Running a successful SaaS company takes much hard work. But if you're not getting the most out of your SaaS pricing strategy, you're missing out on a significant opportunity to grow your business.
Pricing strategy refers to setting prices for your products and services and monitoring those prices over time based on changes in your market and demand for your product.
You aren't alone if you aren't sure what a pricing strategy is or why it's essential. Many small SaaS companies neglect this crucial piece of the puzzle because they don't realize how much it affects their bottom line.
Today, we'll look at what goes into a winning pricing strategy for a SaaS company. We'll also discuss some common mistakes companies make when crafting their pricing strategy.
Let's get started!
Table of contents
- Why Is a SaaS Pricing Strategy So Important?
- Common Mistakes in SaaS Pricing Strategy
- How to Develop Your SaaS Pricing Strategy
- Final Words
Why Is a SaaS Pricing Strategy So Important?
The purpose of creating a pricing strategy is to ensure your SaaS pricing is tied to a clear customer value proposition. Your prices should reflect the value they bring to your target customer.
You also need to ensure that you are making enough profit to sustain your business. If your prices don't reflect your product's value, you'll have a hard time selling it.
After all, no one will want to invest their time and money into a product that isn't worth the investment. And if you want to scale your business and make it a sustainable long-term success, you need to create a pricing strategy that supports your goals.
Moreover, a SaaS pricing strategy helps you keep tabs on your competition. You can adjust your prices accordingly by understanding what they're charging for similar products.
This way, you can stay one step ahead of the competition and ensure that your pricing always aligns with the current market landscape.
What are the Different Types of SaaS Pricing Strategies?
There are three SaaS pricing strategies: subscription, usage, and feature-based.
- Subscription: Subscription-based pricing is the most common pricing strategy in the SaaS industry. Customers pay a recurring fee (usually monthly or annually) to access your product with this pricing.
- Usage: Usage-based pricing is similar to subscription-based pricing, but customers are charged based on their usage of your product rather than a flat rate.
- Features: Feature-based pricing is a more customized approach in which customers pay for the features they use. This type of pricing is less common in the SaaS industry, but it's gaining traction as companies look for more innovative ways to price their products.
Common Mistakes in SaaS Pricing Strategy
Now that we've gone over the different types of SaaS pricing strategies, let's look at some of the most common mistakes companies make when crafting their pricing strategy.
Mistake 1: Not Tying Prices to Value
One of the most common mistakes companies make is not tying their prices to the value their product brings. Remember, your prices should always reflect the value of your product — no more, no less.
If your prices are too low, you're not making enough profit to sustain your business. Conversely, if your prices are too high, customers will be turned off, and you'll miss out on potential sales.
Mistake 2: Not Conducting Regular Price Evaluations
Another mistake companies make is not conducting regular price evaluations. Setting your prices a certain way at the start doesn't mean they'll always be that way.
As your product evolves and improves, so should your prices. By regularly evaluating your pricing strategy, you can make sure you're always getting the most value for your product.
Mistake 3: Failing to Take Seasonality Into Account
Seasonality is another factor that can impact your prices. For example, if your software helps hotel owners in tropical locations, you may want to consider raising your prices during winter when business is slow.
On the other hand, if your software helps businesses in the northern hemisphere with their tax filings, you may want to lower your prices during the summer months.
Of course, this might be an oversimplified example, but the point is that you should consider seasonality when setting your prices. Otherwise, you could be leaving money on the table.
Mistake 4: Not Offering Discounts or Promotions
Customers love a good deal, so not offering discounts or promotions is a missed opportunity.
You don't have to offer deep discounts all the time, but periodic sales and promotions can help boost your sales and grow your customer base.
Just ensure you don't go too crazy with the discounts — you don't want to devalue your product in customers' eyes.
Mistake 5: Failing to Test Prices
Lastly, another standard mistake companies make is not to test their prices.
Prices are often based on gut feelings or market trends, but the only way to know what works is to test different prices and see how customers react.
By testing your prices, you can find the perfect price point for your product — one that maximizes your profits and attracts customers.
How to Develop Your SaaS Pricing Strategy
Before you start developing your pricing strategy, you must note your current business metrics.
To do this, go through all your current customer-facing areas.
Make a note of your current pricing, customer metrics, and the percentages of sales you're receiving from each area. This will help you determine how much each area of your business is worth and how much you should charge.
For instance, if you have a low conversion rate on your pricing page but a high conversion rate from your free trial, you know your pricing page needs work.
Once you have your business metrics in order, it's time to start developing your strategy. There are a few key things you need to consider:
Consideration 1: Your Customer Personas
Customer personas are a fictional representation of your target customers. Essentially, they're a composite sketch of the ideal customer you want to attract and retain.
For example, suppose your business sells accounting software. In that case, your accounting software customer personas might be small business owners and accountants who are tired of dealing with paper-based systems and strongly desire to move to digital operations.
Your customer personas will inform all of your pricing strategy decisions. You'll base your pricing on what your customer personas are looking for in a product and how much they're willing to pay for it.
To create your customer personas, start by surveying your current customers. What motivates them to use your product? What needs does your product fill? How did they find out about your product?
Once you understand your current customer base, you can start to build out your customer personas.
You can still create customer personas by surveying your target market if you don't have any current customers. Try to find people who fit your ideal customer profile and interview them about their needs and motivations.
