Is The Bubble Finally Popping? Willingness to Pay (WTP) in MarTech SaaS Pricing

Can the strategies that brought us here keep going forever?

The wildfire of SaaS started in the tinder of “Willingness To Pay” (WTP) pricing models.

Willingness to Pay (WTP) has been such a winning strategy for SaaS companies that entire generations of business school graduates dream of going into Tech.

The dream of “if only I could join a company that scales infinitely with no variable costs” (as if that exists) became the American Dream over a cushy IB job on Wall Street.

But layoffs in the (formerly-untouchable) tech promised land mean we need to rethink what’s actually going on with our SaaS tools.

How does the pricing model for a SaaS tool affect it’s response to market conditions? Is the bubble starting to pop?

Let’s dive in.

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Pricing is actually pretty complicated—it’s one of the 4 P’s of marketing.

Here are a couple posts that go into more depth on specific methods.

The Price is Right--Until It's Not

How To Price A New Product With Value Walks

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What is WTP?

Unlike cost-plus pricing, where a set profit is added to production costs, WTP lets businesses charge based on the value customers see in their product.

This model helped many SaaS companies boost their profits without raising costs. Great! Innovation is rewarded with profit!

It also worked because many customers saw the tools as essential and were willing to pay more for the benefits they received. Sales and Innovation were co-mingled drivers of profit.

If you absolutely NEED a CRM, then the demand should be the same for one priced at $1/month and when they raise price to $10k/month

But man cannot serve two masters.

The music is slowing and the market is shifting.

What was once a benefit—capital flows unconstrained from costs¹—now presents new risks.

WTP pricing can hurt companies when customers start to prioritize cost over value.

If a company is built around the idea that their core product is worth $1000, then it’s hard to keep the ship moving when it’s only selling for $500².

At the consumer level, WTP along with app commoditization led to the opposite effect in the 2010s.

In 2024, 61% of businesses said price was the main reason they switched their MarTech tools, up from 37% in 2023​ in a MarTech.org survey.

This shift shows that businesses care more about price than ever, making it harder for SaaS companies to rely on WTP.

How WTP Changed SaaS

WTP pricing worked well for years because businesses were willing to pay for the efficiency and growth martech tools provided.

(The fact that the cost of capital was basically zero also helped)

Tools like marketing automation platforms, customer relationship management systems (CRMs), and customer data platforms (CDPs) were seen as necessary³ investments.⁴

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If you need a reminder, here’s a post with tips on how to remember tools.

CCAAW! A Guide to MarTech Tools

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Companies paid premium prices because they believed these tools would result in premium operations & premium customer experiences.

WTP allowed SaaS companies to charge different prices depending on what customers could afford and the value they got from the tool⁵.

This flexibility helped companies maximize their profits, especially when there were only a few competitors—and even fewer that the average customer knew about!

But as the 2024 Martech Replacement Survey shows, cost is now the biggest factor when companies replace their tools​​.

As businesses focus more on price, they are looking for cheaper options, which puts pressure on companies that rely on WTP pricing—and have grown commensurate to the profit they expected.

The Risks of WTP in a Cost-Focused Market

The growing focus on cost is risky for companies that use WTP pricing.

WTP works when customers see high value in a product and are willing to pay more for it. But this can change quickly. When the economy tightens or new competitors enter the market, customers may no longer be willing to pay a premium.

With the cost of debt growing, tech companies may not be able to handle the price/value whipsaw.

SaaS companies face a dilemma: while some customers are still adding new tools to their martech stacks, many more are looking to cut costs​.

Yes, new innovations like AI-powered tools are playing a role, but customers still want cheaper options​—if anything AI will trim down the features customers see.

You can’t win a customer with more gadgets if your core offering doesn’t align.

This change in macroeconomic environment makes WTP pricing less reliable⁶ than before, as customers are more price-sensitive.

Cost-Plus Pricing: Stable but Less Flexible

In contrast to WTP, cost-plus pricing is more predictable. With cost-plus, a company adds a fixed profit margin to the cost of making the product.

