Making an effective pricing strategy to be used for SaaS is among the most important tasks for an SaaS Chief Marketing Chief Marketing Officer.
The company’s SaaS pricing policy will make an enormous influence on the market-fit of your product and, consequently, impact on the most important pricing metrics, such as the churn and ARPU as well as conversion rates and LTV.
SaaS Pricing isn’t that different from the Software Pricing Strategy, but it is a bit different from a Software Pricing Strategy. I’ll discuss within this post.
How do I create an SaaS pricing strategy for your product
Most businesses begin with a pricing approach which is a mix of Cost-Based Pricing as well as Market-Based Pricing.
While this is great in the short and medium term, it’s essential to follow a Value-based pricing model and learn from your customers about what they value, to change your pricing.
- Cost-Based Pricing
This means that you have to price your output on the basis of the cost of your inputs or cost-to-service (CTS).
Example: I have to have a net margin of 30 percent. My all-in costs for widgets are $10. I must cost $14.29 per widget in order to achieve an average net profit of 30. This is essential to bring your SaaS business profitable at some moment.
- Market-Based Pricing
Pricing your production in line with your competitors’ pricing. Learn about the pricing your potential customers will face throughout their buying journey. Do a mystery shopping of your competitors.
You can charge your services higher (position yourself as a premium) or even at par (win from your reputation and expertise) or even lower and engage in the market share games (as in the sense that you’re prepared for an all-out race to the bottom) in the event that you take this choice with care.
Example: Microsoft Word costs $5/month. My version is better I’m going to provide it for $6 per month.
- Value-Based Pricing
Pricing your product according to the value it provides to your customers. The ideal is to get the value-based pricing system in place as quickly as you can. This is most compatible to how you will conduct your selling and messaging with a value proposition.
Example: Olympus Insurance currently runs an operation that cost their Underwriters $50k. We’ll assist and manage that process completely for them. it’ll cost us just $10k. Since that will save them $40k and they’ve no other option so we’ll share the savings and bill them $30k.
If you’re unable to price your product based on value be sure to understand what, when, and why your solution creates value. Then, you can determine what that value is. The sooner you begin making your pricing based on this more effectively.
SaaS Product Pricing – Additional Considerations
- SaaS Pricing according to what?
Take note of you think the “denominator” of your pricing is going to be for your pricing. Making this decision correctly will allow you to create an effective value-based pricing strategy (see #1)
The following example best represents how you measure results from customers?
Price per User
Price per Device (i.e. sensor/phone/PC/outlet/car) /feature/- speed
Price per usage (i.e. data volume, calls, zaps, transactions, revenue, time)
- Think big-picture
Make pricing decision-making decisions in the blink of an eye. Don’t let your desire to close a deal develop your pricing strategy.
There’s a chance of optimizing your business for low friction (salespeople are able to reduce friction and may not be able to optimize profits). Also, you’ll need be able to “grandfather” your current customers into strategies you’ll be developing in the near future. This can affect the way you’ll be thinking about pricing now.
- Keep your pricing structure simple
While reducing sales friction need not be the main reason in determining the pricing strategy you choose but you should ensure that your pricing is easy enough to allow selling to be easy. Your finance department shouldn’t have to leap through hoops to make an invoice to the customer.
Develop your pricing plan with the task of selling as well as your accounting and billing method in your head.
How do you invoice on behalf of your SaaS product?
Regarding billing systems, in #4, you must ensure that you have a SaaS Pricing Strategy is compatible to the way you wish to to manage your different SaaS Price Plans (SKUs and Price Levels) within Your SaaS billing Platform (i.e. Recurly, Chargify, Zuora).
It’s important to make it easy in the future to utilize discounts or promo codes and permit the analysis of cohorts coming through your system for billing (it’s not something you’d like to do on your own).
- What SaaS Pricing Plans?
It is important to create your strategies. Here’s a simple exercise to define your capabilities in relation to your product/service in relation to differentiation from. your competition and the potential market size.
It’s a fantastic tool for planning your different SaaS prices. Here’s an example of an easy but solid SaaS pricing strategy:
- The hero in your SaaS pricing Tiers
Once you’ve decided on what you would like your ideal customer to purchase (your “Hero” offering) you are now able to create the Anchor/Decoy price levels to help be used to support your Hero.
In the above example The ‘Growing’ product is the Hero and includes the ‘Early’ serving as anchor and the ‘Established’ as the decoy prices.
Three basic SaaS pricing models for product
“The “rule of three” has been proved by experts in Marketing as well as Behavioral Science in various ways. The best book to read is the book called “Thinking Fast and Slow” or go through this blog.
- Freemium or Try/Buy?
This article explores the necessity of a trial/buy method to encourage customer adoption or the necessity of free plans to get customers getting started. It is difficult to do both. Choose one.
- Trial Length
If you choose to use the Try-Buy method for the SaaS pricing strategy be sure you select the appropriate duration for your trial. Learn more here.
- Best and Only
Each of the above price choices are made easier to make if you be able to answer the two following concerns :
What do we excel in than the rest?
Why do customers need to obtain this only from us?
The next steps to your SaaS pricing strategy for your product
To conclude that your model pricing strategy for SaaS needs to be easy and straightforward in the event that you take into account the previous 11 aspects to consider.
For more information on SaaS pricing, read the steps to identify you SaaS pricing plans as well as how to create SaaS Pricing pages.
Happy SaaS product pricing!