If you have software that you know is going to change user experiences, you want to make sure it’s priced correctly. After all, why offer the service it all if you aren’t also working to maximize profits?
Too many companies don’t price their SaaS products correctly. Too many business owners don’t know the true value of their product and end up charging either too much or too little. Pricing your SaaS product appropriately can make or break the success of your business.
Here, we will discuss several different options you have for a Saas pricing strategy. Finding the right one for you will help to maximize your profits.
What Is SaaS?
To start, what is a “SaaS” and why does it matter to you? If you’ve found yourself reading this article, you likely own a SaaS product or work for a company providing this service. You may even be interested in venturing into this industry.
As described by the writers on Software Advice, “SaaS” stands for “Software as a Service”. A SaaS is when a vendor offers software through a cloud service. The software can be anything. Prime examples include Google Docs, OneNote, EverNote, DropBox, etc.
SaaS is all about adaptability. It’s software that can be accessed via any device, so long as there is an internet connection. The vendor (that’s you) is responsible for hosting and maintaining the code, servers, and databases for the application.
This is attractive to companies looking to purchase this software for several reasons. First, it’s much cheaper to outsource IT responsibilities to a SaaS company than it is to manage complicated hardware themselves.
Second, it takes the time and stress of maintaining and troubleshooting the software off of the company. In turn, this frees up the company to focus on growing their brand. It is the SaaS vendor’s prime responsibility to ensure the software runs smoothly.
Why Is Pricing So Important?
There is much more to pricing than just numbers. The price point that you choose sets the tone for your product. This decision tells future customers how much you value your product and how much they should value it as well.
There’s a delicate balance between being affordable and being egregiously priced. The appeal of SaaS is that you can be as flexible or fixed with pricing as you desire. Both approaches have advantages and disadvantages.
Flexible Pricing Levels and Greater Scalability
If you’re flexible, you can have pricing “levels”. This can make your product more accessible to a wider variety of customers.
With flexible pricing also comes the option of scaling. This accommodates the changing needs of customers. They can change their pricing level as their own needs and means change.
There is one drawback, however. Too many levels and different options can confuse customers. Customers who are confused by your price point are not likely to want to invest in your product.
Fixed Pricing and Transparency
If you opt for a fixed SaaS pricing strategy, there will be no confusion about what the customer is getting vs. what they’re paying. This lets customers know you are transparent about your fees.
However, the fixed pricing scheme has its setbacks. If it’s too inflexible, you run the risk of excluding customers who can’t afford it/ don’t need all of your features.
Finding the right balance depends on two things: what you think your product is worth and what customers are willing to pay for it. Customers won’t purchase even the most wonderful product if they don’t agree with the price you’ve set.
Considerations when Developing a SaaS Pricing Strategy
Writers at Fusebill offer this insight: To turn a profit and make your venture worthwhile, you have to make more than you’re investing. Put simply, this means your lowest price point must be higher than your fixed and variable costs combined.
You’ll have to crunch some numbers to figure out the total expenditures to make the service versus how many purchases you need to break even.
Besides total expenditures, you also must consider the industry average. A price point that is much higher than the average may set you up for failure – unless you offer something unique that no one else does.
Before setting a price point, you need to consider a few broad questions:
- How many customers do you anticipate serving with your SaaS?
- What kind of customers are you wanting to attract? The types of customers you attract will have a huge impact on your SaaS pricing strategy.
- How long do you anticipate a customer staying with your product?
These aren’t definitive questions. The answers to these questions may change over time as your product progresses. However, these are good guidelines for thinking about your baseline price point.
When it comes right down to it, the only thing that matters is how much value the customer is getting out of the product. You may think your product is amazing, but if the customer doesn’t see that, they won’t agree with your price. Home in on customer value when considering where to set your price.
Options for Setting a Price Point
Now that we’ve established the ground rules for setting a price point, we can go into more depth about your options for a SaaS pricing strategy. There are many different pricing options, and you can even combine them.
Price Per User
According to the writers at Inturact, the Price Per User model is one where the buyer pays different amounts based on how many people are using the service. This can be a good model for businesses that are just starting and won’t have that many users for the foreseeable future.
However, if it’s a bigger company with multiple users, this can hurt your business.
It limits the number of people within the company that can become familiar with your product. It also limits the number of active users. This means your company isn’t getting as much traction or visibility. While this is a commonly used pricing model, the writers at Inturact mention that this may not be the most effective method.
Tiered User Pricing
This pricing strategy places groups of users in “tiers”. For example, 10 users might cost $100, 15 users cost $150, etc. Think of a website design program that offers an entry-level service for free and premier and business packages at different prices.
