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A Complete Guide to Optimizing Your SaaS Pricing Strategy

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saaspriceIt seems like the easiest thing in the world, yet, thousands of businesses lose millions of dollars because of it. I’m talking about pricing. Getting your pricing right is one of the harder challenges for any SaaS business. Price too high and you’ll scare away customers. Too low and you won’t be able to maximize profit. Which is to say, pricing is a Goldilocks problem – not too high, not too low, but just right.

Optimizing your pricing to get this perfect balance is tricky. In this post, I’ll show you how you can use different pricing tactics along with CRO principles to create a pricing strategy that converts visitors without leaving money on the table.

What NOT to Do When Optimizing Pricing

There’s a lot of bad information out there about pricing optimization. Following this advice can be disastrous for a SaaS business. So before we look at the SaaS pricing strategy optimization process, let’s see what you should NOT do when it comes to pricing:

1. Follow cost-plus pricing

Cost-plus pricing is a simple strategy where you add a percentage markup to the cost of a commodity. That is, if your cost for producing a service or product (in raw material or man-hours) is $100, and you want to make a profit of 50%, your actual price would be $150. Although attractive in its simplicity, this strategy doesn’t work because:

  • It ignores competition: Production cost for a competitor might be substantially lower (because of location, advantage of scale, etc.), which means they can undercut you on price and steal your customers.
  • It isn’t optimized for all customers: you’ll end up overcharging some customers and undercharging others.

2. Use flat pricing for all customers

Flat pricing – offering all customers the same price, regardless of features – is another attractive pricing strategy for SaaS businesses due to its simplicity. Barring a few products (one famous example: Buffer’s $10/month price), this isn’t an optimum strategy for most businesses because:

  • It ignores businesses that have more complex needs.
  • Doesn’t allow you to categorize features into different tiers.
  • Doesn’t allow you to extract maximum value from customers with high-tier plans.

3. Use value-based pricing

Value-based pricing means charging customers based on the value (real or perceived) that you provide to their business. That is, if your customers get $1,000/month of value from your products, you can charge them 10%, or $100/month.

Even though this pricing strategy makes sense in theory, it leaves a lot of money on the table by attaching a fixed price to what is essentially a relative commodity – the perceived value you provide to a business. That is, even if a business perceives that your product gives them $5,000/month of value, you’ll be limited to charging them your standard rate. Clearly not the best way to optimize pricing for maximum returns.

Now that we know what NOT to do, let’s take a look at how you can actually optimize your pricing strategy.

How to Optimize SaaS Pricing Strategy

This section assumes two things: that you’ve already reached product/market fit, and you already have at least some data about your customers. Your job now is to optimize your SaaS pricing strategy for better conversions at higher price points. There are two methods to do this:

  1. Optimizing pricing strategy: This a more fundamental change that requires drilling deep into your customer data and fine-tuning your offerings.
  2. Optimizing pricing structure/design: These are cosmetic changes such as optimizing pricing table layouts for better conversions.

Ideally, you should be using both of these methods – fine-tuning strategy as well as design – to get the best possible conversion rate.

Optimizing Pricing Strategy

Take a look at any standard SaaS pricing page:

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You’ll notice that there are essentially three ingredients in most pricing tables:

  1. Features
  2. Value metrics (price per user, per visit, etc.)
  3. Price

Pricing optimization means fine-tuning each of these to get the best possible conversion rate without a substantial drop in customer LTV.

Let’s take a look at a proven process for optimizing these three ‘ingredients’:

1. Understand how customers use your product

Your customers use your products in different ways. Some customers login every day and use your product for hours. Others might login once in two weeks, use your product for a few minutes and leave. A pricing strategy that doesn’t take customer behavior into account is a pricing strategy that is bound to fail.

To fully understand how customers use your product, you’ll need both objective and subjective data.

  • Objective data: Analytics data, demographics data, etc.
  • Subjective data: Customer interviews, surveys, etc.

Ideally, you should interview/survey your customers and supplement their answers with analytics/demographics data to get an accurate picture of how customers actually use your product.

At the end of this exercise, you should have answers to questions like:

  • How often do customers use my product?
  • How long is each session?
  • Do my customers use the product as individuals or as a part of a team?

With this data, you’ll have a far better understanding of your customers and your product.

2. Use data to quantify buyer personas

Like most SaaS businesses, you probably have some buyer personas such as ‘Freelancer Fred’ or ‘Agency Andy’. Usually, these personas are created from subjective data such as interviews and surveys. To create an optimized pricing strategy, however, you need to quantify these personas with hard data.

