We all look to develop and apply the best strategy in every aspect of our business. Honing the workload planning process, selecting the right tools for your team, and working on sales and marketing. What’s sometimes neglected is dedicating the time to set the right price for your product.
A pricing strategy is a plan or approach that businesses use to determine the price of their products or services. In the competitive software-as-a-service (SaaS) landscape, choosing the right one can make or break your business.
Should you follow your competitors’ lead, or is it better to base your pricing on the costs of delivering your product? Perhaps aligning your pricing with your product’s value is the key to success.
In this article, we’ll explore the ultimate pricing strategy for SaaS startups and give insight into determining the model to price your product effectively.
Factors to Consider When Setting Prices
Here are some of the things to keep in mind when setting your product’s price:
Costs
Your costs will play a significant role in determining your pricing strategy. You should ensure that your prices cover your costs and leave room for profit. Some of the costs you’ll need to consider are:
- Development costs
- Hosting and infrastructure costs
- Marketing and advertising costs
- Customer support costs
- Overhead costs
Value Proposition
Your value proposition sets you apart from your competitors and gives your customers a reason to choose your product over others. Therefore, your pricing strategy should reflect the value you provide to your customers.
You can charge a premium price if you offer a unique and valuable product. On the other hand, if your product is more commoditized, you may need to price more competitively.
Competitors
Consider your competitors when developing your pricing strategy. First, look at what your competitors charge and how they structure their pricing. This will give you a baseline for what customers are willing to pay and what features they expect at different price points.
Customer Perception
Perception is everything when it comes to pricing. You need to make sure that your pricing aligns with your perceived value. Customers may perceive your product as overpriced if your prices are too high. However, they may perceive your product as low quality if your fees are too low. Finding the right balance is crucial.
Types of Pricing Strategies
Now that you know the key factors that will influence your pricing strategy let’s look at the different models you can use.
Free Trial
As a SaaS provider, you may have considered offering your product a free trial to potential customers. It’s a common strategy in the industry and for good reason. A free trial can attract new users, showcase your product’s features, and convert them into paying customers.
By monitoring user behaviour and marketing dashboard metrics during the trial period, you can gain insights into how your product is being used and identify areas for improvement. You can also collect feedback from users directly, which can help you refine your product and better understand your target audience.
One example of SaaS offering a free trial is HubSpot, a marketing automation platform that provides potential customers with a 7-day free trial.
Image source: hubspot.com
Freemium Pricing
Freemium pricing is a type of free trial model that provides a free basic version of your product, with the option to upgrade to a paid version for additional features and functionality.
This pricing strategy is effective for SaaS startups that want to attract a large user base and then monetize that user base through upgrades and add-ons.
You must offer a basic product version that provides real value to your customers. Your product’s paid version has to offer enough additional value to justify the cost.
Dropbox is a file-hosting service that implements the freemium model as a part of its pricing strategy.
Image source: dropbox.com
Another example is Akaunting, a free online open source accounting software. It offers users the freemium model as part of its pricing strategy.
Reverse Trials
The reverse trials model, also known as freemium with a time limit, has recently gained popularity. With this model, users can access the full version of your product for a limited time before being asked to pay for continued use.
While it may seem counterintuitive to offer a product for free with the hope of converting users into paying customers, reverse trial pricing can be an effective strategy for SaaS businesses. It can help increase customer retention rates by allowing users to test the product before committing to a paid subscription.
A time-tracking software, Toggle, offers new users a free 30-day Toggl Track Premium Plan trial.
Image source: toggl.com
Flat rate
This is the most straightforward pricing option. With a flat rate model, you offer a bundle of features for one fixed price.
The client can choose to pay every month or once a year. It’s popular among fresh-faced startups who want to test the waters and see if people are willing to shell out for their product.
A good example is Paperbell, a coaching software with all the features included in the billing plan, such as scheduling, payments, and client management. As a result, coaches can spread their philosophy without wondering if they need to upgrade as their businesses grow.
Image source: paperbell.com
Per-User Pricing
Per-user pricing is a simple pricing model that charges customers based on the number of users they have, and it can be an effective way to generate revenue.
This model is often used for smaller SaaS companies, but that’s only sometimes the case.
Canva, a popular designing tool, offers different plans depending on the features, including the number of users.
Feature-Based Pricing Strategy
With a feature-based strategy, you charge customers based on the features they use. This pricing model can effectively generate revenue and encourage customers to upgrade to higher-priced plans.
For example, FileCenter, Document Management, PDF & Scanning Software offers three different plans and charges based on the features each one includes. The clients will choose the plan depending on their needs, ranging from basic file management to enhanced scanning options.
Image source: filecenter.com
Usage-Based Model
If you use a usage-based model, it means you charge customers based on how much they use the software. This pricing model can be a great way to encourage customers to use the software more often.
An email marketing and automation software, Mailchimp will charge, among other factors, based on how many emails you want to send.
Image source: mailchimp.com
Transparency vs Competitive Advantage
Transparency in pricing refers to openly sharing pricing information with customers. This means that customers can access all the relevant information they need to make informed decisions about purchasing a product or service.
This approach can help build customer trust and create a sense of openness that can increase customer loyalty. Achieving these can be particularly important for SaaS companies that rely on recurring revenue streams, as loyal customers are likelier to continue using a product or service over time.
On the other hand, some argue that competitive advantage pricing is necessary for SaaS companies to outperform competitors and maximize profits. Competitive advantage pricing refers to setting prices based on market conditions and the actions of competitors rather than openly sharing pricing information with customers.
Competitive advantage pricing can help companies maintain a strong market position by making it more difficult for competitors to undercut them or steal market share. In addition, by keeping pricing information private, companies can maintain a level of secrecy around their pricing strategies, making it more difficult for competitors to replicate their success.
Final Words on Choosing the Best Pricing Strategy
Pricing is an essential part of any SaaS business strategy. By considering critical factors like costs and value proposition and using the right pricing strategy, you can attract and retain customers, generate revenue, and scale your business.
By identifying the value metrics that resonate with your target customer base and align with your business objectives, you can optimize your pricing strategy, customer acquisition, and retention efforts to maximize your profits.
Remember that you will need to test and adjust your pricing strategy as your business grows.
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