Five things to consider when optimizing your pricing
Your pricing strategy will change over time. You won’t necessarily get it right the first time and even if you did, it needs to evolve alongside your product and business.
A pricing strategy is all about optimizing your pricing and maximizing your revenue as a result. But what do you need to consider with pricing optimization?
We’re lucky enough to work with (and hear from) a lot of different SaaS businesses, so we’ve gained valuable and practical insight into how they’ve launched their products, how they’ve expanded into new territories, and how they’ve developed their pricing strategies along the way.
What does it take to deliver the best possible pricing strategy for your business?
Here are the five main factors to consider when it comes to optimizing your pricing:
When expanding into new territories or growing on a global scale, localizing your pricing gives you a leg up. But it’s something that all too many company owners overlook because proper localization requires time and research - which gets in the way of getting your business out there quickly.
So, what is ‘proper’ pricing localization? We explain it in a lot of detail in this guide , but here's the short and sweet of it. Proper localization can be split into two areas:
- Cosmetic localization: Ensuring prospects are seeing your prices in their own currency.
- True localization : Researching and understanding different buyer personas in different regions, to make sure your pricing aligns with their willingness to pay.
Combining both forms of localization is key to increasing your sales globally. We’ve heard from all too many sellers who only offered their major currency (USD), even when actively selling into new markets abroad. The result? A steady but ultimately unremarkable uptick in sales. Let's look at an example.
Example : Pinegrow takes Brazil (eventually) 🇧🇷
Pinegrow , the website building software, were seeing this exact issue when selling to customers in Brazil in USD at the same price point as their home market.
When they decided to not only offer Brazilian Real (BRL) on their checkout but also lower their prices to reflect what people were actually able - and willing - to pay in Brazil, they saw a considerable amount of new customers.
This increase in customer volume outweighed the discounted price, ultimately increasing Pinegrow's revenue in that market. The BRL prices that Pinegrow used were over a third lower than their initial USD equivalent. Far from harming their bottom line, they saw their sales leap a massive 177% even with that heavy discount.
Knowing your customer and their buying power is a great way to maximize conversion, especially in emerging markets.
So, what do you have to consider when researching the territory or territories you want to expand into? Let’s have a look at the main factors:
- Currencies that people use
- Disposable income
- Local pricing of competitors
- The size of your industry in that market
- General demand for your product
If this is somewhere you think your business is losing out on revenue due to the lack of a considered approach, then I suggest you hop on over to read our full guide to pricing localization.
2) Price sensitivity
We’ve talked a lot about knowing your customer - their persona, their region, their regions’ buying habits, and getting a real sense of how much they’re willing to pay for your software product.
Closely linked to all of this is getting an awareness of price sensitivity.
Price sensitivity is the concept of working out how much the price of a product affects your customers’ purchasing behaviors. It’s measured using the price elasticity of demand, or the change seen in demand when the price is changed.
Basically, how reactive are your customer personas when it comes to your pricing?
Highly elastic customers, for example, will be happy to roll with changes in price over time, perhaps even paying more for your product than they did at the start because your product adds clear value.
To determine price sensitivity with each of your customer personas practically, you have to present them with a rising scale of prices, working out at what point they’ll view the price as:
- Inexpensive, but with worries about the product’s quality (too cheap)
- Inexpensive, with no worries about its quality (bargain)
- Expensive, but still worth buying because of its quality or value (an investment)
- Expensive, and its quality is not worth it (too high cost)
Time for another example.
Example : Tweakbit do some tweaking
Tweakbit sells anti-virus software in a very competitive market, and because they buy the software to solve a particular need (no one likes a computer virus), they don’t necessarily have strong brand loyalty. This could put them in the ‘high’ category of sensitivity.
...Which is exactly what Tweakbit’s pricing is designed to address. With some heavy discounting, both upfront and as the customer moves through the buying journey (in the form of time-based promotions), Tweakbit encourages their customers to view their software as a real bargain. On top of that, they also run regular coupon and promotion campaigns to ensure that customers’ pricing expectations are met.
The main takeaway here is that companies need to strategically determine the right price and billing models for their specific customers, using research, market knowledge, and customer insights.
