Once you’ve got a solid SaaS product to bring to market, it’s time for the next big step – pricing.
Getting your pricing right out of the gate could be the difference between becoming yet another failed startup and generating enough growth to ensure your survival in a crowded digital marketplace.
However you approach your first round of pricing, the most important word to keep in mind is value.
SaaS pricing isn’t a guessing game
So…where do you start? How do you know if you’re aiming too high (or too low)? What if your product is something nobody has seen before? Should you just price a bit lower than your closest competitor? Can you just Google it?
The right answer is (surprise!) that there is no right answer. Every product, every startup, and every industry will have its own particular strategy for internally gauging prices.
What’s most important is that you don’t resort to pulling imaginary numbers out of thin air. Working out an initial pricing strategy will point you in the right direction for future adjustments as you gain a better understanding of your customer base. Your pricing isn’t “set and forget,” it’s an ongoing process.
A pricing strategy should take into account a range of factors which might include:
Your product’s value to customers
Target customers and customer segments
Customer conversion targets
The type of SaaS pricing model you’ll be using
Your sales process
The most important part of any strategy involves keeping your customers in mind every step of the way.
Factoring value into your SaaS pricing
While not directly related to the SaaS realm, this popular meme captures the power of perceived product value in the eyes of a customer.
Customers rarely care about the physical cost of a product but instead focus on the value it brings to their lives. Is your product somehow better than your competitors? Is it faster, more powerful, or easier to use? If you can clearly pinpoint the unique value and differentiating factors of your product, you can begin to place a higher value on it.
It’s important to note that you shouldn’t make direct comparisons with your competitors in an attempt to win customers. If you’ve got your heart set on making pricing comparisons on your website, make sure you emphasize the value of your products relative to your competitors’ offerings (e.g. benefits, customer support, or plan flexibility).
In terms of value, you also need to consider the value of a customer to you. Your sales process, the amount of time it takes to acquire each customer, and the value of that customer’s account all need to be worked into your pricing. The graph below sets out the relationship between sales process and pricing strategy for some well-known SaaS companies.
Image source: Intercom
You’ll notice that the lower right quadrant is a ghost town. That’s because no business can survive in an environment where a complex sales process is rewarded by pennies from its customers. It’s a recipe for certain doom.
Developing your SaaS pricing strategy
One price fits all?
In the world of SaaS, it’s not recommended to have one price tag on your product. An online environment makes it too easy for customers to Google your competitors and choose the cheapest option – leaving you out of pocket and out of business.
A single price point might also leave your customers feeling like you don’t really care about them. Should your small business customers have to pay the same amount as a high-use or enterprise customer? Could they even afford it? And would your enterprise customers feel like they’re using a second-rate budget product if they’re on a $10 plan with your smaller customers?
All of your buyer personas need to feel they’re getting value from your product, no matter which end of the spectrum they’re on.
As the name suggests, cost-based pricing takes into account all the moving parts involved in bringing your product to market, covering your running costs, and making a profit.
Cost + profit = your price. Easy!
While this model feels like a straightforward solution to begin with, when you price this way it could mean you’re missing out on those critical startup dollars.
By looking at the bigger picture of how your product fits into the digital landscape, you can increase your recurring revenue with what is known as a “value-based” pricing system.
Most SaaS companies these days are tending towards value-based pricing. Value is one of the most important considerations you need to factor in when it comes to standing out in a competitive online space.
This model is based on how much your target customers are willing to spend on your product. How much will your product benefit a customer in terms of making their life better, easier, or more efficient?
The biggest problem startups face when considering a value-based price is how to pinpoint and quantify the right value metric for their product – and then how to communicate it in a way that will convince customers to buy.
The most common structure in terms of value-based pricing for SaaS companies involves a multi-tiered plan. This is a popular option as each pricing tier can be targeted to attract a different customer segment.
Take Wistia for example. They offer three tiers, with the type of customer and value offering for each tier clearly laid out in the pricing table.
