This article will cover topics like:
· Understanding the SaaS pricing strategies
· Top strategies any SaaS business needs- the benefits and drawbacks
· Points to consider before changing your pricing model
· Metrics used to track the performance of pricing strategy changes
Understanding the SaaS pricing strategies
There are many pricing strategies in the industry today. However, all those strategies are derivations of three main pricing strategies. The first thing you do is understand these three SaaS pricing strategies before proceeding.
Competitor-based pricing model
This pricing model involves setting prices based on what the competition charges their customers. Any company opting for this model can set their prices above, below, or at the same price as their competition. You can use this option if you are a new SaaS company that is weak on sales. You can also use this model to gather data on whether or not you provide value to the customers.
This strategy works in three ways. Imagine a new SaaS company that developed a project management software. This software is nothing new and is no different from the other products in the market today. You can use the competitor-based model to gather sales data and set your prices accordingly.
· Less risk involved as this model works for the competition
· The model is easy to execute
· You can mix this with other pricing strategies and enjoy the benefits
· Ignore customer preferences
· No different than the competition
A value-based pricing strategy focuses on the customer. Contrary to looking inward at the company, this strategy helps the company look outward. Here, the company considers the product’s perceived value as the benchmark for setting pricing rather than looking at the costs, target margins, and competitors.
Many companies see value-based pricing as the ideal SaaS pricing model. The reason for this preference is because the company can focus on improving the service and value they provide. This approach is preferable to focusing on reducing costs to improve profit. Companies can also use the data gathered to better understand how customers value a product.
· A great way to increase profitability.
· Companies can charge a high price if the customer is willing to pay for that
· Increase the product’s brand value
· Makes it easy for the company to sell their product or service to get more customers
· Greatly increases customer loyalty
· Time and effort is required to understand the customer needs and wants
· It is difficult to set the right price
· It leaves the company very vulnerable to competition
This SaaS pricing strategy is also known as the markup pricing. It is the most basic of all three pricing strategies. Here, a company tallies their business costs and an acceptable markup percentage. Costs in SaaS may include things like the cost of product development, cost of product design, team costs, and the company’s external costs.
The cost-based pricing strategy is typically used when a company is starting out. However, it should not be the primary strategy after gaining a few customers.
· Simple way to get started
· Limits financial downside
· Greatly limits upside
· Does not account for the competition
· Slow way to scale up the company
Basic- add business costs and markup
Customer acquisition cost + COGS + Margin
Simple and ensures profit
Ignores customer preferences and competition
Set prices based on competition
Three options: below, above or match competitor prices
Less risks involved and easy to execute
Not viable in the long-term. Ignores customer demand based on incomplete information
Customer-focused. Considers the product’s perceived value
Research-based. Understanding of customer value
Increase profits and enhance brand value
Demands time and effort to understand customers, hard to set prices and open to competition