A SaaS product's pricing is its most critical strategic consideration.
In order to grow, software companies must find a delicate balance between increasing the number of users and maximizing revenue.
Despite their high growth rates, free tools are notorious for their inability to generate profits.When it comes to purchasing software, as we'll see later in this article, most people don't go with the cheapest option available to them.
There are a number of psychological tricks you can use to increase the number of customers you get and the profitability of the plans they sign up for that you'll learn about in this guide.
How To Perfect Your SaaS Pricing Using The 10-5-20 Rule
There are many ways in which software-as-a-service companies choose to charge their customers.Flat-rate pricing, feature-based pricing, and hybrid-pricing models are just some of the SaaS pricing options available.
Both the strategic and financial aspects of the SaaS pricing strategy you use will be influenced by the SaaS pricing model you choose to implement the strategy.
It's not surprising that SaaS pricing is all about making as much moneyas possible for the service provider.
It is, however, not always so simple to choose the best strategy.
Is it better to accept a smaller number of customers at a higher price or to pursue a larger number of customers at a lower cost?
Almost always, the answer to this question differs from one company to the next.Before deciding on a SaaS pricing strategy, it is critical to compare multiple options.
The approach taken when creating a pricing strategy is referred to as "SaaS Pricing Strategy."The "SaaS Pricing Model" refers to the specific system that will be used to charge and generate revenue from future customers.
It is important to note that "why" and "how" are two distinct aspects of a pricing strategy.It's reasonable to assume that the pricing strategy and the pricing model have a significant impact on one another.
When formulating a strategy for the market, a SaaS company should keep several things in mind.
There are times when companies are willing to accept a negative bottom line in order to strengthen their customer base, which in turn will lead to increased profits in the future.
Particularly in the SaaS and fintech sectors where broad market penetrationis almost always required before sustained value generation.
First, we'll examine the most common SaaS pricing models and weigh the advantages and disadvantages of each.
Please click on any of the blue links below to see the specific models we're looking at:
- The flat-rate model: Uncomplicated pricing for a single product with no plans for feature upgrades.
- The tiered pricingmodel: Based on features, usage, or other factors, there are multiple tiers of pricing.
- The freemium model: Giving people the option to upgrade to a paid version of a free product or plan that they can use as a stand-alone product (usually used as part of a tiered model).
- The feature-based pricing model: A system where plans are priced based on the number of features they include.
- The usage-based model: Plans are priced based on quantifiable usage, such as storage, database size, or messages sent and received.
- The pay-per-user model: Fees are assessed in accordance with the number of user accounts that are required.
- The pay-as-you-grow model: As businesses grow, they should be able to upgrade their SaaS plans to accommodate their needs.
- The one-time fee model: The latest version of a product without updates is usually covered by a one-time purchase policy that requires users to pay an upfront fee for lifetime use.
In the modern world of SaaS, companies use a mix of these pricing models, most commonly in a tiered system where plans are priced on features, usage, and user numbers, for example.
So, you don't have to pick just one of these options – except, perhaps, if you opt for the flat or one-time fee models (you can always include these as optional, of course).
Customers' plans and upgrade paths are defined by your pricing model, but this is just one part of your pricing strategy.Customers' needs, current market conditions, competitors, and businessobjectives all change over time, so your pricing strategy is constantly evolving.
The seven most common pricing strategies employed by SaaS companies are examined in this section:
- Penetration pricing: In order to gain traction, one must undercut the competition.
- Cost-plus pricing: For achieving revenue goals, this is a simple pricing strategy
- Captive pricing: Paying for additional features or products to win over customers with a limited product.
- Price skimming: An initial price that gradually decreases over time.
- Prestige pricing: Maintaining a high-end image for your products by charging a high price.
- Value-based pricing: Your product's perceived value should be taken into account when setting prices.
- The 10x pricing rule: This is a good starting point for figuring out how much your SaaS product will cost.
There is no doubt that implementing a value-based pricing strategy is one of the most difficult tasks for a SaaS company because it necessitates extensive market, customer, and competitive research. However, value-based pricing is the best approach for any SaaS company operating in a competitive market, which is pretty much every corner of the market.
While value-based pricing is the best long-term pricing strategy, some companies find early success with other strategies before making the switch to value-based pricing.
Choosing the best SaaS pricing model for your businessis the next step after you've learned about all of the options available.What questions should you ask yourself before making a decision?
- Do we currently offer any services? What distinguishes our service from that of our rivals?
- In the current equity structure, who currently holds a stake in the company? We're accruing more users, so who's getting paid first (and how much, on the margin)?
- Is there a specific demographic we're hoping to reach?
- What drives people in this market to make purchases or decisions?
- Who could potentially replace our primary target market as a secondary one in the future?
- What are the most common methods of payment for our products and services?
- What is our current financial situation? Over the next ten years, what kind of SaaS company do we want to be??
- Is there a way for you to measure the success of your current pricing strategy? How will you know if future adjustments are required?
As previously stated, no single "best" SaaS pricing strategy or model will work for every business.
If your company is still in its infancy, you may want to experiment with a variety of pricing options before making a final decision.In any case, taking the time to answer these specific questions can help you make a choice that is good for you.