Table of Contents Hide
- What is a SaaS Pricing?
- Saas Pricing Strategies
- Most Popular Pricing Models for SaaS Companies
- Creating Attractive Packages for Your SaaS Product
- Testing and Iterating Your Pricing Strategy
Pricing is one of the crucial factors that affect the revenue of any SaaS business.
If you build a great product and create perfect marketing campaigns, inadequate pricing will lead to fewer acquisitions and retention.
Building a pricing strategy can be a bit overwhelming since there are so many different models and strategies to consider.
When choosing the pricing for your SaaS product, there is no one-size-fits-all approach. But there are some principles that all successful SaaS businesses follow. In this guide, we will show you how to build a winning pricing strategy for your business by covering the following topics:
- Different pricing models
- Different pricing strategies
- How to choose the right strategy.
In the end, you will find yourself building a perfect strategy for your business.
Let’s get started!
What is a SaaS Pricing?
SaaS businesses provide software as a subscription service, delivered over the internet. SaaS businesses need a pricing strategy that meets their customer’s needs while also ensuring profitability.
SaaS pricing is similar to the software pricing model, but in this case, users pay for the service as a subscription model.
To determine a SaaS pricing strategy, you must consider marketing costs, target market size, and competitors.
Your pricing should be flexible so that you can offer discounts or promotions as needed. This will help you attract more customers and increase sales.
Considering the lifetime value of a customer is crucial when developing your pricing strategy.
In short, lifetime value is the total amount spent by a customer on your products or services during their entire relationship. By fixing a fair price initially, you can increase your overall profits in the long term.
Saas Pricing Strategies
When it comes to pricing your SaaS product, there are a few key considerations to keep in mind.
First and foremost,
- Make sure that your pricing strategy is aligned with your overall business goals.
- Ensure whether you are looking to maximize profits or generate more revenue.
Next, you need to take into account the features and benefits of your product.
- How does your product perform when compared to similar products on the market?
- What are the USP of your SaaS product?
Finally, you need to consider your target market.
- What is the average budget for your target market?
- Are the users price-sensitive or value-conscious?
By understanding these key considerations, you can develop a pricing strategy that meets the needs of both your business and your target market.
Let’s look into some of the most popular strategies. Each one caters to a different goal: expanding rapidly into a new market or attracting particularly valuable clients. You can identify which suits your business.
Let’s dive in!
Cost Plus Pricing
When SaaS companies are in the early stages of monetization, they typically prefer using the “Cost-Plus Pricing” model.
In this approach, you consider the resources you invested in developing the software and add a certain percentage as profit.
For example, if you spend $100 to create a design, including the designer’s pay and software expenses, you can add $20 as profit and charge $120 for the design. This way, you can maintain a 20% profit ratio for all services.
With Cost-Plus Pricing, you do not consider competitors’ pricing or the target market’s price range.
- Simple and easy to calculate
- Guarantees a minimum level of profitability
- Not suitable for the long run
- Cannot be predicted in advance.
As the name suggests, this strategy is based on the price of your competitors. Your competitors’ pricing will act as the benchmark for your pricing strategy.
Your SaaS product can be priced above, below, or the same as your competitor’s price. This strategy works well for new SaaS products. In this strategy, competitors’ pricing is the only factor considered, not market demand or production costs.
Using a competitor’s price point can help you determine what your prices should be. You don’t want to start too high and scare customers away or go too low and have customers question your product’s value.
You can see this kind of pricing in streaming services.
- Best for new products.
- Provides a basic idea of what your target customers are willing to pay.
- Simple to follow.
- Less control over pricing decisions and experimenting.
- No strategy to follow for the future.
In this pricing strategy, a core product is offered at a lower price than expected, while extra features are charged at higher prices to maximize their value.
For example, in Canva, users can design using free designs and templates, but for better quality and advanced image creation, a subscription to Canva Pro is necessary, which provides access to premium templates and more.
Similarly, a SaaS product’s core features can be offered for free, with charges applied for its unique selling proposition.
- Effective for established businesses
- Having a high chance for user acquisition.
- In the long run, customers may become unhappy with repeatedly paying for extra features,
- Less chance of customer dissatisfaction.
In value-based pricing, products and services are priced according to the value they will provide to their target audiences. The price they think they are worth.
Instead of focusing on costs or competitors’ prices, this strategy focuses on what the target audience wants.
This also allows companies to do price re-evaluations and also adding value to the service. If the customers are willing to pay more for your service, you can generate more revenue based on it.
You need to understand your audience and the target market to determine the price for your service.
For example – Adobe charges high in the industry when compared to its competitors. They know the value they provide to their customers.
- Apt for the long run.
- Increases the revenue to the maximum.
- Requires time and resources to determine the price.
- Applicable only if you have high-quality SaaS Products.
Penetration pricing is a kind of promotional pricing. It is suitable for new SaaS products where you need to acquire early users for your product.
You can give 50% off the original price. You can limit this price to a period or user count.
For example – 50% or one-month free premium for the first 50 users or for 10 days after product release.
You can later expand to the price you determine. This strategy is employed by many top companies like Slack, where they introduced their products.
As a forerunner to a stronger and more established pricing strategy, the penetration pricing model can be useful.
- Best to acquire early users
- Suited to establish brand identity
- Not suitable for the long run.
