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Everything You Need to Know About SaaS Pricing Strategies

Everything You Need to Know About SaaS Pricing Strategies

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Updated: March 19, 2021

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Here at Bitcot, we are always learning about new IT technologies and trends in order to provide the best Saas Business Pricing Strategy for our clients. After all, we believe that the right tool should be used for the job.

What is a SaaS platform? 

To keep up with the demands of a technological society, businesses need efficient software that will allow them to get up and running quickly at a low cost. A SaaS, (Software as a Service) platform is a type of software that is not installed on computers, instead, it is accessible via the internet, through a website, or app. Their accessibility, affordability, and competitive advantage make them the perfect choice for any type of business, from digital marketing to an engineering firm. 

The increase in demand has resulted in new SaaS companies popping up left and right, so it’s important to distinguish your company not just with a good product, but with competitive pricing. Priced differently than traditional software, SaaS platforms use a subscription-based, or pay-as-you-go model.

Nailing your pricing strategy is key to your company’s success in a booming market. In this blog, we are breaking down everything you need to know about Saas Products Business Pricing Strategy: why it’s important, the most popular pricing strategies and models, and how you can start building your own today!

SaaS-platform

 

Why it’s important to nail your SaaS pricing?

Many SaaS businesses have earned a positive rate of returns after making critical changes to their pricing policy. Nailing your pricing is important for four main reasons: gaining a competitive advantage, providing a true value for your customers, unlocking growth potential, and strengthening your SaaS unit economics.

Competitive Advantage:

A good pricing strategy gives your business a competitive advantage. If this past year has shown us anything, it’s that the future of company work is in the cloud. Our way of schooling, working, and communicating will never be the way we once remembered it, we have come to rely on online platforms to fulfill our human needs. This means that most businesses will be SaaS and the market will only get more competitive. You need to differentiate your business through your pricing to give you a competitive edge. 

Providing Value:

You get what you pay for right? The pricing of your SaaS platform should reflect the value it will provide customers. It can be difficult to find the right balance between balance and revenue. By overcharging, you may drive away current and prospective customers. But by undercharging, you can cripple your business growth. 

Customers want to buy products they can easily justify. To find a price your customer is eager to pay, you need to price based on value instead of your business costs or competitors’ pricing models. Do the necessary market research to find out what problems your customers face and how your product offers the right solution.

Unlocking Growth Potential:

You may think that more customers more growth, however, your growth is heavily dependent on your pricing. Even with thousands of customers, poor pricing can hinder your business’s growth. The 80/20 rule says that about 80% of company sales come from about 20% of its customers. So you need to focus on nailing your pricing strategy to reflect the value of your product to serve your loyal customers and squeeze out every ounce of possible improvement. This is what will bring your company major growth

Strengthen Your Company Economics:

Your customer lifetime value and your customer acquisition cost together will determine the success of your platform. If you understand these important metrics, it will be much easier to find the right SaaS pricing strategy. Your pricing strategy should do two things to strengthen your business growth: lower customer acquisition cost and increase your customer lifetime value. 

Top 4 SaaS Pricing Strategies:

  1. Cost-plus pricing is based on simplicity by using your business costs as a benchmark for your pricing.
  2. Competitor-based pricing bases your pricing based on what your competitors are offering. While both of these pricing strategies make sense, they are not effective pricing for business growth. We previously discussed how important it is to reflect the value of your product in your pricing strategy, that’s where value-based pricing comes into play.
  3. With value-based pricing, your pricing matches what your customer is willing to pay for the value provided. You can offer packages and price points that truly meet customer needs and wants.
  4. You have the freedom to price at a higher price point than your competitors if your customers are willing to pay that price. This leads to instantly higher revenue. You can continuously re-evaluate pricing as your add more value to your product and learn more about your customers.

Top 6 SaaS Pricing Models:

saas-pricing-models-strategy

 

 

As a new SaaS business, it can be challenging to find the best pricing approach. Sometimes, it helps to explore different pricing strategies and models used by other businesses. To help you get the most from your SaaS product, let’s look at the five major SaaS pricing models, and explore the pros and cons of each.

Usage-based pricing: 

This pricing model is based on usage of the platform, the more the service is used, the more it will cost and vise versa. This is most often used with infrastructure and platform-related software companies

  1. Pros: Pros of this pricing strategy include: price scales with usage, reducing barriers to use, and accounts for “heavier user costs.” By directly correlating price with usage, the customer can determine how much they can afford and justify changes in price. With no big upfront costs, small start-ups can get started with your product. 
  2. Cons: Every strategy will have its pros and cons, it is up to the company to weigh out the costs with its benefits. With usage-based pricing, it can be easy to disconnect the value from the product. It can also be harder to predict revenue since billing amounts will vary from month to month and for customers, it can be harder for them to predict their costs. 

