If you think creating your SaaS product pricing strategy is a function of finance, accounting, operations, or sales, you’re in for a big surprise.
Your pricing strategy should never be the result of a spreadsheet analysis. On the contrary, your pricing should be the cornerstone of your marketing strategy. Your price will help you determine revenue, thus allowing you to calculate profitability and project growth.
While finding the right price can be full of trial and error, pricing doesn’t exist separate from marketing -- and, it’s not something you can take for granted. Pricing determines your market position and indicates the type of customer you want to do business with.
Nevertheless, what is the right price for your product and how do you come up with the right number?
In this post, I’ll shed some light on this controversial topic and share a few pointers on how to build a profitable SaaS pricing strategy.
How To Set Your Pricing
Companies pour everything they’ve got into making a great product. They spend countless hours bringing in new customers and do everything they can to make everything work.
But, if your product doesn’t have a solid pricing strategy to back it, you’re not only missing out on revenue, you’re also driving away potential customers.
One of the things I’ve noticed after working with dozens of clients is that they rarely know what their product is worth to their customers or how to best communicate this worth.
When it comes to pricing a SaaS product, the most important thing to keep in mind is customer value. Understanding customer value is essential to pricing all software products, but even more so with SaaS.
And, that’s because of the monthly recurring subscription.
In a SaaS business model, customers are constantly reevaluating whether they want to continue subscribing, which makes it crucial to align the price with the value customers receive.
So, what exactly is “value”?
Value is quantitative. Think of the number of hours your product can save or the additional revenue it can help people earn, value is everything you can measure with data.
You can also define value qualitatively. And, here’s where pricing becomes tricky. Qualitative value can be pain relieved, benefits to their lifestyle, and any other way customers perceive you’re improving their lives.
I consider that customer value, both qualitative and quantitative, should be your main considerations for a pricing model. Not features, not your competitors’ prices, and not your costs. Often this is boiled down to a “Value Metric” that drives value to both the customer and is a way to expand revenue based on usage.
If you don’t know how your product benefits your customers, how can you put a price on it?
How To Identify a Value Metric
A "Value Metric" is the core mechanism to structure your pricing strategy around. A successful value metrics has the potential to grow as your users do.
Traditionally in SaaS this has been users or seats and more recently with the explosion of B2B SaaS a value metric could be usage based such as "contacts" or "revenue/GMV".
There is no right or wrong metric, it's based on what your customers find valuable, simple, easy to understand and has the potential to grow with usage.
How To Test Pricing
My favourite customer-centered pricing method is using a survey to discover their “price sensitivity.” The Price Sensitivity Meter (PSM) is based on four questions and can give you a solid idea of your customers’ willingness to pay for your product.
Ask your customers these four questions:
- At what price would you consider the product to be so expensive that you wouldn’t buy it?
- At what price would you consider the product to be so cheap that you would feel the quality couldn’t be good enough?
- At what price would you consider the product is starting to get expensive, so that it is not out of the question, but you would second-guess the purchase?
- At what price would you consider the product to be a great buy for the money?
Once you’ve gathered a highly representative sample of data, plot those answers onto a graph and visualise your optimal price band.
How To Review Competitor Pricing
There are countless variables related to pricing, and your competitor pricing is just one of them. Your competitor’s price is not a main input on which to decide your pricing structure. However, reviewing your competitor’s pricing lets you know what your competitors are charging, how they’re charging, and the features they’re charging for.
And, since you’re likely competing with other established products, you should know that customers already have a certain bias. They subconsciously expect a certain price, and that’s something that reviewing your competitors’ pricing can give you.
This is also a great idea in niches where everyone in the market has the same pricing model and similar features. If your product is different to the rest in significant ways and needs to set itself apart from the competition, examining your competitor’s pricing strategies is a necessity.
In a nutshell, your competitor’s pricing shows you
- Customer expectations
- Average price ranges
- Insights about your customers’ mindset
Researching Your Competitor’s Pricing
Narrow your target information list to the key components of interests. Don’t turn your review into a wild goose chase and narrow your research focus as much as possible only to find data that’s meaningful to your business.
I suggest you focus on these data points:
- Company website (especially the pricing section)
- Industry bloggers
- Review Sites (Trustradius, G2 Crowd, Capterra)
- Analyst reports (Gartner, IDB)
- Q&A Sites (Quora, StackOverflow)
- Secret shop a competitor and go through their trial or onboarding process
3 Examples Of Best Practice Pricing In SaaS
Pricing a SaaS business can be extremely tricky. You want to be in the middle of the spectrum without being a cheap scam or an expensive ripoff. Similarly, each SaaS business uses a different pricing strategy that makes it difficult for new businesses to figure out the right plan without shortchanging themselves in the process.
Luckily for us, many successful SaaS have great, competitive pricing models from which we can extract insights.
Let’s take a look:
Value Metric = Per Active User Pricing
Slack, the team communications SaaS has a great, simple pricing strategy you can use if you’re a SaaS that promotes team-based services. Slack charges a fee based on active users per month, which means you only pay for each user, rather than a flat fee.
The best about this pricing model is that it scales with adoption and reduces costs. The "free" plan also encourages adoption and creates a nurturing path to being a paid customer.
Tiered Pricing Model + contacts as Value Metric
Tiered pricing is the de facto pricing model for most SaaS businesses. At its core, tiered pricing allows companies to offer multiple packages with different combinations of features at different price points.
HubSpot, for instance, employs tiered pricing centered around the needs and budget of its customers, ranging from absolute beginners to seasoned marketing professionals.
Pricing Approach = Tiered Pricing Model
Evernote has recently revamped their pricing from feature add ons to a simple 3 modules of pricing. The first is free, the second for consumers and the third for business.
The business features are integrations to Salesforce, team collaboration and administration rights. It's a clever evolution to understand Evernote's value and the path to scale across enterprise.
There’s no “best” pricing strategy or pricing model for your SaaS. Choose a strategy that fits your business plan as it relates to the services you offer. And, don’t ever be afraid of upgrading or changing your pricing strategy. That’s often very reasonable because businesses evolve and your customers’ needs change constantly.
A good strategy is to perform thorough research that includes asking both your customers and prospects questions. In doing this, you’ll gain invaluable insights on how to proceed.
Cat Williams-Treloar founded Humanisation, a Human-Centered Marketing Consultancy. Humanisation was born to help startups make a human impact in a digital world as they Go-To-Market across APAC.