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Creating a profitable pricing strategy for Software as a Service, (SaaS) products is nothing less than a challenge for marketers. Pricing can make or break your business. Poor pricing can lead to a false perception of the product, and alternatively, a well thought out pricing strategy can help you achieve your short and long-term revenue goals along with customer satisfaction.
“Pricing decisions are not easy to make; they are often inherently ‘soft’.” – William E. Johnson
Perfecting the pricing structure of your product is not a one time job, it’s a long and thoughtful process for startups.
To understand how to price a product, let’s go through the basic concept of “Pricing strategy” and its significance for a SaaS business.
What is Pricing Strategy?
The concept of pricing strategy lies in identifying the optimum price for your product or service. Coming up with a suitable strategy requires a deeper understanding of the market, customers, competition, costs, the perceived value of the product, and most importantly your revenue goals.
Significance of Pricing Strategy for SaaS Businesses
Strategic pricing plays a vital role in building your brand’s image within the SaaS industry. It also helps in identifying what value your customers perceive from your product against its price, thus helping you to set the price based on what your SaaS product offers.
If a startup fails to put the pricing puzzle right then according to CBInsights’ stats it might join 18% of startups that fail because of poor pricing strategy.
For a growing SaaS company, minor changes in pricing plans can lead to massive changes in revenue and the growth of the business. Such is the importance of this ‘P’ of the marketing mix (other being Product, Promotion, Place).
When SaaS organizations want to grow, they generally beat their heads around customer acquisition. But they forget that pricing is a crucial part of the business, and offers the strongest impact on their growth. They forget that it is an increase in revenue that defines growth, not a large number of customers. Henceforth, monetizing potential customers is vital.
“So, when those in an early-stage startups – or those bringing a new product to market within an existing company – ask me for help on pricing, I always say that you won’t get it perfect out of the gate, but you can get it as right as possible.” – Lincoln Murphy
What’s as Important as the Right Pricing Strategy?
Answer: Choosing a Scalable Hosting Platform for Your SaaS Business
Steps Before Choosing the Right Pricing Strategy
A good pricing strategy is the core of any business. It reflects and affects everything you do.
As Patrick Campbell of Price Intelligently says, “Pricing is a process that utilizes data to eliminate as much doubt as possible for key stakeholders to make a profit-maximizing decision. There is no silver bullet, but with data, you’ll have a nice barrel full of lead.”
The right price of your product falls between its cost and the value it’s offering to your customers. Always ensure that your product prices are closer to the value it’s providing. Hence, if you wish to sell your product at a high price, you must offer greater value, and then sell that value.
With that being said, here are a few prerequisite steps that can help you identify the best SaaS pricing strategy for your product:
1. Identify Target Audience
It is highly essential for you to identify your target audience or your potential customers. Until and unless you do so, you won’t be able to determine your perfect SaaS pricing strategy.
Identifying your target audience enables you to assess the demand for your product. You must then alter your product to meet the expectations of your customers and their specific needs.
There are a number of factors that come into play when you’re identifying your target audience, such as:
- Background
- Company Profile
- Role
- Location
- Pain Points
- Needs and Aspirations
- Buying Power
Keeping the aforementioned factors in focus, you must create your buyer personas, and segmentize your prospects. You must then conduct your market research with different surveys, interviews and garner feedback from support groups.
With that data, you must reassess your offerings and product profile. You must also reassess your target audience periodically, say every six months or at least once a year. With additional research, you can refine your buyer personas accordingly. While you are studying your target audience, don’t forget to check with the advocates of your competitors to get an idea about what do they perceive about your competitor’s pricing.
2. Identify Your Product’s Competitive Strength
You might have a great idea for a SaaS product, but what is the Unique Selling Point (USP) of your product?
Businessdicitionary.com defines USP as; “the Real or perceived benefit of a good or service that differentiates it from the competing brands and gives its buyer a logical reason to prefer it over other brands.”
Many new entrepreneurs are unaware of determining their product’s USP. They are lost in the crowd and quite frankly, dying a slow death. It doesn’t allow them to attract enough customers which result in their business being unable to flourish. Needless to worry though, here’s how you can identify your product’s USP.
You must:
- List out the unique features and benefits of your product. Conduct a Google Search and compare the benefits of your product with your competitors. Identify what sets you apart.
- Decide what emotional need your product is fulfilling. You must think this through from the perspective of your customers.
- Identify the aspects of your product which your competitors cannot imitate even if they try. You can put a star along with the aspects that cannot be easily duplicated or reproduced.
- Answer the primary question: “What’s in it for the customer?”
