SaaS Pricing: When Is The Price Right?

by Trevor

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There is a lot to consider when it comes to pricing your SaaS. You need to figure out what the optimum pricing will be to attract the right customers and, of course, keep your business afloat!

The short answer to the question “when is the price right?” is; when you are able to bring on board your ideal customers and sustainably grow your business.

Unfortunately, while the answer sounds simple, the practice of getting there is far from it. There is no universal “formula”, nor is their any rule saying that once you’ve priced “right” the first time, you’re safe from having to re-evaluate your pricing.

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Let’s take a look at considerations for your SaaS pricing:

Charge Early?

There are so many SaaS startups out there that do not charge their customers from the get-go. Sure, you’re looking to generate buzz, gather feedback and just get some users on board, but you’re opening yourself up to possible problems by not charging. For example…

How do you know that you’ve nailed product/market fit until people actually pay you for it?

We suggest that you charge early and ensure you have a product people will hand over money for. As SaaS founder and entrepreneur Jason Lemkin states: “if you don’t charge, you have no idea what people will actually pay for.”

He also points out that if you’re not charging, that early feedback you get may be entirely useless to you. How do you know those people are really “customers” until they’re willing to pay? Plenty of people sign up to something that’s free just because “free” is the right price to them.  You might have impressive-looking numbers signed on, but those really are just vanity metrics if those people aren’t handing over cash.

If you’re going to need to experiment with pricing (as many SaaS do), early on is the best time to do so. Steli Efti suggests being bold with price experiments early on. Most SaaS are their own worst “complainer” when it comes to pricing, often envisaging that “no one will want to pay that much.” What if they do?

The other thing about free is the perception it can create. Without a price tag, there’s a good chance people won’t see value in your product – a point which leads us nicely into a look at value-based pricing.

Value-Based Pricing

Value-based pricing is about coming up with a price that your customer is willing to pay. As Marketing Donut discuss, there’s no right or wrong answer and it’s a lot to do with the perception of the customer. Why do we pay more for a brand name over a home brand?

While you’re not selling groceries, your SaaS has to figure out what “value” means to your target customers too. As Lincoln Murphy says, your SaaS pricing model should be built around what the customer values which means staying away from any “commodity” metrics like storage.

Your customers only care about what’s in it for them, not considerations like how much it cost you to develop certain features. This means that the place to start with any SaaS pricing is always going to be your market, that “what’s in it for the customer.” Murphy further states: “if you base your pricing on something people find no value in, your value proposition will not be aligned with their value perception.”

Here are a few considerations that should go into value-based pricing:

  • What customer do you want to attract?
  • Where do you want to position yourself in the market?
  • Are you priced to achieve goals for the long-term value/retention of the customer?
  • What unique value do you provide that customers are willing to pay for?
  • How do you differentiate any tiers? Are those things perceived to be valuable by customers?

As we indicated earlier, you might find you need to experiment early on to find your sweet spot with pricing. The key to making it work and retaining paying customers for the long-term is to really be delivering value as it is perceived by the customer. People will pay for something which they comprehend unique value from, but will easily switch to a competitor if that is no longer the case.

What About My Competitors?

The temptation can often be for SaaS to put a lot of focus on what their competitors are doing when it comes to deciding on pricing. If you’re simply matching competitors, you’re looking at a market-based pricing model and this is often unsustainable.

How do you differentiate yourself from the rest? If it’s not based on value, you’re another “me too” SaaS and you may find this doesn’t bode well for your longevity.

What About Pricing Structure?

Good question, and this is something you may need to experiment with before you find the pricing which is “right.” Usually, SaaS are working off some kind of tier-based pricing structure, so you need to determine what those tiers look like and how they are valuable to the customer.

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Here are some common strategies and thoughts on them:

User-based – Increasing the number of users allowed per tier is a frequent tactic of SaaS. This can work well for getting into companies, but Lincoln Murphy pointed out a flaw where it can lead to the old-fashioned view of “shelfware”, where a company has too much software sitting on a shelf. For example, if the company needs 3 users instead of the 2 users available on their current tier, they might go to the next tier which allows 7 users. They only need 3 so those extra 4 might be seen as “shelfware.”

Storage space – Apps with storage associated often offer extra for higher tiers. Again, this is very much going to depend on how valuable that is to users. You could end up with another case of perceived “shelfware” if there is a big leap in storage space that isn’t really needed, for example.

Features-based – Usually, this means customers get more features available in return for upgrading. For example, an invoice app might offer customization instead of standard, software-branded invoices. Getting this right involves a lot of research. What features do your customers care enough about to upgrade for? What do they see as valuable?

Freemium – Plenty of SaaS offer a certain set of features free, but more to customers who upgrade. This could even take the form of more storage space or users allowed to collaborate. The key to this working lies in delivering enough value at the freemium level that your customers are hooked, however, not so many features for free that they don’t upgrade.

Hubstaff illustrated this point well when they discussed their own mistake in offering a free plan. They found that free users simply brought more free users, then collectively they took up a lot of support time. One of their major conclusions? If someone values a product, they’ll pay for it. When they changed their freemium plan to $15/month, they didn’t lose all their users, they now have people happy to pay for the value they provide.

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Final Thoughts

There is no set “rule” or formula to follow when pricing your SaaS, however determining what value looks like to your customers and pricing based on that value is a better bet when it comes to a sustainable strategy.

If you use market-based values to come to your pricing decisions, the chances are you aren’t differentiating what you offer based on value to the customer at all. Also, you might find yourself dragged into a price war which is only heading in one direction…

Consider who your target customer is and what will really mean value to them long term. Finally, don’t be afraid to charge early and experiment with your pricing to find what works.

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