The traditional pricing model for many Software-as-a-Service companies is seat-based. The formula is easy, right? You simply figure out what dollar amount per user per month works for you, slap together some landing pages, and launch your new product.
Wrong. Or, at least, wrong for many SaaS companies. Pricing trends are changing, and there are good reasons that 38% of businesses are looking to usage-based pricing.
Keep reading to learn more about current pricing trends and how to perfect the pricing strategy for your SaaS product.
What Do I Mean By SaaS Pricing?
Simply put, when I talk about SaaS pricing, I’m referring to how much you charge for your product as well as how you determine that pricing. Dozens — or more — of SaaS pricing models exist, and you may very well be familiar with the most common models such as subscriptions, tiered pricing, and flat-rate pricing.
Pricing matters to the company, due to the bottom line, and the customer, due to their budget. Both parties have an equal, if opposite, interest in product pricing, so understanding how to accurately and appropriately set pricing models is essential to meeting customer needs, supporting growth, and ensuring stable business finances.
What Do You Stand To Gain By Perfecting Your Pricing?
Sure, you stand to maximize profit and revenue, but there’s a bit more to it than your bottom line. Here are some additional reasons to spend time developing the right pricing structure.
Understanding the Value of All Users
A good pricing model obviously takes into account metrics such as customer acquisition cost (CAC) and customer lifetime value (LTV). But what if you have free users for freemium models? Does the number of users matter in your pricing model if they aren’t shelling out money for your product?
Absolutely, and when you have the right model, those free users can even help you increase price points for paying users.
Consider the example of Slack. In 2020, it had around 18 million users but only 156,000 paying customers. In its pricing model, a tiny portion of users drives the bulk of the revenue.
Slack understands its pricing structure. It knows that those high-dollar accounts pay for the service in part because of those other users. The popularity of the communication platform makes it an easy choice for some large enterprises.
Aligning with Customer Needs
The ideal pricing structure lets you align your product with the needs and preferences of your audience, which usually leads to an increase in active users.
Don’t make the mistake of thinking that aligning with customer needs automatically means a low price, though. Instead, consider the value proposition behind your product and how to support that vision with pricing.
Supporting Work on New Features
Monetization is important because it paves the road to future growth. When you land on a pricing model that supports a robust profit margin, you have enough revenue to invest in developing new functionality or other products.
But you know you simply can’t keep raising prices until cash flow meets business needs. You have to balance profit concerns with the threshold price points customers are willing to support.
How Often Should You Adjust Pricing?
SaaS business pricing is never set in stone, though you should tread carefully with existing customers and provide ample notice if you plan to adjust pricing for them.
Adjust pricing for new customers as necessary to account for new additions to product functionality, customer feedback, competitor fluctuations, and business objectives. Consider setting time aside every 6 to 12 months to review pricing and make any adjustments necessary to maintain or improve your competitive position.
SaaS Pricing Strategies
SaaS pricing is complex. Start peeling back the layers of pricing and you quickly realize you’ve got more than an onion on your hands. Your pricing model is more like a tossed salad, and some of the bits are made up of various pricing strategies. A few common options are summarized below.
- Cost plus pricing: Take the total cost of developing and distributing the product and add a bit for good measure (you know, for profit).
- Price skimming: Set a high price to demonstrate the product’s perceived value but lower it over time to raise interest in what looks like a promotion.
- Premium pricing: Alternatively, keep prestige-level pricing and avoid the discount to create the perception that the product is luxury or exclusive.
- Free trial pricing: Let potential clients wet their whistle on free trials or freemium versions to help entice them into a paid version of the product.
- Value-based pricing: Focus on the value you provide to the customer and what it’s worth in the market, regardless of the costs on your end.
The 5 Steps To Pricing a SaaS Product
Make it free!
Just kidding. Kinda.
Freemium models may be popular with customers but they aren’t right for every SaaS product. Follow the steps below to figure out the best pricing plans for your business.
Step 0: Use the Van Westendorp Model
This is a survey-based tool that helps you vet pricing options with potential customers. Specifically, you ask customers to provide you with a dollar amount or range that fits four scenarios:
- So expensive they wouldn’t buy the product
- Perceived as expensive, but they might still purchase
- Seen as a bargain price
- So cheap the quality might be in question
When you poll enough of your target audience, the Van Westendorp Model provides a fairly accurate picture of customer thoughts on the value of your product. This can be invaluable if you opt for value-based pricing, but you can also use this model to help with feature-based pricing by adjusting the survey to ask customers how much more they might pay for certain functionality.
