Value-based pricing for embedded payments

Embedded Payments Pricing Guide for Vertical SaaS Platforms (Part 3 of 6)

This post is part of a series on the optimal product, positioning, and pricing strategy for embedded payments.

SaaS companies can easily miss out on the full revenue potential of embedded payments because the payments implementation or go-to-market strategy is a little off.

This series will highlight the different factors in building a successful payments strategy and help you determine the best path to success for your particular platform.

Embedded payments pricing myths

We’ll start by dispelling two common myths about embedded payments pricing.

Myth: Migrations require price-matching

Fact: Migrations from one payments provider to another require value. Embedded payment products already include enhancements that are intrinsically valuable to business customers. In-context payment reports, embedded deposit reporting with transaction and fee level detail, one-stop support, and easy reconciliation are all value-adds that make the merchant’s life easier. Most business leaders will be willing to pay a little more for a solution that saves time and reduces errors.

Myth: Pricing will have a big impact on payments adoption and usage

Fact: Merchants claim that lower pricing is important, but the vast majority of the cost of accepting payments isn’t your margin, it’s the card network and issuing bank fees (interchange passthrough).

For example, if you’re billing customers 3% and your costs are 2.60%, you can cut your margin in half and only be able to effect a 0.20% (or 20 basis point) or 7% cost savings for the merchant. 20 bps across your total platform volume is meaningful, but for the average merchant processing $250,000 per year, that only equals $500 of savings.

Not nearly meaningful enough to motivate them to take action.

Furthermore, the 50% reduction in your margin will limit your ability to add features and continue to improve your product. Those tradeoffs will negatively impact adoption and usage. Solving the merchant’s problems has a big impact on payments adoption and usage. Pricing generally does not.

I worked with a platform that offered enterprise merchants a total card processing fee of 1% for 6 months. At $20M+ per year with 1%+ of savings, this equaled 6-figures of savings.

You would expect this to have a major impact on adoption, but what happened was surprising. The response was virtually zero. The short-term savings wasn’t enough to warrant the pain in moving.

How did that platform ultimately get merchants to migrate?

Deeply integrating payments into core platform features, like revenue forecasting and invoice automation, and sunsetting legacy processor support. Worked like magic.

And this isn’t uncommon. The key to adoption and migration really isn’t about price, it’s about value.

– Becky Kopplin, VP Payments

Factors impacting price ceiling

Core SaaS product

▲ End-to-end solutions (including CRM, quoting, project management, communications, invoicing, payments, etc.) provide more value overall and command higher prices for payment processing

▲ Vertical specific solutions tend to be especially valuable – if your platform is the “business management platform” or “operating system” for a specific vertical, you’re probably in this category

▲ Sticky products that are essential to the merchant’s day-to-day have a higher price ceiling

▼ Products that only offer invoicing and payments tend to be viewed as commodities, and may need to be priced lower

Competition

▲ Underserved verticals and hyper-specialized solutions have less competition

▼ Crowded markets with low-priced options may need lower prices or better product differentiation

Merchant experience

▲ Thoughtful integration of payments into essential workflows make the payments product more valuable

▲ In-context reporting where merchants can see payment data along with relevant business information makes the product more valuable

▲ Easy reconciliation saves time (and headache) and makes the product more valuable

▼ Unreliable payment processing, inaccurate data, or a disjointed experience significantly reduce the value of the payment and can even be a liability

Merchant price sensitivity

▲ High-margin verticals where time has high value are likely to pay more for a solution that saves time

▼ Low-margin verticals will have more price-sensitive merchants

▼ Very large merchants have more leverage to negotiate price

Specificity and comprehensiveness

Comprehensive, end-to-end solutions for a specific vertical will generally have the highest price ceiling (right side of the chart), while horizontal products with limited features will have a lower price ceiling (left side)

What if the core SaaS product is somewhere between vertical and horizontal?

If you have a feature-rich horizontal platform, or a vertical-specific invoicing and payments platform, this decision tree will help you find the right price range.

If you’ll be using bundled pricing, remember that these recommendations are just for payments – incorporating SaaS fees will increase the price! Once you’ve determined the payments price range, follow these steps to calculate your bundled price.

Pricing decision tree

Pricing for comprehensive solutions

If your core product is the “operating system” or end-to-end business management solution for a specific vertical, or if your product is somewhat comprehensive and significantly optimized for a specific vertical, this section will help you hone in on a starting price.

Which statement best describes the target vertical?

Many SaaS competitors, harder to differentiate, commodity product: 2.7% – 3.0%
Moderately competitive, somewhat differentiated, some stickiness: 2.9% – 3.5%
Fewer competitors, vertical-specific solution, very sticky product: 3.2% – 3.9%+

Comprehensiveness > Competition

Even in crowded verticals, more specific and comprehensive solutions can command higher prices. Software that enables merchants to grow revenue while saving time has tangible value. It makes sense for merchants to invest in software that helps them do more.

REAL-WORLD EXAMPLE

One well-known platform dominates the fitness studio vertical with an advertised payment processing fee of 3.5% + $0.15.

A less well-known but rapidly growing competitor has a payment processing fee of 3.9% + $0.30.

Fitness studios are not particularly high-margin businesses. A yoga studio owner once told me she taught 25 classes per week because if she paid another teacher to lead those classes, she wouldn’t have enough money to pay herself as the owner.

Yet even in a relatively low-margin business, studio owners happily pay 3.5% – 3.9% for payments when the software also handles scheduling, class sign-up, subscription management, and administrative work that would otherwise take them out of the studio.

How to command premium prices

Once you establish that the core SaaS product is both specific and comprehensive, what’s the difference between a platform that charges 3.2% and a platform that charges 3.9% or more?

Merchant experience.

The platforms able to command the highest prices for payments are vertical-specific, provide a comprehensive all-in-one solution, and have a winning merchant experience.

A winning merchant experience is fully embedded and high-quality.

Fully embedded merchant experience

Payments functionality (including refunds, chargeback handling, etc.) is part of the SaaS application without redirects or third party portals
Platform controls the payment flow
Payment amount and payment metadata are determined by platform, leveraging existing data and workflows
Payments data is shown where it is most relevant to merchants, and with needed context
Payment status can trigger other events on the platform
SaaS company is the single point of contact for support

High-quality merchant experience

Reliable (high uptime)
Real-time payment status
Accurate data
Predictable deposit timing
Consolidated deposit for all payment methods
Clear deposit report
Transparent fees

Bundled pricing calculation

Now you have an idea of your price ceiling – probably a small range between 2.6% and 3.9%.

If you’re exploring bundled pricing, now is the time to add in your SaaS fees.

To keep this simple, let’s return to the example (from the first installment) of a SaaS platform for law firms.

For this example:

Law firms have an average of 10 employees each
Core SaaS product is $49 per user per month
Law firms average $1M annual revenue

Continuing where we left off, let’s assume that we determined the payments price range to be 3.2% – 3.5%.

The average law firm is paying $5,880/yr in SaaS fees and earning $1M in revenue. If we assume that all revenue will be processed by the new embedded payments feature, we can determine the bundled price by calculating the SaaS fees as a percentage of payment processing volume, and adding the result to the payments price.

SaaS fees / processing volume = $5,880 / $1,000,000 = 59 bps or 0.59%

Bundled price = 3.79% – 4.09%

To keep things simple, the bundled price might be set at 3.9% or 4.0%

Next post: Cost-based pricing