individual price sensitivity.

? Cons: Subject to hypothetical bias where respondents might not accurately predict their real-world behaviour, leading to inflated WTP estimates.

My take: Never really seen being used in practice because 1) there is no incentive for customers to tell you the maximum they would pay for your product/feature, and 2) The setting is hypothetical as no real cash is exchanged so the results can be inconsistent with reality.?

2. Becker-DeGroot-Marschak (BDM)

Creates an incentive for participants to make a real purchase. Participants state the maximum price they're willing to pay. A random price is then generated; if it's lower than the stated price, the participant buys the item at that price. If it's higher, they buy nothing.

? Pros: Reduces hypothetical bias by creating real purchase conditions.

? Cons: Doesn’t work in an enterprise setting because there are many decision-makers?

My Take: Wasn’t practical as a methodology for us in the enterprise SaaS space, but I can see this working well in the B2C segment.??

3.?Multiple price list (MPL)

Respondents are given a list of prices and must indicate yes or no to each, determining their WTP indirectly.

? Pros: Simpler and more transparent than BDM, making it easier for participants to understand. More control over the price points tested.?

? Cons: Can lead to underestimating WTP, as it may emphasize the opportunity cost of spending.?

?? My Take: We tried this methodology once with 500 respondents and the results were inconclusive because the response cohort was varied, and the overall feedback did not match the trends we derived from our past sales data. Doing this right in the enterprise setting requires professionals and if the results are inconclusive the ROI can be low.?

4. Conjoint Analysis?

Participants choose from multiple product options with varying features and prices, mirroring real purchase decisions.

? Pros: Allows for a more realistic assessment of relative WTP and can handle complex product attributes.

? Cons: Requires careful design and may be resource-intensive to implement effectively.

?? My Take: The most common approach in the SaaS industry and well understood by companies and customers alike, also focuses on the value perception, which provides the best results when trying to determine WTP of a product/feature.?

Some good resources on conjoint analysis can be found here and here .?

Practical Approaches to Determining WTP for Product Managers?

I’ve performed a few WTP studies in my career, and it's definitely a hard nut to crack. ?? ??

When launching a new product, determining the right price point is crucial for market success. Pricing too high will result in lost revenue, and pricing too low will impact margins.?

Here are 5 practical ways to determine the willingness to pay for a new product launch I can vouch for. These utilize a blend of analytics, market/competitor testing, and strategic comparisons. No one methodology is going to fully provide a clear answer?—?hence it's important to collect as many if not all of these data points and to make your decision:

Below are the approaches and my comments on them ??

Approach 1: Analyzing past data for adjacent products and their price sensitivity?

?? My commentary:

• Look at the net price realized for existing adjacent products (will be good to get a sense of price sensitivity and any seasonality in price realization)
• An adjacent product will still be different, so make sure you understand the key differences and account for those.
• Low effort to do this - data should be in house and easily accessible.?

Approach 2: User survey on value of feature set and general willingness to pay, leading to conjoint analysis?

?? My commentary:

• If done well, it can provide some great results on the value of feature sets - Data usually goes into a conjoint analysis that can help define the most valuable feature sets for customers.?
• In the past, I’ve had mixed results with broad-based surveys because of the way the surveys were set up (remember, there are multiple decision-makers in the process). The responses provided inconclusive results on price points??
• High effort - If you do this yourself without any past experience, a lot can go wrong. Get professionals to help if you can.?

Approach 3: Continuous & Obsessive Tracking of? Competitor's product/pricing moves

?? My commentary:

• Let's be honest, some products can have many competitors - Who has the time to track 10+ competitors constantly? I usually prioritize 1-2 competitors I want to track obsessively on a daily basis, and set others as secondary/tertiary competitors that I track less frequently.?
• I then performed a feature-by-feature comparison along with a performance benchmark between my new product and the competitor's offerings.
• Pricing Expert Chinmay Saraf also likes to look at the competitors features, frequency of use by customers and cost of introduction of the feature to do a cost benefit analysis.?
• Working with the sales teams, I like to see whether the primary competitors' offerings are coming up in sales discussions and what effective pricing they might be offering customers (not list price, but net prices after discounts) these are not always easily available, but if it is - use it to your advantage.?
• Basically, I am watching the competitors like a hawk ??, tracking their every move. I set up Google alerts and regularly check the competitor's blogs and websites.?
• Medium effort, but the effort is worth it in my opinion.