Step 1: Understand Your Product
Gather subject-matter experts from your dev, tech, and product teams as well as customer service, marketing, and sales teams. Work with these internal experts to understand your product fully, including:
- Why does it exist? What was the motivation for developing the product? How is this product set apart from competitors?
- What does it do? List the full set of features offered by the product. Why would a customer want these features? How much value does each feature add?
- Who is it for? Who is your customer base? Whether you’re selling to large enterprises or small businesses makes a big difference in pricing, for example.
- What problem does it solve? Ask about buyer personas and what their main challenges are. How does the product solve those problems?
Step 2: Perform Market Research
Once you know your product, turn externally to understand the landscape you’ll market it in. Some information to gather during this step includes:
- Competitor analysis. Look at competitor pricing for similar products. Consider how competitors are positioned and what unique value props differentiate your offering from theirs.
- Target market data. Who is your target market and how big is it? Understanding the income, interest level, and other factors relevant to your target market helps you better price your product.
Step 3: Form a Hypothesis
Do you remember the scientific method from school? You want to apply something like that here, creating a hypothesis you can test as you work toward your (current) perfect pricing.
This is another step that can involve collaboration with team members. Pull in relevant subject-matter experts and discuss options such as pricing tiers and per-user pricing models with an eye on how each choice might impact metrics such as LTV or customer acquisition cost.
Form a hypothesis, selecting the pricing model and details that you think will drive the best metrics.
Step 4: Monitor Your Results
Ensure that all the metrics relevant to your hypothesis are tracked. What gets measured gets managed, so you need an accurate and consistent way to track new customers, customer lifetime value, CAC, and any other figure that you believe will help illustrate whether your pricing strategy is successful.
When possible, automate such measurements and create a visual dashboard where you can see real-time or close to real-time representations of these figures. When metrics are easily accessible and understood by you and your team, you’re more likely to act on them.
Step 5: Make Adjustments
If you think back to when you learned the scientific method in school, you’ll remember that hypotheses were often invalidated once experiments were carried out. And this was not deemed a failure, because you learned something in the process.
The same is true here. Even with all the right research and seemingly sound decision-making throughout the above steps, you might find that your pricing approach isn’t quite right. Maybe customer retention isn’t where you’d like it, for example, and you realize your monthly fee must be a little high. Don’t be afraid to make adjustments to your strategy and pricing page on a regular basis. Do, however, ensure transparency and excellent communication with your customer base about pricing.
Popular SaaS Pricing Models
When selecting your pricing model, you have numerous options to choose from. Some popular choices include:
- Flat-rate pricing model. Customers pay a fixed fee for the product, regardless of how much or the ways in which they use it.
- User-based pricing. Also called per-seat pricing, this model involves customers paying for each user or license. It creates an opportunity for an upsell as your client organizations grow and need access for additional people.
- Per-feature pricing. With this option, clients pay more for additional features, such as access to more storage or added integrations.
- Usage-based pricing. In this model, you charge based on how much of your service clients use. An example is cloud storage products offering tiered pricing based on how much storage a client needs.
- Freemium pricing model. In this pricing strategy, you offer a free version to get new customers. The free version might be supported with ad revenue or be designed to introduce the product and entice users to purchase a paid version later.
- Tiered pricing model. This option offers different price points to meet different customer needs and budgets. It works alongside any of the other models in this list to create flexible choices.
- Subscription pricing. You can drive recurring revenue with this model, which typically has clients paying per user, per use, or via other models each month.
SaaS Product Pricing Winners
To better understand some product pricing models, let’s look at providers and startups with winning pricing strategies. We’ve already touched on how Slack leverages a pricing strategy that supports free users while ensuring options for revenues. Here are a few other product pricing winners and what they do right:
- Basecamp. Basecamp offers user-based and flat-rate pricing. Small teams and freelancers can pay a small fee per month, but teams of 20 or more users can opt for unlimited user access via a flat rate. Basecamp doesn’t charge for guest access, which ensures customers can make the most of the product when partnering with clients and others.
- Dropbox. Dropbox wins pricing by offering easily accessible cloud storage space at budget-friendly prices for all users. For individuals, the monthly price equates to a fancy cup of coffee, and the higher price for freelancers, small teams, or even larger teams isn’t that much more.
- Zapier. This automation and integration provider has a tiered pricing approach that charges clients based on how many tasks per month they need to automate.
- Canva. Canva offers a robust freemium version and options for Canva Pro and Canva Teams. One of the reasons Canva’s pricing strategy works so well is that the free version is extremely useful, but many regular users will find enough value in the paid version to make it worth paying for.
Chat About Pricing Models With Other Financial Decision-Makers
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