How To Price A SaaS Product: Tips To Get Started
If a growing SaaS company is not giving a thought to its pricing timely, then probably it is missing a good profit. However, most companies make that mistake. They decide the pricing methods for their service/product and do not touch it for several months or even years. So question is, How To Price A SaaS Product?
Pricing is the most critical element influencing the future of the business. It decides which segment will be attracted by the plans and to which extent the products will be successful.
However, it is a vast topic to discuss. It is as broad as SaaS marketing. Let’s discuss the types and importance of price a SaaS product.
Why Is Pricing Important For A SaaS Product?
Values drive the world. And pricing reflects everything a SaaS vendor does as a business, so it has to make the reflection clear and fair. Nothing else describes and attracts the clients better than the pricing. So, everything comes after the pricing.
Pricing impacts the profitability of the company. If the bar is too low, buyers who are ready to spend a larger amount may think that the product is ineffective because it’s cheap. And if the bar is too high, customers looking for a budget-friendly product may drift away. So, prices should be set considering both these aspects.
With an emphasis on profit, all SaaS providers can benefit from price optimization.
It can be a determining factor in a company’s customer churn and retention rate. For instance, if the users find a product too costly or ineffective according to its prices, they might discontinue the subscription. And if the company satisfies the customers with the product and price, it might be able to retain them for a long period.
Companies often consider the price-defining process a one-time process or one time a year. But it should be a continuously changeable aspect of the business and not a one-off event. Because prices of the SaaS product also determine the sustainability of a company. Therefore, if an organization desires to stay sustainable in the market for a long period, then it must put a higher emphasis on its pricing models.
Different Types Of SaaS Pricing Models
There are dozens of pricing models for SaaS products. All differ from one company to another and according to the niche. Companies usually choose the model best suitable for their niche and the one that gives them competitive advantages. However, a few popular pricing models are listed below to consider:
1. Usage-Based Pricing
This model is directly related to usage. It can also be said to pay as you go. If the user has to make more activities run on a particular SaaS platform, then the bill will be higher. In this type of plan, vendors usually charge the users according to the data they are processing per hour.
On practical grounds, this type is most suitable for infrastructure and platform-based SaaS providers. One such example is Amazon web services; it charges its users according to the API requests made, transactions made, and data used. Cloud storage providers also fall under this category.
Customers find the price plans fair because they are entirely based on their usage. And it is transparent, so it makes an impressive brand value in customers’ minds.
Covers a wide range of segments. As it is based on usage, small businesses to organizations of all sizes can afford it.
Provides the true value to the resources used. In the fixed pricing model, there is a risk of users taking up an inappropriate amount of delivery resources without giving any additional costs of it. In this method, that risk is eliminated; users pay for their use.
Difficult to predict the revenue and maintain a stable flow of income. The usage and revenue may vary from one month to another. So forecasting the future growth is harder.
The same thing applies to the users. They can’t find the exact costs of the product. If they are charged a high amount, though, it doesn’t help them to ease their work. They may back out.
2. User-Count Pricing
Probably the most popular pricing model is the user-count/per-user model. As its name suggests, the users are charged according to the seats they reserve for their work. In simple words, the users are charged as per the number of persons using a particular product. If one, then a fixed amount is billed accordingly; if there are two, then the bill amount gets doubled, and the amount goes up as the users are increased.
In this method, it is easy for consumers to predict the bill amount as per the persons using it. The ideal example of the per-seat model is CRMs like Salesforce that charge consumers according to their profiles, not their usage.
Easy to count and predict. Both the company and clients can count the value of their costs.
The revenue grows with the adoption rate, so companies using this method can just focus on adoption rates to drive more income.
Organizations with a significant amount of profiles cannot afford this type of pricing product.
Users may share their login credentials with others, so the SaaS provider may not get the actual value of its product.
3. Tiered Pricing
This type is also famous among SaaS companies providing multiple features and services through their product. They segment their features and provide users with different options to choose from them according to their needs. Usually, these different options are named as tier-1, tier-2, tier-3, etc. Therefore, it is called the tiered pricing model.
This model delivers an actual value to consumers. In the previously described types, some features may remain unused if the user doesn’t need them, and it might be considered costly for users as they pay for features they don’t actually need. In this method, the buyer chooses the plan according to the features he needs. Content marketing SaaS platform HubSpot provides this type of pricing plan for its users.
Able to focus on
multiple personas. This method allows organizations to tailor the plans according to their consumers’ needs. So, every business can use the product regardless of its size.
There are high chances of users buying upgraded packages rather than one with basic features. So, it grows the SaaS provider’s MRR without costing any marketing effort.