Approach 4: Beta Testing Commitment

?? My commentary:

• Design a beta program for pricing?
• Don’t define a unit price point?
• Set up a bulk price deal commitment with bounded usage for a specified period of time. Say upwards of $100K for up to 10,000 units needs to be consumed within 3 months.???
• This needs to be negotiated deal by deal, customer by customer, and you want to track what the highest price paid among different customers was, that becomes a reference point.?
• Can work well if the program is set up with the right checks and balances so you’re not losing money on every deal, and you have a way to track customers' actual usage of the product/features.?
• Convincing customers to buy in without clear unit prices can be tough, but if it's tied with a perceived benefit (like free services thrown in) it can work.?
• High effort but has gotten me closest to a real-world simulation of capturing a customer's full budget - again might not be conclusive in isolation.?

Approach 5: Third-party data on WTP from key influencers in targeted accounts

?? My remarks:

• This data is rare and not easily available but working with third-party vendors to gather additional resources on what key influencers in a list of targeted customers might be willing to pay for your product can be as close to accurate as possible.?
• Low effort, however data needs to be available and when available it can be expensive.?

Admittedly...

...willingness to pay studies are indeed hard to run. In most cases, product/pricing teams work with many constraints?—? If I had to prioritize, I would focus on analyzing internal data and tracking competitors pricing at a minimum.

Willingness to Pay - A Seller’s Perspective

As Product Managers/Pricing Strategists, our goal is to determine the highest price each customer is willing to pay using the various scientific methodologies listed above. However, we must remember that sellers are at the forefront of capturing customers' wallet share and budgets.

From a seller’s perspective—arguably the most crucial viewpoint—Willingness to Pay (WTP) should be considered in terms of the total budget (annual, project-specific) or, ideally, how much the client is willing to pay to solve their problem.

Many sellers mistakenly inquire about customers' WTP based on the common pricing metrics in their market segment. This approach can be limiting.

While buyers often ask about price to facilitate easy comparisons across offers, a more effective way to consider WTP is by focusing on the project's total budget. This involves understanding:

1. Customer Expectations: These could be influenced by past experiences with similar projects or external factors like market trends and media reports.
2. Affordability: The customer's capacity to allocate a certain budget.
3. Project Value: The impact of the project on their business, such as potential revenue increases or cost reductions.
4. Supplier Value: The unique value a specific supplier can deliver, affecting the customer’s calculations.
5. Psychological Factors: Personal buyer profiles and histories, such as a tendency towards cost-consciousness or a preference for the highest quality within their budget.

Remember this: Not all customers seek the cheapest price; many are looking for the best value, which we can refer to as the “Fair Price.”

The art of determining a “Fair Price” involves leveraging choice architecture, as outlined by Emanuel in his article .?

Quoting from the article:

"As a seller, it is your responsibility (and opportunity) to:

• Influence the definition of a ‘fair price’
• Understand what the buyers think they need
• Determine if they actually need something different (which can sometimes mean a lower price)
• Convince them to buy from you by offering what they need at a fair price"

Additionally, it is crucial to share this information with the product management team to better align with customers' perceptions of “fair” pricing or Willingness to Pay.

This article was a collaborative effort between Vidhi Agrawal , Emanuel Martonca , and Chinmay Saraf .

Emanuel Martonca is the Founder and Pricing Strategist at Soft Fight . Use Soft Fight SaaS software to increase your win rate and charge higher prices, with less effort.

Chinmay Saraf is a faculty lecturer at Prestige Institute of Engineering Management & Research, where he teaches and researches topics related to additive manufacturing, sustainability, composites, and entrepreneurship. On top of that he is a freelance Content Writer specializing in SaaS, manufacturing, advance materials and eShip.

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