This is useful for SaaS companies that don’t have a lot of individual features to offer. With minimal features, it’s not profitable to charge by the feature.
This model might not work so well for companies that need more features but not more users. As with all the models, this one requires deep consideration of the types of customers you aim to attract.
Tiered Unit Pricing
This strategy prices units within a range. For example, the first 10 units could cost $5, the 11-20 units cost $10, etc. Each tier has a set price.
With this scheme, the higher up the tiers go, the better the price for individual units. Once you fill the final tier, you can offer individual units above that tier for a set price per unit. This strategy is useful to target customers who want more options.
As described by writers at New Breed, this is a “cheaper by the dozen” approach. The price per product goes down with the purchase of more products. Think of it as a “bundle” deal. The more features a customer purchases, the better deal they get.
This can seem similar to the tiered pricing model. The difference is in volume pricing, as explained by writers at Unleashed, instead of filling each tier, once a customer hits a set number of units purchased, the price for each unit in the entire purchase drops. For example, a customer wants 10 units at $10 each, but if they buy 11 units, they can get them all for $9 each.
This strategy is based on feature packages. Customers can choose how simple or extensive they want their package to be.
You can offer basic features for an “intro” package. This is probably best for smaller companies or start-ups.
More established companies can include more features for a more extensive package. They also can set the price higher. This offers flexibility to the customer.
This is similar to tiered unit pricing, except the product is storage-based. Many companies offer a set amount of storage free outright. They will require a subscription to pay for anything above that.
Giving a few GBs of storage for free in the beginning allows a customer to try out the product before paying more for it. If they love the product, they’ll be more inclined to upgrade and pay more when they hit the limit.
A freemium package offers the basic features of your SaaS for free, forever. Namely, your customer should be able to use this product mostly as it was designed to be used, for free.
This may sound counter-intuitive and potentially a drain on profit margins. However, for start-ups, it’s optimal. Freemium schemes are a great way to get traction and increase brand awareness.
You can offer upgrade “pro” packages for additional features. The trick with this plan is to offer just enough to get users interested but not offer everything for free. Your audience should have a real need for your add-on services. The free version should just entice them to upgrade more!
Roll Your Own
An option that allows your customers to choose their features and packages is by far the most flexible service you can offer.
This is a great SaaS pricing strategy if you are trying to cater to small businesses. These small businesses may not need everything, but they do require more than the basic package, too.
Customers can add-on products as they see fit from month to month. It’s easy, uncomplicated, and best of all, customizable. Everyone loves a service that’s customized to them!
Pay as You Go
This model allows customers to pay based on their usage of your service. Pay-as-you-go is a great concept for customers whose usage fluctuates from month to month.
However, if newer customers don’t have a good idea of how much their usage will be, this pricing model may deter them from signing up for services. They wouldn’t be able to calculate out how much they’re spending per month on your product.
Flat Rate Pricing/ Subscription
Flat-rate pricing is by far the simplest model. You simply charge a set fee per month. The customer has unlimited access to all of the features.
This scheme means no more having to worry about upgrading, choosing the right tier, or how many users are on it. Customers simply purchase the subscription, access the product on all devices, and go forth.
This option is simple for customers to understand and use. It also makes it easier for you to predict your revenue. However, it’s not a good fit for all products and services.
Flat-rate pricing works best for products that don’t have many stand-alone features. This means the product is more-or-less “all or nothing”.
Pay Per Active User
With this scheme, customers pay based on how many active users they have. Think for example of a family cell phone service. Each new line is an additional cost. As a SaaS pricing strategy, the more user accounts, the more they pay.
This model can be great but makes it a little more complicated for you, the host. Customers can commit to a user tier, but if they have fewer users than anticipated, you’ll have to figure out a refund agreement.
This scheme can be really attractive for businesses that are just starting.
There is a way to keep your services free but still generate revenue, and that is with the use of advertisements. Typically, these ads show up in the sidebar of the SaaS.
The great part of this scheme is that your customers will love the product and the price point, and you will still be making a profit.
The only downside to this model is that ads tend to negatively affect the customer experience. However, you can combine this with a tiered plan and offer upgraded packages with no ads.
The Bottom Line
Determining a SaaS pricing strategy is not something to take lightly. As you can tell, there are many things to consider before deciding on a final scheme for your business. Educate yourself on all the pricing models available before deciding on the one for you. Take time to consider which pricing model best aligns with what your product offers and the value it offers the customer. Remember: value to the customer is paramount, but the value you place on your product is also key.