A major mistake that businesses commit is by intentionally lowering the product’s price to label it as their brand’s USP, but a low price can never be your product’s USP because this can either make you lose a good amount of profit, or your customer might end up labeling you as a cheap brand.
3. Performing Competitive Pricing Analysis
Competitive pricing analysis is a critical part of your SaaS marketing plan. Good analysis harvests digital consumer insights that’ll help you make informed decisions about your brand’s strategy.
Competitive pricing analysis should be an in-depth study of your industry and competitors comprising their strengths and weaknesses. Only then will you be able to identify new opportunities for improvements within your pricing strategy. Here’s how you can carry out a competitive pricing analysis.
Step #1: Categorize your competitors
You can divide the market competition into two categories:
- Direct Competitors — They belong to the same industry and offer the same product as you. Your direct competitor will offer better value to gain customers.
- Indirect Competitors — They belong to the same industry but offer different products. They release offers and promotions to attract new customers.
When you categorize your competitors, the market analysis becomes less time-consuming. Moreover, it allows SaaS organizations to focus in the right direction in terms of competition.
Step #2: Determine the quality of data
Analyzing competition demands complete and accurate data. The following check-list is crucial to determine high-quality data.
- In-depth product/service comparison
- Error Percentage Analysis
- The ratio of planned and delivered data
- Use collected data not more than two hours before repricing
- Data delivery time
Step #3: Determining Data Parameters
SaaS organizations must determine important data parameters of their competition in order to collect and analyze their pricing process. They can do so by determining:
- Pricing index
- Competitor’s promotional activities
- Product availability
Many SaaS organizations believe competitive pricing includes peer group analysis only. But, competitive pricing analysis also demands a study of competition’s internal data. It’s next to impossible to set up an optimal pricing model without having profound knowledge of the market, and your position in the industry as a SaaS provider.
Step #4: Using Machine-Based Pricing Tools
SaaS companies are increasingly using algorithms to collect and analyze data. It’s safe to say that machines have significant benefits over manual evaluations and approaches such as:
- Improved Accuracy
- Complex Data Processing
- Scheduled Delivery
- Precise Pricing Recommendations
Automating the pricing process allows your marketing team to switch from routine tasks to strategic tasks concerning SaaS pricing strategy and price management.
4. Conducting Market Research
Before outlining your strategy, you must analyze the market with solid research. You must survey your target market and identify whether the industry is growing or running out of action.
Market research will assist you in making educated decisions. It will help you to allocate the right resources as an essential part of your product’s development.
Conducting market research will help you identify and predict the factors that might affect the demand for your product.
You can identify your potential market by measuring how big is your market segment? Where do you see it in the long-haul? Is the industry booming? You get these answers by attending important industry events where thought leaders discuss the scalability of any idea.
Next, understand your ideal buyer’s persona followed by potential buyer-mapping. Analyze your SaaS competition by conducting a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats). With this data, you can research and develop what makes your product unique from your competitors.
Take a look at how Klipfolio performed A/B testing for their pricing strategies after realizing that they didn’t optimize their pricing for their target market – consists of SMBs – and also didn’t align it with their vision of leading the market.
5. Identifying the Best-Selling Business Model
Your business model must identify how you will charge your prospects. Whether it’s going to be on a regular monthly, quarterly or yearly basis or laying all your cards on the table and sell your product against a one-time payment?
For a better understanding of how to go about it, take a look at the following pros and cons of both payment models.
| Recurring Payments | One-Off Payments | |
|---|---|---|
| Revenue | Slower revenue Shorter commitment Higher conversions | Faster revenue Longer commitment Lower conversions |
| Cash Flow | Grows along with your business | Limited until next time you ask for payment. Advisable in cases where you really know much you will spend |
| Churn Rate | Requires more focus on retention and acquisition | Requires slightly lesser focus on retention and acquisition |
| Failed Charges | Can always be a problem | Can always be a problem |
| Break-Even Point | Slower than one-off payments | Slower than one-off payments |
Types of Pricing Strategies for SaaS (with Examples)
Now that you’ve identified the importance of an effective pricing strategy for SaaS product, and what steps you can take to determine the best fit for your business, here’s a list of different pricing strategies that you can consider.
1. Penetration Pricing
Market penetration strategy refers to the price of your product that is set low just to enter the market. Once your product finds a relevant market segment, you can raise its prices to a more reasonable level.
