Knowledge of pricing best practices is essential for building a successful SaaS business.
A great product that solves a big problem isn’t enough. The right price for your service generates enough revenue that you can fuel your growth and ensure customers are happy to pay it.
There are several ways you can go about pricing your product, but some general best practices apply to all types of SaaS businesses.
What are SaaS Pricing Strategies?
These strategies are a set of rules that a SaaS company uses to determine how much it will charge for its product. They are revenue generation models generally involving cloud-based software.
Companies rent software solutions through subscriptions or pay-per-use programs with SaaS rather than buying and hosting software on-premises.
Why are they Important?
SaaS pricing strategies can make or break your business by ensuring sufficient revenue. Pricing well means finding a delicate balance.
Pricing too high will turn customers off, but charging too little can restrict your cash flow and limit your growth.
In addition to having a direct impact on your revenue and profit, it can also have an indirect effect on your brand perception and customer satisfaction. Customers in many industries are price-sensitive, making pricing an essential part of your marketing strategy.
Pricing Strategies of SaaS Businesses
Pricing strategies can vary widely, depending on the business, its goals, and your solution.
For example, a company might offer free trials or freemium services to entice new customers and grow its customer base. On the other hand, a company that wants to maximize revenue from existing customers might use a tiered pricing structure. The latter involves higher fees for additional features or capacity.
Take a look below at some pricing best practices used by SaaS businesses.
Competitor-Based Pricing
This strategy seeks to position your product as the best solution for a specific problem or need. Many businesses use this strategy, which can be effective if you have a strong brand and reputation.
If you choose this strategy, ensure that your product differs from your competitors. It also helps to have features that are not available with other products in the market.
Penetration Pricing
Penetration pricing is when a company offers its product or service at a low price to attract new customers. This strategy is often used by startups who need to get their product out there and make a name for themselves.
The goal is to gain market share quickly by making it a no-brainer for customers to sign up. Think of the early days of Uber when prices were low and driver benefits were high.
Once the company reaches its desired market share, it can increase prices without losing customers.
Cost-Plus Pricing
This pricing strategy involves adding a markup to the cost of the product or service. The idea is that you have to recover your costs and generate profit. It’s usually done by calculating the cost of the raw materials and services used to produce a good or service, then adding a percentage to that amount.
The advantage of this method is that you will have clarity on how much your product costs and how much profit it generates for you.
This method has disadvantages. It doesn’t consider other factors like competitors’ prices or market trends. It gives little room for discounting and promotional offers. And it assumes your cost reflects your value to the market.
Value-Based Pricing
Value-based pricing is a strategy that uses the value your product delivers to customers as its primary consideration. Instead of comparing your price with competitors or your internal costs, you compare the value of your product with alternatives, taking into account other factors like customer needs, features, and usage levels.
What are SaaS Pricing Models?
Pricing models reflect how you package your products and services. In other words, it determines the price you should charge for your product or service.
Why are they Important?
The pricing model you choose for your SaaS business is critical to your business model. The best pricing model can help you attract more customers and increase your revenue, but the wrong one can lead to customer churn and lost income.
Pricing Models for SaaS Businesses
Flat-rate Pricing
You charge one price for all your products or services with flat-rate pricing. SaaS companies that use this model charge customers a fixed price for their services. The amount of money customers pay stays the same no matter how much they use the service or how many users are on board.
Tiered Pricing
This model breaks the product into basic, premium, and enterprise packages. Basic users get a barebones product version for free or at little cost, and premium users will get additional features. Enterprise users have many more features than basic or premium users but pay higher prices.
Usage-Based
Usage-based pricing is when customers pay a certain amount of money based on how much of your product or service they use. Prices are often calculated monthly but can also be adapted annually or bi-annually.
It’s also known as a “pay-as-you-go” model, as customers only pay for the amount of usage they make.
Per User-Based
The idea behind this model is that you charge your customers for every software user. For example, one user using the software would pay the monthly fee for one user; similarly, five users will pay for five.
It’s possible to offer discounts as the number of users on an account scale.
Need Help with Pricing for Your SaaS Business
SaaS pricing best practices are essential for finding the suitable model for your business, and there are many factors to consider when pricing.
You have to think about the number of users you’ll have, the features you’ll offer, your costs, and other factors that will affect the pricing structure for your product or service. You might even need to try a few options and iterate as the business grows.
Your pricing should be fair and competitive but also profitable for your business. That’s why getting help from an expert who knows how to price SaaS products is essential. Contact Founders today to find the best pricing strategy for your business.