This predictability gives steady profit margins and is easier to manage in markets where prices don’t change much.

However, cost-plus lacks flexibility. It also doesn’t reward innovation. In an engineering scenario where someone designs a new, more efficient process, the cost reduction erases some of the potential new profit⁷.

It doesn’t let companies capture the full value of their products, especially in the SaaS world, where the value to customers often goes beyond production costs.

SaaS tools often create much more value than they cost to make (especially at scale), so cost-plus pricing can leave huge chunks of potential profits on the table.

On the other hand, in a cost-focused market, cost-plus pricing aligns corporate structure and incentives with buyers’ expectations.

Competition and Commoditization

Another challenge for WTP pricing comes from competition. As more companies enter the SaaS market, products can start to feel similar to buyers.

When this happens, customers see less difference between products, and WTP becomes harder to justify.

Buyers often choose the cheapest option if they think the products are alike.

SaaS is like the Surpreme brick when things are good. Don’t read too much into this analogy. Veblen Goods are weird

This is where cost-plus pricing may have an advantage. As products grow more similar, cost-based pricing becomes the norm, and customers are less willing to pay for extra features.

In a market where price has become the main factor, companies that rely on WTP pricing will lose out to cheaper alternatives.

Behavioral Economics and Pricing Perception

Another factor affecting WTP is behavioral economics. The price customers are willing to pay can change based on how the product is presented.

For example, subscription tiers or discounts can change how much value a customer sees in the product.

By using smart pricing strategies, SaaS companies can still charge higher prices, even in a cost-focused market.

Contrary to the rhetoric of Gladwell-esque social scientists, these strategies have their limits—and we’re running up against them today.

When price becomes the most important factor, even the best pricing tricks won’t stop customers from choosing a cheaper option.

This makes WTP pricing harder to rely on as customer preferences shift.

Conclusion: Pricing Model Dynamics in a Changing Market

Both WTP and cost-plus pricing have their strengths and weaknesses. WTP pricing has helped SaaS companies capture high profits by charging customers based on the value they see in the product.

But WTP is more sensitive to changes in customer priorities, like we’re seeing now. As more companies focus on cost, WTP’s ability to capture value is shrinking.

Cost-plus pricing, on the other hand, is more stable. It gives predictable margins and works well when products are seen as similar by customers. The other added benefit is that cost-plus pricing keeps a company from exploding in size just because the money is there. It keeps growth manageable and reasonable.

However, cost-plus may miss out on extra profits when customers are willing to pay more for added value.

In today’s market, companies need to be aware of these pricing dynamics.

WTP is great for capturing value in good times, but it’s riskier when buyers focus on price.

Cost-plus is safer and keeps company growth reasonable but may not capture the value a SaaS product offers.

Pricing strategies are like cards. Just like the Gamber in the late Kenny Rogers’s song, SaaS companies need to know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.

1. Which generally leads to hiring more headcount, a bozo explosion, if you will.

2. Obviously, you could point to this as a core part of a market-based economy and how the principle affects all products. This is true and important. What I want to highlight is that physical products—with real-world supply chains—generally have significant pricing inertia due to their cost and pricing structures. Tech products are more like kites in the wind, especially as the market has become saturated and commoditization is common in key SaaS verticals.

3. Even if not necessary in a Marketing Operations (MOPs) sense, you’d be hard pressed to find an executive who discusses running a lean tech stack when the CEOs on the cover of Forbes has a bigger stack.

4. See, it is tough to remember what is what!

5. Sure, it violates the customer expectation of fair treatment, but we’re making so much money—who cares!

6. I say reliable because different industries will have different reactions to economic conditions. Unless you have an extremely large customerbase, it can be difficult to suss out what those effects are until you’ve lost a lot of deals.

7. This isn’t quite the same as a ‘race to the bottom’ because one process might be meaningfully cheaper. However, if the marketshare gains cancel out the lost potential profits from retaining the full previous price your customer expected depends on the scenario.