This pricing method works on the belief that a product has enough number of customers to make up for its low price. Many businesses also use it as an aggressive tactic against competitors, which lowers their prices or risk being forced out of the industry.
| Pros | Cons |
|---|---|
| Increases Sales Volume | Profit Problems |
| Lowers Production Costs | Branding Issues |
| Widens Audience | Limited Timeframe |
2. Milking Pricing
This product pricing strategy lets you set up an initial high price but then slowly lowering the price to ensure the product is available to a larger market. It lets SaaS owners to ‘milk’ profits from the market layer by layer.
The milking strategy provides greater priority to short-term revenues instead of longer-term revenues. It is commonly used by investors who wish to boost their stock or revenues in order to make quick profits.
3. Value-based Pricing
This strategy is based on what your target prospects believe the worth of your product is. It is also known as “Customer-Based Pricing”.
Instead of looking internally, or laterally towards your competitors, value-based pricing allows you to set prices based on the value your solution provides to your customers. It increases customer willingness to pay for your product, lets you build a better product and get to know your prospects well.
With the value-based pricing strategy, two things are different. Firstly, your product can come at a higher price as you have identified that your prospects are willing to pay. Secondly, you can raise your product prices as you add more value to it, and get to know more about the needs of your customers.
Appcues identified the value their product is delivering, hence changed the price of their SaaS.
“Prices are ultimately set by value, not by the competition or supply/demand, but by value.” – Ron Baker
4. Cost Plus Pricing
This pricing strategy for SaaS lets you set the selling price of your product by evaluating variable costs and adding a markup percentage. It is the basic form of product pricing. Selling your product for more than its manufacturing cost.
Your initial costs may only be web hosting and development, however as your SaaS business grows, you’ll have to factor in sales, marketing, and various other unknown costs.
For a business, cost-plus is not a viable option, as SaaS products are mostly sold on the basis of their perceived value, competitor pricing, and features, but this pricing method doesn’t take these factors into account.
5. Captive Pricing
The captive pricing strategy lets a business sell its base product at an inexpensive price, maybe give it away for free. However, it can upsell other products at regular or higher prices.
You may lose a small chunk of revenue on your base product, however, you’ll make enough profit on captive products, and make up for the difference. You can also consider captive products for upselling where the customer comes in for a specific product but leaves with more than what he came looking for.
Microsoft offers older versions of their software for a low price, and gradually eliminates support for their older versions, forcing users to upgrade to an expensive version if they want to use and updated version of their software. This an accurate captive pricing strategy example.
6. Psychological Pricing
This strategy allows you to use your customers’ emotions in order to boost your sales. By pricing the products strategically, you can increase your sales without reducing your prices.
As a matter of fact, you can use a higher price as well to play psychologically with your customers and increase your profits. Consider the following factors when implementing a psychological pricing strategy.
Customer Emotions – Stir the feelings of your customers with either a bargain or an exclusive product for a higher price.
Charm Pricing – Price products just below the whole dollar amount. For instance, instead of charging $10 for a product, charge $9.99 only. Your customers will associate the price closer to $9 instead of $10 even though it is only a single cent less.
Font Size – You must’ve noticed the difference in font size between the dollar and cents. That “99c” is put in the corner in a smaller font to make the customers forget that it even exists.
Bundling – It reduces the pain of purchasing multiple products individually. You can sell multiple products at a small discount.
Flash Sales – It is a highly effective psychological strategy, as they convey exclusivity in addition to urgency.
Ceiling Price – This allows you to keep your products under a specific price point such as under $100. Customers feel more comfortable knowing that all your products are under that one specific amount. An ideal example – the dollar store.
Discounts – When you offer discounted prices, your customers feel they are getting a good deal with a reduced price.
Price Lining – It involves distinct lines of products. Each in a distinct price range. For example, budget, mid-range or high-end products.
See how Poptin is playing the psychological pricing game by not mentioning the actual annual price of their tool in each plan. Further discounting the prices by 20% gave their audience the impression of acquiring the best value for a lesser amount.
7. Tiered Pricing
Tiered pricing is a default strategy used by many SaaS companies. It differentiates between the number or type of users in terms of how they will use your product. In the case of differentiation by type of users, an account is only charged for the features included in that tier.
As an example of this pricing strategy, have a look at Hootsuite’s pricing plans.
One of the major advantages of using tiered pricing is that you can easily accommodate different buyer personas or target audience in your pricing plans.
Like any other pricing plan which includes a high and a low price range, you will end up disliking the low price paying customers, because they won’t be adding much to your average annual revenue when the company is growing.
SaaS Pricing Models
Selecting a pricing strategy is important, but while looking at the big picture, and to meet long-term revenue goals, you need a systematic method to follow. That systematic method is a pricing model you select for the base of your pricing strategy.