The value metric for their pricing hinges on bandwidth. If you’re just starting out, or only need one or two videos for your business your bandwidth usage will be low. If you’re a large business that relies on a ton of video, well, you’ll need to speak to a sales rep directly because that crazy bandwidth usage is going to cost you.
Stencil is another fan of multi-tiered pricing. Again, they present three options, clearly stating which option is best for each type of customer. Their pricing strategy goes a little further than Wistia, allowing customers to toggle between monthly and annual billing plans to check which plan would best fit their needs and budget.
By flagging their Unlimited plan as “popular” they’ve set a price anchor for customers to compare against the value of their other plans. Using this strategy makes the more prominent middle plan with its extensive list of benefits seem like a bargain.
A money-back guarantee is also displayed to show customers that Stencil has their best interests at heart. If the customer isn’t experiencing the value offered by Stencil’s product, they won’t be left out of pocket.
Offering three tiers is a good start to your pricing journey. It gives customers a choice of plans that can best meet their needs and budgets, but at the same time it doesn’t overwhelm them with too much information.
You might decide to test more or less tiers further down the track as you get customer data and feedback coming in. There’s no right or wrong number – it’s all about what works best for your particular business.
Should you offer “freemium” as part of your pricing strategy?
In both the Wistia and Stencil examples above, you’ll notice the first tier is free for customers to use. This is known as “freemium” (a combination of “free” and “premium”), and it’s a popular offering for many startups. The customer pays nothing to use basic product features, but needs to subscribe to unlock advanced features and get the most value out of a product.
From a customer standpoint, this is a huge plus. It’s a no-risk way to see if a SaaS product is going to work for them before they hand over their credit card. From a business perspective though, freemium is obviously not going to pay your bills if nobody moves up to paid plans.
Some questions to ask yourself before you offer a free tier:
How much are you willing to give away for free?
Can you offer enough incentive for customers to upgrade?
Will you have enough traffic/customers to ensure you meet your conversion target?
Will your free users get enough value out of your product to start referring others?
Can your startup keep improving and offering new, innovative features as a continuing incentive for users to upgrade?
Image source: hbr.org
Dropbox is a good example of a freemium model that works. Sign up and you get an awesome 2 GB of free storage space. This is perfect for keeping basic documents in the cloud, but once you start backing up photos and other media you’ll hit your storage limit fast. The need to upgrade to a paid plan becomes fairly obvious at that point. Dropbox have also expanded and introduced new features over time to increase conversions and encourage late adopters to sign up for paid plans.
At the other end of the spectrum, there’s LinkedIn. You’ll most likely be on their free plan if you’ve signed up. If so, you’ll be familiar with their constant suggestions that you upgrade to premium. But why would you? It’s an expensive monthly fee and the benefits aren’t obvious or particularly exciting. For most people, the free membership offers everything they need to use the platform on a day-to-day basis.
LinkedIn could probably monetize their service better if there was a clearer distinction between free and paid, or if more features were restricted in the free version.
Testing and optimizing your SaaS pricing
Getting your prices as close to “right” as possible at the outset is what everyone aims for, but it’s by no means the end of your adventures in pricing.
As you acquire more customers and get a clearer idea of what they want, you should continue to test and optimize your prices. Surveying existing customers can give you a deeper insight into pricing opportunities you may have overlooked and it’s these insights that will enable you to scale and grow.
Customer feedback can also help you find ways to increase the perceived value of your products which will, in turn, attract more customers who are willing to buy from you.
Final thoughts on determining the best SaaS pricing strategy for your startup
There’s no one-size-fits-all solution for a perfect SaaS pricing strategy. There are multiple moving parts to finding prices that are right for your particular products. These include your market, your competitors, and most importantly – your customers.
Strategic SaaS pricing should offer an irresistible amount of value for all tiers of your buyer personas. Most importantly, your pricing schedules should be flexible enough to accommodate changes in the market and your evolving customer base as your startup goes through its milestone growth phases.
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