Multiple tier options create complexity in the decision-making process, and it might also result in confused customers purchasing the competitor’s subscription.
4. Flat Rate
This method is the simplest one. Opposite to the tiered plan method, all the features and services are included in just one plan. Therefore, it is easy to attract users because they won’t have to suffer from any additional costs.
This method is based on a “one size fits all” strategy. Not many SaaS businesses provide this type of pricing, but it can be helpful for products with limited features and functionalities. Basecamp is a leading name in project management SaaS providers; it provides its users with a flat-rate pricing package.
The most straightforward method appealing to customers. They get valuable features in one package, so they tend to subscribe to the product for a long period.
Calculating MRR and forecasting future growth is easy as there are no complications.
Some features of the set may remain unused, so the user might consider it costly to pay for features that they don’t even use. And also, it doesn’t provide true value to the unique features of the product.
There is no option for upgrade, so fast-growing businesses won’t be comfortable with a limited feature product.
Freemium is another popular and common strategy listed here. SaaS providers offer a free and limited version of the product to increase the sign-up rate. Users can leverage advanced features after subscribing to a package.
The primary thought behind this strategy is to hook consumers to the product and nudge them later to purchase the subscription. Drift is a conversational support platform offering its users both free and premium plans.
The initial stage of product adoption is a very challenging task. However, after adopting the free plan, the users are habituated to using the product, so it increases the chance of a conversion.
SaaS providers can monetize the free plan also by allowing ads.
Free plan users do not generate revenue until they subscribe to the premium.
Consumers using the free package might have a throwaway mentality, so the churn rate is higher in this type.
Feature-based strategy is helpful for SaaS companies looking to adopt a flat pricing method, but also they don’t want to let their features go unused. So, they adopt this method. This type is similar to tiered pricing plans, but the users pay according to the features they need.
As the package goes cheapest to the most expensive one, more features are added to the tier. In this model, the vendor ties the price directly with the value offered to users. Canva is a photo editor app and designing system offering a feature-based pricing model.
Customer satisfaction is higher in this model as they pay for what they use. And they can also add features whenever they need them.
Highly affordable structure for all business sizes. Small enterprises may use fewer functions, so they pay less, while organizations may need advanced features, so they according to it.
Difficult to segment the features into different tiers. It’s hard to say which customer needs which features.
According to Devsquad, 38% of SaaS providers adopt the usage-based pricing model. On the other hand, 40% of vendors prefer a value-based structure that justifies the value of their product in the best way. While 50% of businesses go for user count price setting.
Tips To Consider While Pricing A SaaS Product
1. Understand The Value Of The Product
Before setting up the pricing structure, the SaaS company must understand what value it is providing to its users. Next, it must identify unique features and their importance. If the SaaS provider finds nothing unique and appealing, it might give the product a re-thought. Value metrics are the best solution to measure how likely users are to adopt the product.
2. Know The Targeted Audience
After understanding the values of a particular product, the next thing is to gather information about the customer segment the business is going to target. There may be multiple segments with different characteristics, so the SaaS provider must know about each one of them. Next, it must understand what the users look for when searching for particular SaaS products. Finally, it should be identified what features are more appealing to them and what are not. By following this step, it becomes easy for the vendor to convince the buyers.
3. Charge Accordingly
Once the SaaS company has gathered the users’ data and interests, it should set the pricing plans that best suit the potential consumers’ needs and budgets. This is the most influential part of the process because the pricing structure reflects the business as a whole in the first impression for users. Therefore, it should be set according to the actual value business is providing to its customers, and it should be appealing at the same point. If the customers don’t find the plans reliable, they might drift away without having a second thought.
4. Don’t Just Copy The Competitors, Study Them
The most important thing for a SaaS provider is to identify the right price metrics and not just blindly copy the competitors. The SaaS company should look at different industries with similar business models and study what they are doing and identify the reason behind it. So, instead of copying the competitors, the business must know their strategies.
5. Do Changes Constantly
Various SaaS providers might often ignore this tip. The pricing is not just a one-off event, but it should be changed with time and market trends. After onboarding a specific amount of users, the SaaS provider should identify the level of user satisfaction and what the customers think about the pricing structure and features offered in tiers. If common indications are made on a particular point of change, then it should be done.
How To Price A SaaS Product? As per the above discussions, one conclusion can be derived that the pricing process of SaaS products holds much importance and should be emphasized, too. And it should be revised at multiple intervals, so that accurate prices according to the true value of the product can be offered. However, the pricing and the re-pricing process is a difficult task, but proper market research and working through different options can make it somehow easy.