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.
How to Develop SaaS Pricing
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 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 developing pricing out of the gate. What’s most important is that you don’t resort to pulling imaginary numbers out of thin air.
Your initial pricing will become a baseline that points you in the right direction for future adjustments as you gain a better understanding of your customer base. The goal is to start out in the right ballpark and refine as you learn more.
Defining your product's value
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.
SaaS pricing is an iterative process
Successful SaaS startups have leaders who are vigilant and take quick action to adjust their pricing strategy when there's an opportunity to deliver a higher value proposition.
Imagine a hypothetical SaaS startup that initially sells one program with four major features. By year three, when they have 15 major features, they should already be adjusting their pricing model to account for the value they’ve built.
“When you add on, you become more of a solution to a bigger problem as opposed to being just a point problem-solver,” says Lighter Capital CEO BJ Lackland. Those who solve big problems—perhaps whole categories of problems—are providing a much greater value above and beyond the smaller problems they solve along the way.
So how do you choose the best pricing model for your SaaS startup? Let's explore the options and a few examples.
SaaS Pricing Models and Examples
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 money 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 they expect 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 SaaS 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 and price subscriptions too low you could end up missing out on a lot of future revenue, because compounding.
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 prefer the value-based pricing model. Value is, of course, one of the most important attributes startups need to stand out in a competitive digital space.
Value-based pricing zeros in 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. Communicating that value in a way that resonates with buyers can be equally challenging for many SaaS businesses.
Tiered pricing models structure subscription plans by value (pricing tiers) around different customer segments or needs.
Take Wistia, for example. They offer three tiers, differentiated by the type of customer and value offered by each tier, which is clearly laid out in the pricing table shown below.
The value metric or variable they've chosen for their tiered pricing plan is 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, unpredictable bandwidth usage is going to need a customized plan that doesn't fit the other cookie-cutter plans.
Stencil offers another example 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 see which plan best fits both 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 get burned for trying it out. And if they love it, the customer won't be leaving anytime soon.
Offering three tiers is a good way to start to your pricing journey. It gives customers a choice of plans that can best meet their needs and budgets, without overwhelming them with too much information.
You might decide to test more or less tiers further down the road 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.
So What's the Best SaaS Pricing Model?
There’s no one-size-fits-all SaaS pricing model. There are many moving parts to finding prices that are right for your particular products. These include your market, your competitors, and above all–your customers.
The best SaaS product pricing should convey an irresistible amount of value at every tier for each 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 matures and grows.