Dig through your analytics to find answers to questions like:

  • What price is each of my buyer personas willing to pay?
  • What is the LTV and CAC (Cost of Acquisition) for each buyer persona?
  • What are my top customer acquisition channels for each persona?
  • What are the top 3 features for each persona?
  • What are the 3 least used features for each persona?
  • How does the purchase process work for customers in each buyer persona? Are they decision makers or do they report to someone else?

With this data, you can now start optimizing your features, value metrics and pricing.

3. Optimize features based on quantified buyer personas

If you run a SaaS business, you most likely have multiple tiers or plans for different customers. Figuring out what features to include in each plan is a big part of the optimization process.

This is a tricky exercise – you want your starter plans to be good enough to get users to sign-up, yet diluted enough to get them to upgrade to higher tiers. What features you choose to include (or exclude) from each plan is crucial.

Optimize your feature list based on data from Step #2 above. Ideally, your starter plan should offer at least one of the three most used features, middle plan should offer two of the three most used features, and so on.

4. Optimize ‘value metrics’

Value metrics are what you sell your product on. This can be the number of users per plan, number of pageviews, contacts, etc. Every SaaS tool will have different value metrics. A support tool like ZenDesk might charge per agent, while an analytics tool might charge based on the number of pageviews. 

Optimizing your value metrics is crucial to unlocking massive growth.

Optimizing your value metrics is crucial to unlocking massive growth.

Look at your value metrics again. Ask yourself: am I charging my customers equally with these metrics? Am I maximizing revenue from each customer?

Take a hypothetical photo storage service as an example. This service offers unlimited storage space to all its users, but charges for each extra team member. Using this value metric, a customer such as Disney get charged the same rate as a two-person photography studio with a few hundred pictures. Clearly, this business could charge Disiney 100x more than the photography studio if it based its price on total number of photos, not total team members.

Your customer research data will once again come handy here. See how customers actually use your product and optimize value metrics accordingly. If you see a lot of different people using the same account, perhaps charging on a per user basis might be relevant. If customers are using up a lot of bandwidth (say, for a video streaming service), charging on the basis of bandwidth used might be more appropriate.

Optimizing value metrics will give you a big bump in MRR.

5. Optimize price based on features, value metrics and price elasticity

What price you charge for each plan will depend largely on the features you provide and your value metrics. However, there is one more metric you should know that helps you optimize your price: Price Elasticity

How Price Elasticity affects product price?

Price Elasticity (or Price Elasticity of Demand) is a measure of the change in demand of a product with price.

That is,

Price Elasticity (E) = (% Change in Demand) * (% Change in Price)

A product is said to be “elastic” when an increase in its price leads to a drop in demand (i.e. E > 1). A product is said to be “inelastic” when demand stays constant with an increase in price (i.e. E < 1).

Nearly every product in the world is elastic. Some products, such as luxury goods, go up in demand with an increase in price – these products are inelastic.

Your Price Elasticity gives you an understanding of how much you can charge for a product without a substantial drop in demand. If you have a highly elastic product, you will have to either improve your product or optimize features and value metrics to get a higher price.

Measuring Price Elasticity is a good way to gauge market tolerance for price increases. It also gives you an idea of product direction – if the product is too elastic, it’s probably a good idea to find a different market, or improve the product.

Do the above five steps and your pricing strategy will be far better aligned with customer needs. However, you can still optimize pricing further by changing your pricing structure and page design.

Optimizing Pricing Page Design and Structure

These are more superficial changes that can nevertheless yield great results if done right. Once again, testing is crucial here. You should have multiple pricing tables with different designs and pricing structures.

Here are a few things you can test to create better converting pricing tables:

1. Use ‘charm pricing’

‘Charm pricing’ is an industry term for prices that end in non-zero digits, usually 9, 7 or 5. You see prices like in nearly every store.

Pricing like this works because it creates the impression that the product is cheaper than it actually is. Gumroad analyzed its sales and found out that such pricing can lead to substantially higher conversion rates for the same product. This is why most SaaS businesses use this pricing structure.

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2. Highlight your best-converting plan

This is established wisdom in SaaS pricing: your best-converting plan should occupy the best real-estate on your site. Just take a look at how others are doing it:

ZenDesk:

2

HighRise:

4

This is a simple design tactic meant to subtly direct visitors to your best plan (for them and for you).

There are multiple ways you can do this:

  • Place the recommended plan in the center of the pricing table.
  • Make the recommended plan slightly larger than others.
  • Use a different color to highlight recommended plan.
  • Use badges such as “Best Selling” or “Best Value” to draw attention to the plan.