Consideration 2: Your Value Propositions
A value proposition is your promise to the customer that your product or service will solve their problem. It needs to be clear and concise so that customers understand why your product is worth the investment.
Your value proposition needs to be reflected in your pricing. If you promise to solve your customer's problems, you must show them that you're worth their investment by offering a fair price.
A solid value prop will also help you to avoid the common pitfall of underpricing your product. If you genuinely believe in the value of what you're offering, you won't be afraid to price it accordingly.
Here are a few ways to make sure your pricing aligns with your value prop:
- Do your research: Before setting a price, you need to understand your customers' needs and what they're willing to pay. This means conducting market research and surveying your target audience.
- Be clear and concise: Your pricing should reflect your value proposition. If you make a promise to your customers, make sure you can deliver on it.
- Be competitive: Take a look at what your competitors charge for similar products or services. You don't want to be too high or too low – find a happy medium that allows you to be profitable and still offer a fair price.
Consideration 3: Your Core Offerings
Your core offerings are your product's or service's main benefits and features. They're what you created your business to do. They also represent your core customer personas. You should tie your core offerings to your pricing strategy.
You also need to consider how much they cost to produce.
For instance, if you're a SaaS company that offers a CRM and an email marketing tool, your pricing should be based on the value of those two products. The email marketing tool may be a lower-priced product because it's not as essential to the customer as the CRM.
Also, consider the cost of each product. The CRM may be more expensive to produce, so you may need to charge more.
The key is to price your products according to their value and not just their cost.
Consideration 4: Usage and Margin Requirements
Finally, determine how much your product or service costs to produce. You also need to account for the number of customers you want to serve and the length of their contracts.
You should tie your pricing to a reasonable margin. You must account for the money it takes to create, maintain, and host your product or service.
It would help if you also considered the cost of hiring and retaining a solid customer support team.
The last thing you want to do is price your products so low that you can't sustain your business. But simultaneously, you don't want to price your products so high that customers won't buy them.
The key is to find a balance that allows you to be profitable and still offer your customers a fair price.
Consideration 5: The Price Corridor of the Mass
In Blue Oceans Strategy, the authors W. Chan Kim and Renée Mauborgne talk about the "price corridor" of the mass. This is the sweet spot where you can reach the most customers with your product or service.
To find your mass corridor, you must understand your target market and their needs. This information will help you to determine the price point that will reach the most people.
You also need to consider your competition. You may not reach the mass corridor if you're too high or too low. Instead, it would help if you found a competitive price that still allows you to make a profit.
The mass corridor will vary depending on your industry, but finding that balance is essential to reach the most people with your product or service.
When determining your SaaS pricing strategy, keeping the mass corridor in mind is essential. This will help you to find the right price point for your product or service.
Consideration 6: Different Pricing Options
When determining your SaaS pricing strategy, you should offer different pricing options. This will allow you to reach a broader range of customers.
You can offer different pricing options by altering the features included in each package. For example, you could provide a basic package that consists of the core features of your product and then offer additional packages with more advanced features.
You can also offer different pricing options by altering the subscription duration. For example, you could offer a monthly subscription, a quarterly subscription, or an annual subscription.
Offering different pricing options will allow you to reach a broader range of customers and can help you to increase your profits.
SaaS Pricing Strategy FAQs
Why do you need a solid pricing strategy?
A solid pricing strategy is essential for businesses that want to remain competitive. It helps them ensure that they are setting fair and reasonable prices and that they can make a profit while also offering value to their customers.
Having a pricing strategy also allows businesses to adjust their prices as needed, which can be beneficial in a fast-changing market.
Additionally, it helps to determine the pricing of new products or services and to set discounts or promotional offers to boost sales.
A well-planned pricing strategy can also help businesses better manage their cash flow and make more informed decisions about how to best allocate their resources.
What is the rule of 40 in SaaS?
The rule of 40 is a metric used to determine the health of a company.
It is calculated by adding the company's growth rate and operating margins and aiming for 40%.
A company not achieving this number is considered to be in a more precarious financial position.
The rule of 40 is often used by investors and venture capitalists as a benchmark for determining how successful a SaaS company is and can help them decide whether or not to invest in the company.
What is a good margin for SaaS?
A reasonable margin for a SaaS company is typically between 30-40%. However, this can vary depending on the company's operating expenses and desired growth rate.
Generally, SaaS companies should aim to achieve a total of 40% or more when combining their growth rate and operating margins, according to the rule of 40.
Companies with higher margins tend to have greater stability and are more attractive to investors. A higher margin can help a SaaS company better manage its cash flow and allocate resources more efficiently.
What is the difference between a pricing model and a pricing strategy?
The main difference between a pricing model and a pricing strategy is that a pricing model is a specific way of calculating prices. I
n contrast, a pricing strategy is a more holistic approach to setting prices. A pricing model determines prices based on cost, demand, and competition.
On the other hand, a pricing strategy considers the company's overall goals, such as growth, profitability, and customer retention. It uses those goals to inform pricing decisions.
A pricing strategy also considers external factors, such as market trends, customer feedback, and competitor pricing, and adjusts prices accordingly.
Your pricing strategy is one of the most critical aspects of your business. It sets you apart from your competitors and allows you to charge the amount you deserve for your products and services.
To create a solid and effective pricing strategy, you first need to understand who your customers are and what they value. You also need to understand what it costs to create and maintain your products and services.
Finally, you need to tie all of these components together to create a pricing strategy that makes sense for your company.