How to Choose the Best Pricing for your SaaS
Apr 16, 2022
SaaS Pricing to Perfection
Many people start a software company with clear goals on product development, but with no clear vision on how to do pricing. Admittedly it’s a tedious process, but pricing perfectly (which takes a long time to reach) can supercharge your business.
But what is the perfect pricing? Does perfect pricing really exist? And if so, how do you achieve it?
Well that depends on your customers. Knowing exactly what value your customers get from your product and what these benefits are worth to them is essential to your pricing strategy.
Remember:
Pricing communicates to the market exactly what you think your value is.
Great pricing also takes a long time to achieve, and companies need to test alternative pricing structures to investigate their customer’s response. Willingness to pay is the single most important metric you need to follow and that requires a constant communication channel with your customer’s funnel (old and new)
Strategy, Strategy and more Strategy
There is no better way to investigate best pricing than with market research on your customer segment and product positioning.
Are you selling a tool for developers?
For marketers?
For Indie Hackers or no-coders?
Build ideal customer profiles and investigate their core interests, their pricing power and their willingness to pay.
From development and product to sales and finance everything is used to drive someone to buy the product at the given price. Several aspects of your business influence your pricing strategy and your conversion rates (also to be included on your customer profile):
- Customer segment and vertical
Go upmarket to higher Willingness to Pay? Shift vertical that sees more value in your offering? Or even modify the ideal customer profile entirely - 3Ps -Product, Positioning and Packaging-
Adding features, moving features behind paywalls, pull features out, add-ons, differentiations in Value Propositions etc. - Price
Moving Prices up or down impacts directly conversion, but also perception of your brand.
But enough with the college lecture worthy of a Twitter thread - let’s dig into something interesting!
If interested though, you can dig in more techy staff in this exceptional ebook by PriceIntelligently
-everything you’ll ever need-
3 ways to SaaS Pricing
All right, you have determined customers, positioning, business needs and competitor’s differentiation.
-collected extensive data on each and came up with a plan for pricing (give or take) -
You can construct a target price and you can see it come to life.
You should be able then to list it on one of those 3 categories:
Cost plus pricing - Calculate how much it costs you to deliver the product (server costs etc) and add a percentage markup.
Competitor based pricing - This one is easy, look at your competitors and see what they charge.
**
Value based pricing -** The price is determined by the value delivered to the customer.
Indiehackers have a tendency to price on cost and competitor based pricing and that’s the reason why there are so many products out there charging <$10 a month.
It’s a double edged sword too, because you aren’t going to earn a living from $9.99 a month (unless you are the next Spotify or Netflix) and in the long run the community is damaged, since standards are set really low. You are undervaluing yourself and your product. Need for a change, right?
Value-based pricing to the rescue
What is your customer’s willingness to pay? Price it accordingly. That easy? Not necessarily…-Wanna go into the willingness to pay rabbit hole? -
Grab a coffee and dig into Profitwell’s exceptional blog here
To make life simpler, to do value-based pricing you need to consider your “value metric”
Meaning “what your customers perceive as true value offered?”
For example: value per seat, per GB used? per transaction? per zaps? You get the point…
Getting everything else wrong, but getting the value metric right would still seem like a win on your bank account! Flat rate or volume pricing does not matter that much as long as the value metric captures the right value!
Last on Value Metric -SaaS positioning-
In B2B probably the Value Metric will be money saved, revenue gained or time saved.
In B2C, it might also include joy, fitness, increased efficiency and productivity among others.
Consider these questions:How many hours does your product save (one or more) people? How much do they get paid per hour?
How often do your customers perform the task?
Obviously, joy , fitness or even time saved can’t be measurable, but if you can proxy-measure them and your customer trusts your measurement. For example, you save them time worth $100 per month, then there’s your value metric.
In the case that the value metric isn’t directly measurable, you can think of proxies for it and price accordingly.
The important checks should be:
✔️Value metric makes sense from a growth perspective.✔️Larger customers get more from the metric✔️Smaller customers get less from the metric
✔️Metric ensures retention and business sustainability
Important Takeaway
“The most successful companies optimize monetization in some manner every quarter”
Think of pricing as a dynamic contract between you and your potential customers.
Constant communication with them to investigate their Willingness to Pay and slow but steady experimentation with different pricing approaches (or even tiny parts of it) can render your company a huge topline boost.
Bonus Tips?
Design does MIRACLES✨
- Design boosts willingness to pay considerably.
- Very positive perception on design increases Willingness To Pay by 26%.
- Willingness to pay goes at 20% for just positive perception.
Design is measured from Product to Pricing Plans, so…
Turn the UIs add-ons on!?
Experiment with your Pricing every Q?
- Experiment with different models
- Add/Reduce Plans
- Provide Offers and accessibility (e.g. Private discord)
Changes correlates with higher revenue per customer. Just as everywhere else, focusing on something makes you improve it.
Localize your Pricing ?
- Revenue per customer is ⬆️30% when you use the proper currency symbol
- Different prices in different regions because demand is not equally distributed (Norway vs Greece)
Don’t Discount over 20%?
- Discounts creates higher churn
- Big discounts get people to convert, but they don’t stick around
Remember: “Price is just a tool to materialize value”
Always go with annual contracts /subscriptions?
- Annuals see oh so much lower Churn!
- 1️⃣ purchasing decision per year vs. 12
“Freemium is a Samurai sword: unless you’re a master at using it, you can cut your arm off”
- Don’t do Freemium until you get the value metric right
- Freemium is an acquisition model, NOT part of your pricing!
How to Freemium:
- ⛔Set the limits from early-on
- ?Monitor your product usage and test changes to make users convert
- ? Offer free trial for your paid plans
- ?Notify users about limits and offer seamless upgrade
- ?Identify hot users- let Sales team work
Is Freemium for you? ?
If you know the answer to those questions, then YES!
- Who is your target audience?
- High enough user monetization? (actionable plan..?)
- What will make your users switch to paid? (Value proposition)
- What is the suitable revenue generation system? (subs, fees, volume pricing?)
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