3. Use descriptive labels for each plan

As a SaaS business, you job is to help customers choose the plan that best fits their requirements. Using empty labels such as ‘Business’, ‘Enterprise’, etc. doesn’t really your cause much. Try using descriptive labels for your plans. Instead of ‘Business’, go with ‘Small Business’ or ‘Studio’. Instead of ‘Enterprise’, use ‘Agency’.

It’s also a good idea to describe each plan in brief, carefully highlighting its target customer. Here’s how HubSpot does it:

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4. Use expensive plans for ‘price anchoring’

One easy way to make your lower priced plans appear more attractive is to juxtapose them against an expensive plan. That is, a $29/month starter plan will seem like good value when your top-tier plan is priced at $499/month.

For example, there is a $225/month difference Salesforce’s top-end and low-end plans:

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This top-end plan offers nearly all the features of their ‘most popular’ Enterprise plan, except it is ‘unlimited’.

Few businesses will opt for this. It does, however, help reframe the price of the cheaper plans and makes them more attractive. This phenomenon is called ‘price anchoring’.

Try testing two variations of your page – one with your standard pricing table, and one with a top-tier plan that is substantially more expensive than others.

5. Address customer fears, uncertainties and doubts (FUDs)

Your customers have several doubts, questions and uncertainties about your product. Addressing these on the pricing page is a good way to increase conversions. For example, your customers might be apprehensive about not getting enough value from your product. You can reassure them by offering a 30-day free trial.

Here’s how Aweber does it:

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You can assuage customer fears by using logos of your other customers as social proof. Here’s an example from SproutSocial:

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Wistia uses testimonials from customers to show that it is a trusted product:

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All the standard rules for Ecommerce optimization apply here as well. Use social proof, authority, etc. to address customer doubts and get better conversion rates.

Conclusion

Optimizing your pricing strategy is a big ask, but it is also essential for SaaS success. Even a small increase in monthly pricing can mean big changes to your customer LTV and the viability of your business.

For SaaS businesses, pricing optimization is a lot about understanding your customers and maximizing your returns from them. Create plans that give customers exactly the features they want at a price that is just right for them. Follow this up by testing different pricing page designs/structures to get your best-ever conversion rates.

Key Takeaways:

  • Cost-plus pricing, flat pricing and value-based pricing all leave money on the table for SaaS businesses.
  • Completely understanding how customers use your product with subjective and objective data is essential for pricing optimization.
  • Use customer data to create plans that have exactly the features your customers needs.
  • Optimize your value metrics to extract higher returns from each customers.
  • Factor in price elasticity to increase/decrease prices for each plan as needed.
  • Optimize pricing page design and structure by addressing FUDs, highlighting plans, and using psychological pricing (charm pricing, price anchoring).

 

By Nestor Gilbert

Senior writer for FinancesOnline. If he is not writing about the booming SaaS and B2B industry, with special focus on developments in CRM and business intelligence software spaces, he is editing manuscripts for aspiring and veteran authors. He has compiled years of experience editing book titles and writing for popular marketing and technical publications.

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3 Comments »
Ryan Law says:

Awesome post Khalid! As an Econ grad it always makes me happy to see mention of price elasticity: there's a whole pricing toolkit available to SaaS founders, and yet many people shy away from using it! Learned a load from your write-up, and you even inspired me to share my own two cents on the topic of SaaS pricing models: The Ultimate Guide to SaaS Pricing Models, Strategies & Psychological Hacks It'd be great to get your thoughts :) - Ryan

Reply to this comment »
Eduard @ InnerTrends says:

Hey Brian, Thanks a lot for putting this list of SaaS pricing strategies together. We faced a lot of challenges when we were trying to come up with our own pricing plan. We didn't know which was the best way to approach it so we analyzed over 100 SaaS companies to see how they apply discounts. We published our findings here: https://blog.innertrends.com/saas-pricing-strategies/ Would you say that implementing discounts for both your yearly and monthly plans is a viable pricing strategy?

Reply to this comment »
BrianJones says:

Hi Khalid, thanks for an informative article. I own a SaaS software startup and am thinking about an effective pricing strategy for the product. I intend to make it a freemium product with a few basic features and charge for upgrades that include premium features. Plus, I am also thinking about bolstering my revenue with sidebar ads on related deals and products in the customer dashboard of the freemium version. What do you think about my pricing strategy? Will it work? Can you summarize its pros and cons for my benefit. Thanks in advance.

Reply to this comment »

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