Most Popular Pricing Models for SaaS Companies
Once you fix how you are going to price your SaaS product, you need to work on the pricing model.
Your pricing model determines what the best price for your product or service is. It is how you package your product or service. There are various ways to package your SaaS pricing, and each model has its own pros and cons.
You need to determine the package for small businesses with 5 employees to enterprise saas pricing models with 500 employees.
Here are some examples of B2B SaaS pricing models.
1. Usage-Based Pricing
Usage-based pricing is like the more you use – the more you pay. If you the service more the bill increases accordingly.
This is best suited for companies with infrastructure and platform-related software companies. Where you can charge the users for the number of API requests, gigabytes used or more.
Examples – Amazon web services, Oracle data integration
- Price increases along with usage
- Reduces unwanted barriers
- Attracts users with low budget
- Value of the product is not included in the pricing
- Complicated to predict revenue and per customer cost.
2. Tiered Pricing
Tiered pricing has different pricing packages. There will be multiple packages and the features in the packages will be different and the pricing too.
Also, in tiered pricing, you can establish packages for single users and multiple users. You can customise the package according to the business size.
Example – Hubspot
- Personalised for different target markets.
- Can upsell easily.
- Confusing to determine the pricing.
- Neds time and resources to fix the price.
3. Flat Rate Pricing
It has a single price, once subscribed all users have access to all the features. It is just the opposite of the tiered pricing model.
It is more similar to software licencing.
Example – eCommerce SaaS CartHook
- Starch forward pricing
- Easy for selling
- Reduced personalisation.
- No use of unique features
4. Freemium Pricing
In freemium pricing, there will be a free trial where users can use the product for free, Once the free trial is over, the pricing gets started.
This is one of the most popular pricing models in SaaS. You can see many SaaS products employ this SaaS pricing model.
Example – Mailchimp
- Best for attracting early users.
- Chance of conversion is high.
- Reduces revenue.
- Chances of high churn rate.
5. Per-Feature Pricing
Basically, it’s like tiered pricing, but customers pay per feature. it’s a great solution for companies that want to set a flat rate, but don’t want features to go unused. It becomes harder to understand and troubleshoot your service if customers aren’t interacting with all aspects of it.
In general, higher-priced packages include more features than lower-tiered packages. Generally, higher-end packages come with all the features of lower-tiered packages.
For example – Netflix
- Easily scalable
- Every feature generates revenue
- Difficult to fix pricing
Build your SaaS product in 11 steps. Read more here.
Creating Attractive Packages for Your SaaS Product
When it comes to creating an attractive package for your SaaS product, there are a few key things to keep in mind.
Make sure 👍
- Pricing is competitive and in line with what other similar products are charging.
- Create a package that is simple and easy to understand – potential customers should be able to quickly see the value in what you’re offering.
- Consider how you can add additional value to your package through things like discounts, free trials, or other incentives.
Testing and Iterating Your Pricing Strategy
Building and testing a pricing strategy for your SaaS business is essential to ensure that you are maximizing revenue and profits. There are a few key things to keep in mind when testing and iterating your pricing strategy:
1. Understand your customer’s lifetime value (LTV)
This is the key metric that will determine how much you can charge for your product or service. If your LTV is high, you can charge more since customers are more likely to stick around (and pay more) over the long term.
2. Test different price points
Don’t be afraid to experiment with different prices to see what works best for your business. Remember that you can always adjust prices up or down based on customer feedback and data from your tests.
3. Pay attention to conversion rates
Your pricing strategy should be designed to maximize conversion rates (the percentage of visitors who take the desired action, such as signing up for a free trial or purchasing a subscription). Track this metric closely and make changes to your pricing accordingly.
4. Use A/B testing
A/B testing is an effective way to compare two or more versions of something (such as a pricing page) to see which one performs better. This technique can help you fine-tune your pricing strategy and make continual improvements over time.
By following these tips, you can be sure that you are constantly improving your pricing strategy and giving your SaaS business the best chance at success.
Explore top AI SaaS tools
When you price your SaaS product, consider two important factors – the value of your product and the real situation of the target market.
Before you go into the SaaS pricing model or strategy, understand the target market and audience. Make it simple and uncomplicated.
Work on your pricing from time to time. Appropriate pricing is more than revenue, it also determines the company’s value. make sure you create a better pricing strategy.
Need help building your SaaS product? Reach us now!
How do you define a pricing strategy in SaaS?
A pricing strategy in SaaS is a plan that outlines how a company will charge customers for their software as a service product. It involves determining the optimal price point that balances customer value, competition, and profitability.
What is the best price model for SaaS?
The best price model for SaaS depends on the specific business and target market. Common pricing models include subscription-based pricing, pay-per-use pricing, and freemium pricing.
How do you develop a pricing strategy?
Developing a pricing strategy in SaaS involves researching and analyzing the market, understanding customer needs and preferences, evaluating the competition, determining the value proposition of the product, and experimenting with different pricing models and strategies.
What are the 4 steps to pricing strategy?
The four steps to a pricing strategy are:
a) Research and analyze the market and competition
b) Determine the value proposition of the product or service
c) Experiment with different pricing models and strategies
d) Continuously monitor and adjust pricing based on customer feedback, market changes, and business goals.
Read the full article here