The perfect SaaS pricing strategy for startups
Does the perfect pricing strategy for SaaS even exist?
We explored this answer and the ins and outs on the basis of the many start-up projects that Bakklog has delivered. Creating a profitable pricing strategy for Software as a Service (SaaS) products is a major challenge for marketers. Prices can make or break your business. Poor pricing can lead to misperceptions of the product, and a well-thought-out pricing strategy can help you achieve your short- and long-term revenue goals along with customer satisfaction. Perfecting your product's pricing structure isn't a one-time job, it's a long and thoughtful process for startups.
The ultimate pricing strategy tips
What is ‘pricing strategy’?
Importance of pricing strategy for SaaS companies
Steps before choosing the right pricing strategy
Types of Pricing Strategies
Pricing Models
To understand how to price a product, let's first explain the basic concept of 'Pricing Strategy' and its significance to a SaaS business.
What is the Pricing Strategy?
The concept of pricing strategy lies in identifying the optimal price for your product or service. Devising a suitable strategy requires a deeper understanding of the market, customers, competition, costs, the perceived value of the product and most importantly your revenue goals.
Importance of pricing strategy for SaaS companies
Strategic pricing plays a vital role in building your brand's image within the SaaS industry. It also helps identify the value your customers are seeing from your product relative to price, helping you price based on what your SaaS product offers. For a growing SaaS business, small changes in pricing plans can lead to huge changes in revenue and business growth. That is the importance of this 'P' of the marketing mix (others are Product, Promotion, Place). When SaaS organizations want to grow, they usually focus on customer acquisition. But they forget that pricing is a critical part of the business and has the biggest impact on their growth. They forget that it is an increase in revenue that determines growth, not a large number of customers. From now on it is important to earn money from potential customers.
Steps before choosing the right pricing strategy
A good pricing strategy is at the heart of any business. It reflects and influences everything you do. The right price of your product falls between the cost and the value it offers your customers. Always make sure your product prices are closer to the value it offers. So if you want to sell your product at a high price, you need to offer more value and then sell that value.
That said, here are a few necessary steps that can help you determine the best SaaS pricing strategy for your product:
1. Identify the target audience
It is essential that you identify your target audience or your potential customers. Until you do this, you won't be able to determine your perfect SaaS pricing strategy. Identifying your target audience will help you assess demand for your product. Next, you need to customise your product to meet your customers' expectations and their specific needs. There are a number of factors that go into identifying your target audience, including: - Background - Company Profile - Role - Location - Pain points - Needs and aspirations - Purchasing power Keeping the above factors in focus will help you create your buyer personas and segment your prospects. Next, you need to conduct a market research with various surveys, interviews and feedback from support groups. With that data you have to reassess the offer and product profile. You should also reassess the audience periodically, such as every six months or at least once a year. With additional research, you can tailor the buyer personas accordingly. While studying your target audience, don't forget to reach out to your competitor's proponents to get an idea of what they think of your competitor's prices.
2. Identify your product's competitiveness
You may have a great idea for a SaaS product, but what is the Unique Selling Point (USP) of your product? Many new entrepreneurs are not aware of determining the USP of their product. They are lost in the crowd and frankly they are dying a slow death. It does not allow them to attract enough customers, which prevents their business from thriving. You don't have to worry though; we are going to explain how you can identify the USP of your product.
Follow the following steps:
1. List the unique features and benefits of your product. Do a Google search and compare the benefits of your product with your competitors. Identify what sets you apart.
2. Determine which emotional need your product fulfils. You have to think this through from the perspective of your customers.
3. Identify the aspects of your product that your competitors can't imitate, even if they try. You can put a star along with the aspects that cannot be easily duplicated or reproduced.
4. Answer the primary question: "What will it get the customer?" A big mistake that companies make is to intentionally lower the price of the product to label it as the USP of their brand, but a low price can never be the USP of your product as it can cause you to lose a decent profit or your customer may end up labeling you as a cheap brand.
3. Conducting a Competitive Price Analysis
Competitive pricing analysis is a critical part of your SaaS marketing plan. Good analysis provides digital consumer insights that allow you to make informed decisions about your brand's strategy. Competitive pricing analysis should be an in-depth study of your industry and competitors, with their strengths and weaknesses. Only then can you identify new opportunities for improvements within your pricing strategy. Here's how to conduct a competitive price analysis.
Step #1: Categorise Your Competitors
You can divide the market competition into two categories:
Direct Competitors - They belong to the same industry and offer the same product. Your direct competitor offers more value to acquire customers.
Indirect Competitors - They belong to the same industry but offer different products. They post offers and promotions to attract new customers.
When you categorise the competitors, the market analysis becomes less time consuming. In addition, SaaS organisations can position themselves in the right direction in terms of competition.
