6 pricing objectives your SaaS business should consider
Pricing objectives come in all shapes and sizes, but most SaaS companies stick to a handful of different objectives, including revenue, adoption or retention, free trial signups, contract length, and competitors’ prices.
Let’s go through each in more detail, to help you understand which pricing objective is best for your SaaS business.
1. Maximize profit
Profit-oriented pricing objectives are defined to maximize the profit margin of each sale and the long-term profitability of the business. Put simply, profit-oriented pricing objectives are about making as much money as possible.
Most businesses take a twofold approach to profit maximization: they go for a price increase to juice their top-line revenue, and they reduce costs to increase their bottom-line profit. Both numbers play into each other to provide a superior return on investment—increasing pricing might lower the number of sales (without reducing revenue), which lowers per-account costs like support and hosting.
However, hitting numbers purely for the sake of hitting numbers does nothing unless you’re making a profit and retaining users. Getting the high-end buyers to buy your product may be a less profitable objective than having many middle-class buyers buy your product. You might find that you are spending more to acquire customers at the higher price point or that your churn rate increases after changing your prices.
2. Maximize retention
I’ve said before that retention is far more important for SaaS companies than acquisition, and your pricing can be designed to reflect that. Creating a retention-first pricing strategy can be a great objective for SaaS companies. Your prices should be set high enough that customers value your product and continue using it, but low enough that you’re not turning off your target customers with high sticker prices.
Putting retention first can be a great option for subscription companies, but you need to balance that against acquisition costs. Make sure that your CAC is low enough that you’re able to retain users at a profit and keep them from churning; the value you provide needs to be greater than the price so that they won’t churn.
3. Increase adoption and trial sign-ups
Another way you can optimize your pricing is for maximum trial sign-ups. Set your initial pricing low—or even offer a freemium option—to encourage more prospective customers to sign up for your platform. Then, monetize them later through upsells and expansion revenue.
Since the dollar cost of a free trial isn’t part of the equation, solving for trial subscriptions often means making decisions outside of the actual cost of your product. You can play with pricing elements such as free trial lengths, money-back guarantees, and free value-add services, like installation or configuration, to help maximize adoption.
Remember, though, while freemium is a great acquisition model, you shouldn’t make freemium your only pricing strategy.
4. Extend contract length
Another great pricing objective for subscription companies is to extend the lifecycle of their product line and maximize the length of customer contracts. Longer contracts correlate directly to greatly reduced churn while also keeping your acquisition costs in check.
The optimal contract length for SaaS startups varies, according to Tomasz Tunguz, but annual (or longer) contracts bring stability and predictability. They also give customer success teams more opportunity to create meaningful relationships with new customers and help them achieve their goals.
Ask yourself: Is your contract as long as it should be? Are you retaining users for a year and then letting them go or keeping them for a decade? Can lengthening your contract help minimize costs down the road?
5. Beat the competition
Yes, beating the competition might sound obvious, but your prices can be a powerful tool for maintaining or increasing your market share. Competitor objectives are not the most important thing to consider, but they have their relevance.
Pricing your product low can deter competition from entering a target market—some companies even choose to sell their products at a loss to prevent new players from entering a market. On the flip side, a high price can signal to potential customers that your product is of high quality, increasing the likelihood that they’ll choose your solution over those of your competitors.
6. Mix and match
Pricing objectives are like ice cream flavors: you don’t have to pick just one. In fact, mixing and matching multiple pricing objectives can be a great option for SaaS startups.
Say you want to maximize both adoption and revenue. Generally, you want a careful balance of the two to make the most revenue without losing market share. That “sweet spot” is your ideal price—it’s the inflection point where 50% of the people think it’s not too expensive, but 50% of the market thinks it’s not too cheap.