How to create a successful SaaS pricing strategy

You've grown a loyal customer base, and your goal now is to find the right pricing strategy. But how much should you charge them? Should you charge them by the month, or according to their usage? When it comes to pricing, there isn't a magic formula that will work for all SaaS products. Your pricing strategy will depend on a variety of factors including sales cycle length, price sensitivity of your market, competition, and more.

Pricing is the cornerstone of a profitable SaaS business, it is, however, one of the most divisive topics among teams. It typically requires buy-in from a variety of teams, including sales, marketing, and finance. Getting everyone on board with this topic can be contentious — there are bound to be discussions along the way. 

Your pricing strategy greatly impacts key metrics like churn rate, Average Revenue per User (ARPU), conversion rates, and Lifetime Value of the customer (LTV). Knowing how to set your SaaS price points is critical since it will shape your revenue, market fit, and ultimately the direction of your organization.

Why Is It Important To Get Your SaaS Pricing Right?

Have you ever wondered why some SaaS products gain traction while others simply don't? It’s often due to the fact they offer an unfair value proposition. They offer minimal features and charge a substantial amount of money. Now that may work well if you're focused on initial rapid revenue growth but if you're more concerned about nurturing relationships with your customers, then it's just not the way to go.

If you are not using the right pricing strategy, many customers will go to your competitors and if you happen to be in a hyper-competitive market, then that would put you at a disadvantage. Do your homework and find out how much your customers are willing to pay. Don’t make the same mistake as 40% of SaaS companies that never test their pricing strategy.

Pricing strategy is a critical element in the marketing mix and has a significant impact on the long-term success of an organization. There are many pricing strategies to choose from, which means you have to identify the best strategy that works for your business. It’s not always easy to choose a strategy so follow the steps below to find out how.

1. Identify Your Target Audience

Your product needs to resonate with your target audience. If your product misses the mark on what your audience is looking for, then you’ll miss out on sales and grow unhappy customers who won’t consider purchasing from you again. Creating buyer personas gives you a clear picture of who your ideal user base is.

Understanding the ins and outs of your buyer personas will serve as your starting point throughout your SaaS business journey. Don’t be shortsighted when deciding your pricing strategy; don’t forget to do market research on your target audiences first, before adding any dollar amount. The type of customers you want and what they are willing to pay for are two very different things and need to be determined at the same time when launching a subscription model. 

To find out who your customers are, consider answering a few questions like:

• What are the demographics (industry, location, role, etc.) of your target customer?
• What are their pain points?
• What are the features of your product that appeal to your target customer?
• Why would they choose you over your competitors?

2. Identify Your Product's Value Metric

Price is one of the biggest factors that influence customers' purchasing decisions. Your pricing should also take into account whether your users consider your product to be worth the price. 

Price and value are not the same things. Price is what users pay for a product, service, or resource and value is how much that product, service, or resource meets the user’s needs.  Value depends on the customer’s perception.

Having a clear understanding of your product value helps you to find the relevant pricing value metric. You can do this by talking to potential and current customers and, observing what kind of questions they have about pricing for your service. By doing so, you can advertise the perceived value of your product such that customers will find it more attractive & convenient to buy from you. Your product’s value needs to be aligned with your customer’s needs as well as scale with your customer. 

When you assign a relevant pricing value metric, two things will happen: First, you’ll be in a position to remain relevant to your users and the market. Second, your pricing strategy will become coherent with your company's expectations and deliver on its value proposition.

3. Keep Your Pricing Structure Simple

Businesses often focus on feature-rich solutions and discount offers that result in a sales process that is overloaded with friction, manual work, and excessive complexity. Going overboard with your pricing plans can turn off your potential customers. Make sure that potential customers can see what each plan offers, and what the costs are for each option.

When determining the pricing model for your SaaS business, keep your customers in mind. Customers often make purchasing decisions based on the feature set of your product and the price they see displayed. To avoid confusion, keep your pricing page straightforward without a lot of confusing information.