Step #2: Determine the quality of your data
Analysing competition requires complete and accurate data. The following checklist is crucial to determine which data is high-quality and therefore valuable: - In-depth product/service comparison - Error Rate Analysis - The ratio between planned and delivered data - Do not use collected data for more than two hours for repricing - Dates delivery time
Step #3: Determine Data Parameters
SaaS organisations need to determine key data parameters of their competition to collect and analyse their pricing process. They can do this by determining: - Price index - Competitor's promotional activities - Product availability Many SaaS organisations believe that competitive pricing only includes peer group analysis. But competitive price analysis also requires a study of the competition's internal data. It is almost impossible to set up an optimal pricing model without a thorough knowledge of the market and your position in the industry as a SaaS provider.
Step #4: Using Machine-Based Pricing Tools
SaaS companies are increasingly using algorithms to collect and analyse data. It is safe to say that machines have significant advantages over manual evaluations and approaches such as: - Improved accuracy - Complex data processing - Scheduled Delivery - Precise price recommendations By automating the pricing process, your marketing team can move from routine tasks to strategic tasks related to SaaS pricing strategy and pricing management.
4. Conduct Market Research
Before setting out the strategy, you need to analyse the market with thorough research. You need to research the target market and determine if the industry is growing or not working. Market research helps you make informed decisions. It helps you allocate the right resources as an essential part of your product development. By conducting market research, you can identify and predict the factors that can affect the demand for your product. You can identify your potential market by measuring the size of your market segment. Where do you see it in the long run? Is the industry growing? You'll get these answers by attending key industry events where thought leaders discuss the scalability of any idea. Next, understand your ideal buyer persona, followed by mapping potential buyers. Analyse your SaaS competition by performing a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats). With this data, you can research and develop what makes your product unique from your competitors.
5. Identifying the best selling business model
Your business model should indicate how you charge your prospects. Whether on a regular monthly, quarterly or annual basis or laying all your cards on the table and selling your product for a one-time payment. Check out the following pros and cons of both payment models for a better understanding of how to do this.
Types of Pricing Strategies for SaaS
Now that you've identified the importance of an effective pricing strategy for SaaS products and the steps you can take to determine what's best for your business, here's a list of different pricing strategies to consider.
1. Penetration pricing
Market penetration strategy refers to the price of your product which is set low to enter the market. Once your product has found a relevant market segment, you can raise the prices to a more reasonable level. This pricing method works from the belief that a product has enough customers to make up for the low price. Many companies also use it as an aggressive tactic against competitors, lowering their prices or risking being forced out of the industry by these low prices.
2. Bottom-line Pricing
With this product pricing strategy, you can set an initial high price, but then slowly lower the price to ensure the product is available to a larger market. It enables SaaS owners to take advantage of the market layer by layer. The bottom-line pricing strategy prioritizes short-term revenues over longer-term revenues. It is often used by investors who want to increase their shares or earnings to make a quick profit.
3. Value-based pricing
This strategy is based on what your intended prospects think is the value of your product. It is also known as 'customer-based pricing'. Rather than looking internally or laterally at your competitors, value-based pricing allows you to set prices based on the value your solution provides to your customers. It increases the willingness of customers to pay for your product, you can build a better product and get to know your prospects well. In the value-based pricing strategy, two things are different. First, your product may become more expensive (and therefore more profitable) because you've determined that your prospects are willing to pay higher prices. Second, you can increase product prices as you add more value to it and learn more about your customers' needs.
4. Cost plus pricing
This SaaS pricing strategy allows you to determine the selling price of your product by evaluating variable costs and adding a markup percentage. It is the basic form of product pricing. Selling your product for more than the manufacturing cost. Your initial costs might just be web hosting and development related costs, but as your SaaS business grows, you'll need to factor in sales, marketing, and several other unknown costs. For a business, cost plus is not a viable option as SaaS products are usually sold based on their perceived value, competitor prices and features, but this pricing method does not take these factors into account.
5. Captive pricing
You may lose a small portion of your revenue from your commodity, but you make enough profit on products for internal use and make up the difference. You can also consider captive products for upselling where the customer comes in for a specific product but leaves with more than they were looking for. Microsoft offers older versions of their software for a low price and is gradually eliminating support for their older versions, forcing users to upgrade to an expensive version if they want to use an updated version of their software. This is an accurate example of a captive pricing strategy.
6. Psychological Pricing
With this strategy, you can use your customers' emotions to drive your sales. By strategically pricing the products, you can increase sales without lowering your prices. In fact, you can also use a higher price to play psychologically with your customers and increase your profits. Consider the following factors when implementing a psychological pricing strategy.
Customer Emotions – Stir your customers' feelings with a bargain or an exclusive product at a higher price.
Charming Prizes – Prize products just below the whole dollar amount. For example, instead of charging 10 for a product, you only need to charge $9.99. Your customers will associate the price closer to $9 instead of $10, even if it's just a cent less.
Font size – You must have noticed the difference in font size between the euro and the cent more than once. That "0.99" is put in the corner in a smaller font to make the customers forget it even exists.
Bundling – It reduces the pain of buying multiple products separately. You can sell multiple products with a small discount.
