Defining an effective SaaS Pricing Model
Figuring out how to price your product is one of the trickier aspects of running a SaaS business. And a key question for these companies, especially quickly growing B2B SaaS startups, is when and how to increase prices as their offerings develop and expand. The SaaS pricing model most appropriate for your startup right now might not be as appropriate in a year or two as your company continues to grow.
A Common Sense SaaS Startup Pricing Model for Startups
It’s very common for SaaS startups to get off the ground with a simple offer that helps other companies solve a problem in a relatively inexpensive way. This is a straightforward value proposition and a straightforward single-tiered SaaS pricing model. As SaaS startups build out more advanced software and add features — a typical growth path for B2B tech companies — they often fail to evolve their pricing structures to keep pace with these changes.
Effective SaaS Pricing Models Are Not Stagnant
One of the most common mistakes startups make is implementing a stagnant SaaS pricing model that fails to evolve with company growth and any increased value in product offerings. Startups must be alert for when to begin adjusting prices to take advantage of 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 value above and beyond the specific value of each of the smaller problems they solve along the way.
Fast-growing startups will be in a position to raise prices before they may realize they are or feel comfortable doing so. But being assertive about revenue growth is essential in the competitive tech industry.
So how do you adjust your SaaS pricing model as your business grows? Here are a few different options.
3 Effective SaaS Pricing Strategies for Growing Startups
1. Raise Prices on Existing Customers
One way to adjust prices is to tell your existing customers that the contract is getting more expensive. This is a controversial decision, with the potential for backlash from dissatisfied customers.
“Everyone has to ask themselves: When you decide to increase prices, do you increase prices on your existing customers or not?” says Lackland. “Raising prices on existing customers is always a difficult thing.”
However, many customers are likely to stay despite heightened costs if you provide a valuable service, especially in a very specific niche, and/or if your software has high switching costs.
2. Raise Prices on New Customers
A straightforward way to raise prices is to charge more each time you get a bigger customer. While some companies come to regret their early deals because they were locked into pricing that quickly began to seem too low, they serve as useful reference points regarding where not to stay. These deals are not mistakes — they’re an integral part of building a business. But they are best approached as launching pads for moving up.
Climbing steadily toward larger clients is a good strategy for increasing pricing. Large enterprises aren’t as price-sensitive as small startups, so pricing differences that seem large to a scrappy team of entrepreneurs may be hardly even discernible in corporate budgets.
Such companies may take months (or even years) to commit to purchasing a specific software solution. After spending so many resources on the decision-making process, they just want something that will solve their problem, regardless of the price tag.
3. Price Your New Features as Add-ons
Many SaaS businesses neglect to consider another option for increasing prices: charging for new features as add-ons to the core offering. Startups often don’t do this is in part because the continual and incremental process of updating and improving the software obfuscates how much its value is increasing.
“Back when you sold packaged software, you’d plan out your release for months and then you’d go release it, but now you can push updates and changes weekly,” says Lackland. “Frequently you don’t think you’ve added a whole lot more value with all these new features for your customers.“
Accurately assessing the value you’ve created by improving your software over time will help you see that your offering is worth charging more for. Analyzing how your features may be grouped — or picked apart — in order to create modular pricing can reveal interesting new ways to get more revenue from your product.
“Don’t be afraid to call something a different offering and try to up-sell it,” Lackland advises.
The Add-on pricing model recognizes that not all customers have the exact same needs and allows customers to build the most effective solution with the greatest value based on their specific requirements. Nobody likes to pay for features they don’t use and add-ons allow a level of customization most customers will recognize and appreciate.
What’s the Best SaaS Pricing Model for Your Startup?
Defining the most effective SaaS pricing model for your startup depends on a variety of factors only you can answer. Your initial pricing model, increased value in product offerings, overall company growth, and how your ideal target customer may have evolved since inception are just a few things you’ll want to consider. But, it is crucially important that you are actively considering different strategies that make the most sense for you and your company right now, as well as down the road as you continue to experience growth.
The best SaaS pricing models aren’t necessarily a one or the other decision, either. Smart companies might consider implementing a custom combination of the above mentioned pricing models if they believe it will result in high customer retention, high customer acquisition, and greater overall revenue. Whether you are planning to raise prices, seek bigger-ticket clients, or reconfigure your offerings, the important thing is that you’re looking critically at how you can get more revenue out of the valuable product you’ve created.
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