by @Erika Malzberg
This article originally appeared in the Zuora Academy
As we’ve repeatedly noted, for SaaS companies, growth is the number one indicator of success. In order to grow fast and sustain a high growth rate, SaaS businesses need to adopt the 10 core growth strategies. Here we take a deep dive into Growth Strategy #1: Tailored Product Editions as illustrated by star example Zendesk.
Many SaaS companies might start off selling a single product. But as new features are added, cramming everything into a single product doesn’t really work.
We know that in order to scale and avoid being priced out by competitors, SaaS companies need to offer more than one product edition. The question is: how can you best design your editions to move your growth forward?
The best SaaS companies smartly package their product capabilities so that:
- Each edition appeals to a different segment of the customer base,
- Each add-on targets a different customer need
SaaS businesses need to offer a number of tailored product editions at different price points in order to appeal to a wide potential customer base. And pricing and packaging must clearly communicate the value of each product edition, as it’s tailored to a specific audience.
Editions and add-ons are effective means for monetizing different parts of the customer base.
ZENDESK TAILORED PRODUCT EDITIONS
Zendesk is a great example of a company that continually experiments with tailored product editions, to design plans that are purposefully and thoughtfully tailored for different company sizes and needs — and in alignment with their current growth strategy.
With the help of the internet archive the WayBack Machine, let’s trace Zendesk’s pricing trajectory from 2010 to the present to see how their editions reflect and contribute to their growth and growth strategy.
2010 STRATEGY: SEARCHING FOR SMB DIFFERENTIATION
We choose to start with 2010 because it was then when Zendesk learned a hard lesson about how important it is to get editions (and their pricing and packaging) right.
Zendesk faced criticism in May 2010 after a significant price increase. While their stated intention had been to offer more features and functionality for a good price, this was not how the pricing changes were perceived.
The new features — such as community support and knowledge base — weren’t seen as whole new product offerings and thus the price increase (and promise to grandfather in only those customers who committed to an annual plan) wasn’t received well. Customers who reported price increases up to 300% were understandably not happy.
Zendesk quickly responded to the customer uproar, grandfathering pricing to all existing customers. They also became much more proactive about designing product editions, consulting with customers to craft meaningful editions, and clearer about the value of packages going forward.
You can see, based on the three plans offered in 2010, that the SMB market was their target market. But Zendesk still had some work to do to detail offerings, differentiate between plans, and appeal to potential customers with different needs.
2011 STRATEGY: EXPAND TO THE ENTERPRISE
By October of 2011, Zendesk had created additional product editions and clearly identified the value of each plan by highlighting differentiated features:
According to a recent McKinsey SaaSRadar report on pricing pages, based on a proprietary benchmark of both public and private SaaS companies (with annual revenues from $10 million to $500 million), it appears that, by offering more tiers, businesses are able to better align pricing with customers’ willingness to pay.
As evidence: of SaaS companies that provide transparent pricing information, approximately 60% only define 3 or fewer pricing tiers — but businesses that define more than three tiers see 25% higher ARR growth, and lower discounted rates.
So, by adding an additional plan, Zendesk is able to better tailor each plan to their customer needs.
While they’re extending their reach to the Enterprise (evidence of their strategy to go up-market), you can see that they’ve also identified their target customer base of SMB by visually highlighting the Plus+ plan (and anchoring the free trial on that plan).
2012 AND 2013 STRATEGY: GRAB AS MUCH OF THE MARKET AS POSSIBLE, ACROSS THE BOARD, IN PREPARATION FOR IPO
By October 2012, with 20,000+ companies as customers, Zendesk eliminated their Starter plan and focused on just three editions. They also offered company descriptors and a feature comparison chart to help prospects to choose the best plan for their needs. Pricing increased somewhat as well, but not too significantly.
With an IPO on the horizon, it seems that Zendesk was trying to widen their scope and grab more of the market, without pigeonholing themselves as a solution for only a specific type of company.
We can see that they’re trying to define the plans for their target audience. For example, the Plus plan is for “growing companies” and Enterprise is for “larger teams, or those with multiple brands to support.” Rather than push one plan across the board, they’re widening the net and demonstrating how their solution works for different types and sizes of companies.
2014 STRATEGY: GO DOWN-MARKET AND UP-MARKET, PURSUING A LARGER PIECE OF THE ENTERPRISE, AND LARGER DEALS
When Zendesk went public in 2014, they expanded their product editions offerings once again to bookend their Regular, Plus, and Enterprise versions on either end with both a lower-level self-service option and a higher level plan.
The Starter plan — for just $1 — is a clear example of going downmarket to capture the long tail.
On the other end of the spectrum was their Enterprise Elite plan which offered a whopping 59 features from SSL encryption to a key performance indicator dashboard, web-based help center, feedback tab, multiple ticket forms, and more.
This new pricing was a clear reflection of Zendesk’s desire to get a larger piece of the enterprise market (as outlined in a May 2014 TechCrunch article titled “Zendesk Gets Serious About the Enterprise”).
Up until then, Zendesk customers tended to be from the SMB space, but as they started to see larger deals, they made the decision to go after more and larger enterprise customers — and they attacked this opportunity by creating a special Enterprise Elite plan specifically designed for this customer base.
2015 STRATEGY: REFOCUS ON CORE MARKET: SMB
A year later, in October 2015, with 60,000 companies as customers, Zendesk kept the same pricing and packaging, while clearly trying to emphasize the middle-of-the-road Plus plan. They had also shifted the Enterprise plan into the assisted sales category (so you could no longer make an online self-service purchase of this plan).
As a public company, Zendesk had already established the enterprise market,but it’s clear from their pricing and packaging that they had figured out that their sweet spot was SMB so they crafted editions to target this market specifically.
2017 STRATEGY: CONTINUED EMPHASIS ON SMB MARKET
And this takes us to March 2017 at which time Zendesk is now used by 200,000+ organizations worldwide with a reported $208.8 million USD in revenue and a publicized goal of $1 billion in revenue by 2020.
Zendesk has finally renamed their plans with more descriptive — and meaningful — titles (e.g. from “Regular” to “Team”) to better reflect their target customer. These edition names more clearly outline who the intended customer is for each plan, and the nomenclature makes them more appealing.
Descriptive names help customers identify their best plan, rather than arbitrarily going for the cheapest option (not good for a company’s bottom line or for customer experience).
They have also reduced pricing for their mid-market plans which surely makes them more appealing to the SMB market cost-wise. This pricing focus seems to reflect an ongoing strategy to double-down on the SMB market.
Of course this isn’t the locked-down final incarnation of Zendesk’s product editions (their pricing may have already changed by the time you read this!), nor is it the end of their pricing and packaging journey. Zendesk, like all growing SaaS companies, knows that their offerings need to be dynamic in an ongoing process of mapping product editions to strategy.
Since editions and add-on products change over time, SaaS companies need the ability to:
- Change pricing in a central location so that it updates across all systems and sales channels (online, in the quoting tool, etc.)
- Add new products, editions, and free trials over time without SKU explosion
- Enable quick testing and iteration of pricing and packaging
Download our free eBook, 10 Essential SaaS Growth Strategies for details on all 10 strategies.
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