Just like the three bears and their porridge, SaaS businesses get their pricing too hot, too cold, or just right. But unlike the bears, you really want Goldilocks to eat your porridge.
When SaaS businesses get their pricing just right, the most porridge is eaten. And ultimately the highest potential of revenue is won because Goldilocks (and the rest of your target audience, both present and prospective) can’t get enough of it.
And in case you’re confused here, the porridge is your product.
So, how do you get your pricing strategy just right? How do you figure out which one works best for your target audience?
Don’t risk your porridge being too hot with a price your customers won’t pay for, and don’t throw away money by making your porridge too cold.
Let’s look at what to consider to get your pricing strategy just the right temperature
Why your pricing strategy is so important
A vast majority of SaaS businesses underprice their product, meaning money is left on the table.
At the end of the day, you’ve got three main strategies to worry about when it comes to optimizing your business growth:
- Product strategy: what you want your product to achieve
- Go-to-market strategy: how you will take your product to market
- Revenue delivery strategy: how to optimize the customer journey to accelerate your growth across customer acquisition, renewals, and expansion
And your pricing strategy sits within not one, but all of these important growth strategies.
The type of pricing you go for will have an obvious impact on your revenue, as well as your marketing, your brand positioning, and ultimately how your business is perceived by your target audience.
Business owners and CEOs can often overlook a more in-depth pricing strategy, and revert to the simple considerations of product cost, competitor pricing, and a slight price margin for profit.
Why’s that? A more in-depth pricing strategy takes time, patience, and research - customer research, competitor research, market research. Not to mention the fact your pricing strategy should be constantly evolving - and you won’t always get it right the first time around.
But when you do, you will reap the benefits.
What are popular SaaS pricing strategies?
A physical product requires ongoing production costs, whereas once you’ve built a software product, it’s far easier (and cheaper) to expand its usage and supply for any increase in demand.
With software, you profit by selling access to your software. And this is where your pricing strategy slots in nicely; with the right pricing, you can maximize that profit.
The type of pricing you choose for your SaaS business relies not only on what you offer and the cost of production, but how your product is perceived and valued by your customers and target audience.
Every SaaS company is different, which means a whole bunch of pricing methods have been created and used, then scrapped or commended.
Let's look at some of the most popular strategies.
1) Competitor-based pricing
Competitor-based pricing or competitive pricing is something we’ve vaguely covered already, as it’s one of the first considerations when it comes to breaking into an industry: what is everyone else doing?
It’s a pricing strategy that relies purely on public information about your competitors’ pricing.
SaaS is an incredibly competitive industry, and no matter how original your product or service may be, there are bound to be some crossovers. See it as a positive, this is where you can make a true judgment of what works and what doesn’t.
Pros of competitor-based pricing:
- Less time and research: Someone’s already done a lot of work for you, and you’ll be in the bracket of what your prospects will be expecting to pay.
- Keep your friends close, enemies closer: This way, you’re keeping a close eye on your competitors.
- One for startups: A common starting point for new launches just wanting to get their product on the market.
Cons of competitor-based pricing:
- Copycat behavior: It’s like copying the kid sitting next to you in a school exam (who might be an A+ student for English, but a C- for Math); accuracy is not guaranteed and you’ve definitely just lost some originality.
- Too generalistic: It’s not bespoke or optimized to your business or your specific target audience, risking missed opportunities and lost customers (and $$$).
Why SaaS businesses love it:
It’s simple and it saves time; ideal for startups or businesses introducing new products into the market.
2) Cost-plus pricing
Unlike competitor-based pricing, cost-plus pricing (among other SaaS pricing strategy favorites) involves the research and analysis beyond what competitors are sharing in the public domain.
Cost-plus pricing, otherwise known as mark-up pricing, takes the cost of production and adds a little something on top. 🍒
It’s the sum of your production costs and your desired profit margin.
It’s typically fairly straightforward to work out your production costs. Your desired profit margin, on the other hand, is more complex. You might have an ideal amount in mind (hello, big bucks), but you do have to be realistic and consider the value you bring to your target audience.
Pros of cost-plus pricing:
- Fewer resources required: All you’ve got to think about is the perfect profit margin to win over your prospects.
- Your costs are definitely covered: You can guarantee that your production costs are covered, and with a reasonable mark-up you can guarantee a profit too.
Cons of cost-plus pricing:
- Lone wolf syndrome: Without knowing anything about your competitors, you’re risking feeling (and looking) a little bit isolated in the eyes of the market.
- Customer, who?: With this pricing strategy, you are completely leaving out your customers; what they want, what they value, what they’ll pay for. At the end of the day, your customers don’t care that you’re getting your money back on production costs, they just want to pay for something that is valuable to them.