4. Choose The Right Pricing Strategy and Model 

One of the key components to a successful SaaS business is choosing the right pricing strategy. The right pricing strategy can help accelerate your business objectives, increase customer acquisition, and differentiate your offering in a crowded space. 

Choosing a pricing strategy that is not the right fit for you can have consequences for both your business and your bottom line. This is because the pricing strategy that you select will determine who buys from you, which means that having the wrong pricing model will cause you to miss out on some valuable customers.

There are several options to choose from when deciding how to price your product. Each option has its pros and cons, but ultimately it’s up to you to decide which pricing strategy or model works best for your company.

Strategies

• Cost-based pricing strategy: As the name suggests, with this strategy the pricing is determined by the cost to develop the product or service. Usually, prices are set at a rate above the cost.
  
  Although it's a simple pricing strategy, it is an inflexible strategy. SaaS customers usually prefer paying for a product based on the value it delivers rather than the cost to develop the product. 

• Competitor-based pricing strategy: Many SaaS companies look to their competitors' pricing when coming up with a pricing strategy especially if they are new to the market. Although it may seem that setting your pricing strategy by benchmarking is a good idea, you lose out on the opportunity to distinguish yourself from competitors with this strategy. 
• Value-based pricing strategy: It's a pricing strategy where companies set the prices based on their customer’s perceived value of the product or service. This pricing strategy is customer-focused. Companies can use the value-based pricing strategy to their advantage when they sell products that have a high worth to their customers

Models 

While most SaaS pricing models can be applied broadly, some nuances don't apply to all SaaS companies. The key is to choose a pricing model that's best suited for the business based on your value metric. Here are some of the more common types of SaaS pricing models: 

• Usage-based pricing model

The usage-based pricing model is a dynamic pricing model in which customers are charged based on the number of units consumed. It is also known as metered or pay-for-what-you-use model. 

Companies using this pricing model typically charge customers based on the number of API requests, transactions processed, bandwidth used, or a percentage of revenue made.

• Flat rate pricing model

Flat rate pricing is a subscription model that charges customers a fixed predictable amount each month, quarter, or year depending on the package they choose. It's one of the simplest SaaS pricing models which makes it easier to predict revenue and customer churn. 

• Tiered pricing model

Tiered pricing is an excellent, tried-and-tested B2B SaaS pricing model. With this model, you can offer different packages with different features, customizations, and price points for each tier. This pricing model is highly targeted, which means it leads to higher conversion rates.

• Per-user pricing model

The per-user pricing model charges businesses based on the total number of people who use the software. This pricing model makes it easier to forecast recurring revenue since a monthly or annual fee is charged to users on an ongoing basis.

• Freemium pricing model

The Freemium model is a popular pricing strategy in which businesses allow users to try a service for free, with the option to upgrade to more advanced features at a later date. This allows businesses to gain exposure to new customers and generate leads.

5. Understand your competition

SaaS organizations are going head-to-head with each other, trying to win their customers through customized plans and attractive offers. When designing a competitive pricing strategy for your business, you should carefully study your industry and competitors. What’s their strength? What can you gain from them? 

To get the most out of a competitive analysis, it helps to review consumer insights too. This enables you to identify new opportunities for improvements within your pricing strategy.

Understanding how your pricing strategy aligns with the market is an important measuring stick for success. If you get it right and nail down a competitive pricing model that challenges other competitive prices head-on, you’ll have a recipe for success. The importance of competitive pricing analysis can’t be overestimated.

In Conclusion

No matter where you’re at in the life cycle of your SaaS company, it’s crucial to have a pricing strategy that will generate revenue while catering to your target customer.

If you start thinking about different pricing options and features and how your pricing structure works with your business plan, you’ll find yourself largely more prepared to make decisions that entice more customers and bring in your desired revenue.

Whether you’re looking to understand the reasons behind a current pricing strategy or you’re working on a new model from scratch, determining your company’s value to customers can be instrumental in designing a successful SaaS pricing approach, LogiSense can help. Contact us if you are looking for a billing solution that will help you make the most of your complex pricing structure.