Per-user pricing:

Another extremely popular SaaS pricing model is per-user pricing. Its simplicity makes it very attractive to SaaS companies. The model says: a single user pays a fixed monthly price; add another user and that price doubles; add a third user and the monthly cost triples. 

  1. Pros: This makes it easy for customers to understand what their monthly subscription gets them, and easy for SaaS companies to manage and predict their revenue.
  2. Cons: By charging per user, it limits adoption and gives users a clear reason to avoid adding new users to the platform. It also provides a clear incentive to cheat, by, for example, has two users share a login. 

Tiered pricing:

Tiered pricing is one of the most common models used by companies because it allows them to offer multiple packages with different combinations of features to meet different customer needs. These packages are often geared towards a low, middle, and high price point. 

  1. Pros: This pricing strategy appeals to multiple customers. It also leaves less money on the table by appealing to multiple customer needs, balancing and maximizing revenue. This also offers a clear upselling route, when your customer outgrows their current package, there is a clear route to a better package with more features. 
  2. Cons: This strategy might be potentially confusing to customers since there are a variety of choices. Appealing to too many people may also hurt your connection to your ideal customer. 

Flat rate pricing:

Probably one of the simplest pricing models, companies that use flat-rate pricing offer a single product with a simple set of features at a single price. 

  1. Pros: Flat rate pricing is both easy to sell and easy to communicate because of its simplicity. You can focus all of your marketing energy on selling every single detail and benefit the product has to offer. It makes it easy to establish the brand identity early on. Flat rate pricing is also easy and quick for customers to understand.
  2. Cons: The cons of flat-rate pricing include making it difficult to differentiate the value of your product from competitors and you also only have one shot at securing customers. 

Per feature pricing:

This model separates out different pricing tiers according to the functionality available in each, with the higher-priced package associated with the most features. 

  1. Pros: This model offers a strong upgrade incentive by making it clear that by upgrading, customers unlock extra functionality. This connects value to price. 
  2. Cons: It can be difficult to match features to the right price for SaaS companies, and getting that balance wrong can discourage adoption. It could make customers not want to use the product because they are missing out on functionality while still paying a monthly fee. 

Freemium pricing: 

This model is similar to the tiered pricing strategy, except the regularly paid packages are supplemented with a free, entry-level tier. That free tier is limited across certain dimensions to motivate users to upgrade for more features. One example of this strategy is Grammarly, as they offer a free, premium, and business subscription package at different price points to cater to different types of their potential customer.

  1. Pros: This model allows for exposure and viral potential. With low barriers to entry and easy initial adoption, it allows your SaaS to grow quickly.
  2. Cons: However, it could also kill revenue, devalue your core service, and customers may take advantage of the free package.

Other pricing strategies:

There are two other pricing models that are also relatively popular among SaaS companies. These are: per active user pricing and freemium pricing. 

Per active user: One variant of the per-user pricing model is active user pricing. It encourages customers to sign-up as many users as possible, with the peace of mind that only active users will actually be billed for. One example of this model is the communication platform: Slack. Their customers only get billed for the active users rather than all the users added. 

Enterprise model: This final pricing model offers customers large-scale solutions, which means a major opportunity to monetize the delivery of greater value.  The enterprise model offers variety to meet each organization’s needs, including everything from product assortment, single sign-on, audit logs, role-based access control, change management, product security, deployment options, team management, integration, analytics, and reporting. This is especially useful for large customers who feel the burden of a small issue multiplied throughout a huge, interconnected organization. As a SaaS business, selling to the enterprise market means your company needs to embrace product, company, and customer development opportunities in return for greater opportunity for future revenue growth.

Conclusion

Are you ready to price your SaaS platform for growth, profitability, and success? Here are some key things to take away: ALWAYS price based on value, weigh out the pros and cons of every model to find the right fit for your company, and know your customer! 

Make sure that your pricing evolves with both your customer and your product. If you have any questions, feel free to contact us here.

If you are serious about your business and you are looking for a tech solution, we encourage you to look at our previous successes with our clients. After that, contact us, and let’s see how we can help you. Let us know how you use this in your own apps. Read our blog and be sure to keep in touch on Twitter and Facebook for updates, including announcements when we release additional educational resources.

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    Raj Sanghvi BitCot CEO

    Author: Raj Sanghvi

    Raj Sanghvi is a technologist and founder of BitCot, a full-service award-winning software development company. With over 15 years of innovative coding experience creating complex technology solutions for businesses like IBM, Sony, Nissan, Micron, Dicks Sporting Goods, HDSupply, Bombardier and more, Sanghvi helps build for both major brands and entrepreneurs to launch their own technologies platforms.

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