3) A/B testing
Speaking of elasticity of demand, A/B testing is a key way of not only testing how discounts and promotions perform, but also how your pricing is working in general, or how it could be working better.
It’s a method that allows you to see, in real-time, what is truly resonating with your audience, and helps you generate new ideas for your business.
Here are two examples of how companies have used A/B testing:
- Testing normal price vs a price with a discount: This helps you to decide whether a discount can bring momentum in the buying decision. If people are not considering your product at its standard price, then you may need to look at whether you’re overpricing your product.
- Testing different plans : Instead of basic and pro, you could test out basic, pro, and some sort of intermediate plan. If people are choosing certain price bands, it will illustrate whether you should modify your pricing hierarchy.
The risks of A/B testing
A/B testing certainly has its advantages with its statistical significance, but there are some downsides.
For starters, any statistical test needs a certain number of respondents to make sure the test is legitimate, a reliable source, and not just down to random chance - especially if you’re testing for multiple customer personas. This can be tricky to achieve for businesses early in their growth.
Another risk when testing out two different prices on different users is someone finding out they’re paying more than others. The best practice is to A/B test exclusive offers instead, seeing which of your temporary offers entice people the most over a specific period of time.
4) Upgrade potential
Another way to fully optimize and get the most out of your pricing is to consider your product upgrade potential.
Picture this: you’re ready for your next major version launch, what do you need to be thinking about? Well, definitely how to adapt your pricing, but you need to ask yourself more specific questions, like:
- How do I price my new version vs. my current version for new customers?
- What impact would something like intro pricing have, depending on the discount I give?
- How do I price it for existing customers?
- What about the customers who’ve bought the product just before you’ve released your upgrade?
Let’s take a look at where these questions have led some major SaaS companies.
Tiered pricing is a good method to look into if you want to focus on existing customers. And what better way to show how this works in practice than with an example?
You got it.
Let’s talk about Smile Software, who released an upgrade to PDFPen (their PDF editing software), with a very user-focused approach.
Firstly, they sent an email to their customers to encourage them to upgrade via the PDFPen app. This was because the in-app experience could automatically validate their existing license, and handle the free upgrades automatically as well.
For those that bought the latest version of the product in January of that year, Smile Software offered a free upgrade. For those that had bought a version earlier than the year before, Smile Software introduced a tiered system.
This tiered system was created to evaluate how much an upgrade from pro to prop ($30) or basic to pro ($50) would cost them. This gave clarity to existing customers, letting them see the cost of upgrading from their previous tier.
Grace periods for upgrades
It’s a common dilemma for companies who have recently released an upgrade that customers can be left a little disappointed when they realize they’ve just missed out on a better version of your product.
This can be quickly resolved with the idea of a grace period, allowing them to upgrade at a reduced price or even for free.
This worked well for Screenflow, which offered free upgrades to customers who had purchased a previous version of their product within a specific period of time. Easy work, happy customers.
Folivora looked at selling perpetual licenses using a subscription-style enticement model. You could pay less for a standard license ($6.50) but not have the same amount of new features or, you could invest in a lifetime subscription ($20) and gain recurring updates.
The standard license was priced at less than a third of the lifetime price, yet over their launch period, 75% of their sales revenue was for the lifetime license.
It’s all about the perceived value, the bargain factor, and the reward for loyal customers without neglecting those customers that opt for the more basic version of your product. No one was forced to make the move to the updated version, yet most users were invested in the product and wanted to keep it up to date.
5) Different pricing strategies
It’s always worthwhile looking into (or at least considering) other pricing strategies. It’s not about deciding on one and sticking with it.
Your pricing strategy is going to need to change as your product or service grows, whether that be through slight adjustment or completely jumping ship to an entirely new strategy and pricing model.
It’s a game of experimentation - you won’t know for sure which is the best pricing strategy for optimum growth and revenue, so keep testing and learning over time.
It's important to consider the points above in your product’s launch, but also continue to revisit them as your product and business grow.
Got your plan and keen to get started? Read how to optimize your SaaS pricing in practice