For Saas companies, pricing strategy is a core part of the business which provides unique challenges and opportunities as the subscription-based pricing models require more thought into it. Pricing models determine the success of Saas products. Customers can churn and unsubscribe if they feel that the pricing of the Saas product is too high. So selecting the right pricing strategy is crucial to balance cost and revenue while ensuring it achieves your business goals.
According to research, about 80% of businesses use at least one SaaS application. Yet, an average SaaS startup spends only six hours to develop its pricing strategy. It’s nearly not enough time to create such an important strategy that will greatly impact the bottom line of your business. Developing a pricing strategy that is just right for the software is difficult. It is not a set and forgets function but instead, it requires constant evaluation to keep up with market trends, customer feedback, and your competitors.
According to research, about 80% of businesses use at least one SaaS application.
Why is SaaS pricing important?
- The right pricing strategy helps to gain a competitive advantage in the market.
- A value-based pricing strategy can help attract more customers as they see value in the product.
- Pricing plays a big role in the company’s bottom line. Monetization as a growth lever is 4 times more efficient than acquisition and 2 times more efficient than retention.
- An optimised pricing strategy lowers CAC and increases CLTV.
What are the different Saas pricing models?
- Flare-rate pricing– This pricing model is also known as the “one size fits all” method. The product is offered with a set of features at a predetermined price. Here customers don’t have the option to choose a pricing structure or features. The price remains constant regardless of how many customers the business has or what their overall usage is. This pricing method is simple to implement and easy to communicate with the customer. It makes forecasting revenue very easy as there are no variables. However, it’s not an efficient model for businesses that require custom plans to accommodate their requirements. When it comes to scaling operations, the lack of upgrade plans means that companies lose on the opportunity to upsell to their customers. Example- Basecamp.
- Tiered Pricing– Tiered pricing model offers different variations of the product at different price points. These tiers are based on features, several users or usage and/or are decided by the business based on the product they have to offer. Ideally, 2 to 5 tiers are created for customers to choose from. This pricing strategy can be appealing as it suits the customers’ level of proficiency, from beginner to advanced. Also, it gives customers the power to choose and customize according to their necessities. The downfall of this pricing model is that too many tiers can complicate the customer’s decision-making process. All tiers must be carefully thought out and constructed based on the target customers and eliminate any scope of confusion. Example- Hubspot.
- Usage-based pricing– Usage-based pricing model is also known as the “pay as you go” model. Customers are charged based on their usage of the product in this pricing structure. While some companies employ a purely usage-based pricing model, others use a base subscription fee and top that up based on the user’s usage. This is a tempting offer for customers as the price they pay is directly proportional to the usage of the product. There is more transparency in this model. The disadvantage of this model is that the price cannot be modified according to the size of the organization which means that the company loses out on revenue opportunities. Also, forecasting revenue can be tricky in this process as revenue depends on the customer’s usage of the product which can vary. Example- Chargebee.
- Per-user pricing– In the per-user pricing strategy, businesses are charged based on the number of users. Multiple accounts would add be priced individually. This pricing model works well as it allows SaaS companies to scale up easily. From a customer perspective, this model is easy to understand and the overall cost can be calculated by simply adding the number of team members who will be using the product. SaaS companies need to be wary of log in abuse wherein multiple users log in through the same account. Also, organizations using the product may limit access to the product to reduce cost. These factors can affect the revenue and impact the growth of the company. Example- Canva.
- Per feature pricing– In per feature pricing model, the product is priced based on the features and functionality that customers are offered. Customers can upgrade their plan to get additional features. Here the price is directly related to the value the company offers to its customers. Customers only pay for what they need and it saves them money as it eliminates the need to pay for unnecessary features. This model can be difficult to nail as it’s hard to predict which customers need which features. Some features may not be appreciated by the customers as they don’t find value in them and this may restrict them from upgrading the plan. Example- Quickbooks.
- Freemium pricing– Freemium is the most widely used pricing model which involves offering a limited version of the product for free. The free version lures customers in and hooks them onto the product and nudges them to upgrade to the paid version. In this model, the basic features are offered for free and customers can pay for the upgrade to get additional features. Freemium has lower CAC compared to other models. The disadvantage of this model is that it decreases the value of the product in the eyes of the customers and increases the burden on operational resources. Example- Drift.
- Per active user pricing– In this pricing model, the users are charged based on how active they are. From a customer perspective, no money is wasted on inactive users. For organizations, the product can be purchased for multiple team members but they only have to pay the members who use the product actively. This pricing model doesn’t work for small-sized businesses as a lot of customers with access to the product may never use it, hence affecting the bottom line. Example- Slack.
How to choose the right pricing strategy for your business?
Here are some areas to consider when determining the pricing strategy of your product:
- The sales strategy of your company will play a very important role in your pricing strategy.
- You must opt for pricing strategies that allow your business an opportunity to upsell.
- Annual pre-purchase discounts must be used with caution as research shows that it negatively affects revenue over the long term.
- You must think about building discounting options for enterprise licensing.
- It’s a good idea to consider free trials to acquire new customers.
- Great service is key to prevent customer churn at every renewal period. Support and customer service are crucial for SaaS companies, so consider whether your customers are willing to pay a maintenance fee.
- The demand curve for SaaS companies is never linear. Customers don’t always go for the cheaper, what they go for is value for money. So pricing should be adjusted to reflect the purchasing behaviour of the target audience.
When you are deciding on the price of your product, always keep three things in mind:
- The price should always be based on the value your product offers to the end consumer.
- Target the right buyer. The accuracy of your buyer persona will have a massive impact on the price.
- Never complicate the pricing structure. Customers don’t like that.
The pricing strategy can make or break your subscription-based business. You need to get it just right such that it’s competitive in the market and appealing to customers as well. At the end of the day, you want your customers to keep coming back.