Why SaaS businesses love it:
It’s a popular choice for startups looking to get their product or service into the market quickly, particularly when you don’t know much about the amount your customers will be willing to pay or what your competitors are up to.
3) Tiered pricing
Tiered pricing is a strategy where sellers segment pricing into tiers catering to different target markets. By creating separate tiers that are optimized for each customer segment, you appeal to a wider (and more varied) customer base as you provide for different needs and budgets.
One of the most common structures that you’ve almost definitely seen is:
- Basic: Providing customers with the essential features at an affordable price
- Standard: Adding in a few more advanced (and valuable) features and upping the price for it
- Premium: The full shebang - everything your customers would need from your product or service
Once you’ve thought about how to package your product, you’ll then want to think about the actual pricing of each tier - check out our full guide to tiered pricing to get the lowdown.
Pros of tiered pricing:
- Snaps for SaaS: Tiered pricing is a great strategy for businesses that want to appeal to different size businesses and different size budgets. This can be particularly beneficial to those that sell licenses or seats (or similar). Are your ears burning?
- Incentivizing your customers: If you prove the value of your product and its features, this creates incentive for customers to pay more and more up the tiers - more features for them, more revenue for you.
- Improved buyer experience: By paying more, your customers see and receive the value of more product features.
Cons of tiered pricing:
- Easy to overwhelm: When it comes to creating tiers for your pricing, you need to be cautious you don’t overwhelm your customers with too many options or any complexities. Keep it simple, for your sake and theirs.
- Can complicate your billing: Introducing a tiered pricing structure can add complexity when it comes to subscription management, depending on the platform you are using.
Why SaaS businesses love it:
It’s a popular strategy with SaaS businesses because it means appealing to a wider - and more varied - customer base. It makes your life easier when it comes to an upsell too.
See our full guide on everything tiered pricing, right here.
4) Volume discount pricing
Volume discount pricing or volume discounting is a structure that rewards customers who buy larger amounts, quantities or licenses of your product, with larger discounts. The more that’s purchased in one go, the bigger the discount.
And who doesn’t love a discount?
It’s as simple as that. But if you did want to fill your brains with all things volume discounting, we have written a guide on the ins and outs of the volume discount pricing strategy.
There you’ll find out about the different types of models within the strategy, the advantages and disadvantages, a bit about the psychology behind it, and GIFs (obviously).
Pros of volume discount pricing:
- Encourages your customers to buy more: Because, just like we said, who doesn’t love a discount?
- Competitive value: Any discount in your pricing strategy is a great way to get one-up on your competitors.
- Greater appeal to a wider audience: You can appeal to different customer segments by introducing the tiered pricing model, (and get more revenue as a result).
Cons of volume discount pricing:
- Profit loss: As with any discounted offering, you will risk profit loss to some degree because not everyone will be willing to buy huge amounts.
- Setting standards: When you introduce great deals and discounts to your product or service, it can be difficult to persuade your current customers to pay more if you change your pricing down the line.
Why SaaS businesses love it:
One of the best things about being a SaaS business is that there is minimal cost involved when it comes to increasing the customer base you’re delivering your product or service to. Volume discounting encourages your customers to buy larger quantities, so ultimately the profit loss is never too great.
5) Value-based pricing
Oh, we do love a bit of value-based pricing - but it doesn’t come without its hard work. (Totally worth it though).
Value-based pricing relies on you figuring out your perceived value; you make the most of how much your customers would be willing to pay and apply that to your pricing for optimum revenue.
It involves a lot of research - of your customers, of your competitors, of the general market space. We’ve rounded up exactly how to calculate it, implement it, and how the likes of Peloton smashed this type of pricing, right here.
Pros of value-based pricing:
- Every revenue opportunity covered: Create price points to suit each segment of your target audience and perceived value, and reach full revenue potential. 💸
- Getting to know your audience: The valuable customer research required for this strategy is something that can - and should - be thought about time and time again.
- Optimize your product: When you start to think about the worth of your product or service in regards to its perceived value, you’ll start to think how you can further improve it to add more value.
- Encourages top-notch customer service: If you know the profit you can win is all down to the value you provide to your customers, you’re bound to try your hardest to keep a smile on their faces, aren’t you?
Cons of value-based pricing:
- It’s not easy: It’s tricky working out your perceived value, and for this strategy to work, your efforts in doing so need to be as accurate as possible and continue over time.
- You can never be 100%: You’re (probably) not a psychic, so you can’t firmly predict your worth or perceived value.
- Not always ideal for start-ups: Obtaining a high level of perceived value from your target audience as a start-up (or a brand that hasn’t been seen or heard) isn’t an easy job.
Why SaaS businesses love it:
Value-based pricing is popular with SaaS companies striving to be unique in a competitive market. This is because it allows you to really play on your niche to attain more value from your customers. Plus, once you’ve got it right, the advantages are almost never-ending.