Flash Sales – It is a very effective psychological strategy as they convey exclusivity in addition to urgency.
Ceiling Price – Allows you to keep your products below a certain price point, such as less than $100. Customers feel more comfortable knowing that all of your products fall under that one specific amount. An ideal example - the euro shop.
Discounts – When you offer discounted prices, your customers feel that they are getting a good deal at a discounted price.
Pricing – It concerns different product lines. Each in a different price range. For example budget, mid-range or high-end products.
7. Tiered Pricing
Tiered pricing is a standard strategy used by many SaaS companies. It distinguishes between the number or type of users in terms of how they will use your product. In the case of differentiation by type of users, an account will only be charged for the functions included in that level. One of the great benefits of using tiered pricing is that you can easily incorporate different buyer personas or audiences into your pricing plans. Like any other high and low price plan, you'll end up not liking (or less) liking the lowest paying customers because they won't add much to your average annual revenue as the business grows.
SaaS pricing models
Choosing a pricing strategy is important, but when you look at the big picture and to meet the long-term revenue goals, you need to follow a systematic approach. That systematic method is a pricing model that you select as the basis for your pricing strategy.
1. Flat Rates
This is the most basic SaaS pricing model. In this model, SaaS companies charge a fixed fee on a (monthly, quarterly, semi-annually, or annual) recurring basis. The simplicity is the most attractive aspect of this pricing model. You sell a solution with a fixed set of functions to all your customers and charge everyone the same price. SaaS plans can be complex. Flat-rate SaaS pricing is a comprehensive pricing model that attracts online prospects comparing different solutions. Also, a flat rate offer is much more convenient to sell online. It is important when you have a limited marketing budget. However, since this model does not offer any variation(s), there are slim chances that you will be able to collect value from customers who are actually willing to pay you more for your services. This pricing model can leave you missing out on a lot of potential revenue, especially when dealing with business (B2B) customers. That's what we call simple pricing with effective messaging.
2. Premium Pricing
This SaaS pricing strategy allows companies to set high prices to successfully reflect the quality or exclusivity of their product. A SaaS company with a good brand reputation and higher value perception among users can afford to set premium prices for their products. In fact, their users stop using their product even when they lower the price of their product. If you offer a premium pricing plan, remember that your customers will get enough recognition and value with your perfect product features to keep them engaged and on board with your SaaS product.
3. Freemium Pricing
Offering basic services for free, but enhanced features for a fee, is what the freemium pricing method is all about. If a SaaS company offers a free plan to its users, it's like wide opening of its acquisition funnel, as acquiring customers is a challenge for early-stage startups. If the user is later satisfied with the product and wants to scale or upgrade, the company may charge a high price for it. Freemium pricing is generally linked to a tiered pricing strategy, allowing users to move to higher pricing plans as their business requirements related to your product grow. A good example is a free trial, where the customers use the set of basic services at no cost for a certain period of time, but in order to continue using those services, they have to pay for the subscription once the free trial comes to an end.
4. Usage Based Pricing
This pricing method allows you to charge your prospects based on how much they use your product or service. Usage-based pricing lets you price, package, and sell in a variety of ways.
For instance:
Minimum: Minimum price points based on usage
Forfait: fixed fee, regardless of use
Standard, Volume and Flat Rate Tiered: different price points for usage ranges
Pooling: use sharing from the same master account
Consumption: price changes based on usage
Rollover: allocated usage, not used in the specified period, will be rolled over to the next period
Overrun: fees for usage over allotment
Pay-as-you-go: pay for what the customers consume
Time-based: Fixed time pricing, typical for subscription offers
Surcharge: extra costs incurred due to fluctuations in supply/demand, peak hours, etc.
Rated/Mediated: Pricing based on business logic and event combinations
5. Bundle Pricing
This pricing method allows you to sell your product or service in a bundled offer with multiple products/services at a discounted price, instead of charging the customer separately for each product. When you pursue bundle pricing, you can increase profit margins as the number of sales per product increases. If you have multiple extensions, plug-ins or add-ons included in your SaaS product package, you can bundle them with your product in the pricing plans, simplifying the sales funnel of your product.
Conclusion
Start by evaluating your competitors' pricing strategy. Analyse the amount they charge for their products. And what tangible or intangible value(s) do they provide with their products? In a market with a fluctuating volume of supply and demand, the right SaaS pricing strategy is essential to remain competitive. It gives your business the value it deserves and secures the profits you need to ensure the scalability of your business. In short, let's make one thing clear: it is still very important to regularly perform cost-saving procedures. Taking cost-effective measures increases the efficiency of your organisation. Also, be honest and consistent with yourself. Invest your time, energy and money wisely and improve your biggest revenue driver: your pricing strategy. Want to build a SaaS product yourself? Bakklog helps startups build new products, from idea to solution. Launch your business and contact our experts to start your project.
Do you want to increase the visibility of your SaaS product instead? Learn all about SEO Strategies for SaaS Startups.