1. Flat Rate Pricing
This is the most straightforward SaaS pricing model. In this model, SaaS companies charge a single flat fee on a (monthly, quarterly, half-yearly or yearly) recurring basis.
Its simplicity is the most attractive aspect of this pricing model. You’re selling a solution with a fixed set of features to all your customers and charging the same price to everyone.
SaaS subscriptions can be complex. Flat-rate SaaS pricing is a comprehensive pricing model that attracts online prospects who are comparing different solutions. Also, a flat rate offer is much more convenient to sell online. It is important when you’re on a limited marketing budget.
However, since this model doesn’t offer any sort of variation(s), there are slim chances for you to cash the value from customers who are actually willing to pay you more for your services. This pricing model may cause you to lose out on a lot of potential revenue, especially if you’re dealing with enterprise customers.
That’s what we call simple pricing with effective messaging. Help Scout is following the same model as we have discussed above.
Source: Stimulead
2. Premium Pricing
This SaaS pricing strategy allows businesses to set up high prices in order to successfully reflect the quality or exclusivity of their product.
A SaaS company with good brand reputation and higher value perception amongst users can afford to set premium pricing for their products. In fact, their users might even stop using their product when they decrease the pricing of their product.
If you offer a premium pricing plan then you must remember that your customers get enough recognition and added value with your perfect product features to keep them engaged, and on board with your SaaS product.
If you look at GretaThemes pricing page, you will notice how their premium plans (premium and lifetime bundle) differ on the basis of value, features, and price to its basic plan (single theme).
3. Freemium Pricing
The practice of offering basic services for free, but enhanced features for a fee is what the freemium pricing method is all about.
If a SaaS company offers a free plan for its users, then it is like making a wide opening of its acquisition funnel as customer acquisition is challenging for startups during the early stages. Later on, when the user is satisfied with the product and wants to scale or upgrade then the company can demand a high price for it.
Freemium pricing is generally coupled with a tiered pricing strategy, allowing users to move to higher pricing plans as their business requirements grow with respect to your product.
A prime example is a Free-Trial period, where the customers use the set of basic services for a certain period of time without any charges, however, to continue using those services, they must pay for the subscription once the free-trial period comes to an end.
Drift uses freemium pricing for their plans, for the individuals, where they offer their basic product for free to users then charge $50 for the upgrade of features.
4. Usage-based pricing
This pricing method allows you to charge your prospects based on how much they use your product or service. Usage-based pricing lets you price, package and sell in various ways. For example,
- Minimum: Minimum price points based on usage
- Flat Rate: Fixed fee regardless of usage
- Standard, Volume and Flat Rate Tiered: Various price points for ranges of usage
- Pooling: Share usage from the same master account
- Threshold: Pricing changes based on usage
- Rollover: Usage allocated, not used in the given period, is moved on to the next period
- Overage: Fees for using more than the allocation
- Pay-as-you-go: Paying for what the customers consume
- Time-based: Pricing set on a fixed time, typical of subscription offers
- Surcharge: Additional costs incurred due to supply/demand fluctuations, peak hours, etc.
- Rated/Mediated: Pricing based on business logic and event combinations
Cloudways’ pricing plans are based on a usage-based pricing model, coupled with ‘Pay as You Go’ pricing which means you are charged only for what you use at Cloudways.
Try Scalable Hosting for SaaS Businesses by Cloudways
5. Bundle Pricing
Using this pricing method, you can sell your product or service in a bundle offer with multiple products/services at a discounted price, instead of charging the customer separately for each product.
When you pursue bundle pricing, it allows you to increase your profit margins as the number of sales per product increases.
If you have multiple extensions, plugins or add-ons included with your SaaS product package, then bundling them with your product in the pricing plans, will help with simplifying the sales funnel of your product.
For their Office 365 Suite, Microsoft offers bundle plans for the users who would purchase a range of their apps at once.
With all that being said,
Start with evaluating the pricing strategy of your competitors. Analyze the amount they charge for their products. Also, what tangible or intangible value(s) are they offering along with their products?
In a market with a fluctuating volume of demand and supply, the right SaaS pricing strategy is essential to remain competitive. It brings your business the value it deserves and secures the profits you need in order to ensure the scalability of your business.
To sum up, let’s be clear on one thing, it’s still very important to run cost-cutting procedures on a regular basis. Taking cost-efficient measures will increase the efficiency of your organization.
Also, be honest and consistent with yourself. Wisely invest your time, energy, and money and enhance your biggest revenue driver – Your Pricing Strategy.
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