Generate More Revenue: Master the Art of SaaS Pricing
According to a study conducted by ProfitWell, SaaS companies, on average, spend six hours defining their pricing strategy which, you’ll understand by reading this article, is not enough.
There’s no doubt that you put your sweat and blood into creating your software, but without a coherent pricing strategy, all that hard work may have been in vain. Monetisation is a core piece of the SaaS puzzle and a lever that you must use in order to maximise revenue.
There are no one-size-fits-all when it comes to finding a price for your program, however, there are a few good practices that we’ll show you in this article.
Why SaaS Pricing Is More Strategic Than You Think
Pricing is a key element when choosing the right software
In SaaS, like in many other industries, the price isn’t just an amount you spend, but a real strategic choice.
It’s first and foremost a decisive element when deciding to buy one software over another because:
- It’s limiting: Some businesses, especially those who are financially limited, will off the bat eliminate software that doesn’t fit into their aligned budget.
- It positions you on the market compared to your competition: it immediately gives your prospects an idea of the quality of your system and your overall brand. Therefore, you shouldn’t go overboard when it comes to pricing.
- It could give you a competitive advantage: only if your different offers and prices are clearly defined and displayed (we’ll go into more detail later on).
☝️ What are the consequences of a poorly set price?
- Too low a price: can cause you to lose money, and could also be harder to justify a price increase in the future for customers.
- Too high a price: can cause potential clients to reconsider, in favour of more well-known software programs with similar pricing. On the flip side, it could also frustrate users who don’t think the number of features matches up with the price.
Pricing: a growth opportunity in its own right
Normally, when companies want to increase their revenue, they turn to client acquisition, however, monetisation can be much more powerful.
According to a study among 500 SaaS companies, conducted by ProfitWell, using monetisation to your advantage can be four times more effective in driving up revenue, compared to acquisition. It might be worth spending a little more time on, right?
To understand it, you have to calculate the ratio between Customer Lifetime Value and
- If the ratio is above 1, that means you’re not losing any money when you sell your products.
- The further the ratio gets from 1, the faster you create value and revenue.
🤑 According to the same study, businesses who review their pricing once per year had a ratio three times larger than those who didn’t. Furthermore, companies that continually optimise their prices have a ratio more than ten times higher.
5 SaaS Pricing Models to Test Out
Package Pricing
Also called a flat rate, this pricing model has a recurring, either monthly or annually, fixed price with the same features for everybody, regardless of the number of users.
Advantages:
- The software isn’t restricted to just internal usage, due to the unlimited number of users allowed, outside parties can also be invited and collaborate alongside.
- What’s more, third parties will also have access to all the same features as you.
On the other hand, this model may not be the best suited for smaller businesses, as they may end up paying for features they don’t need or use. In the end, this may push them to look for a more adapted software, most likely from a competitor.
Summary: For SaaS companies, it’s an easy model to handle and manage
- A sole offer is easy to understand and, more importantly, sell
- Calculating your total revenue is a breeze, via your MRR (Monthly Recurring Revenue) or ARR (Annual Recurring Revenue).
- Strategic decisions resulting from pricing will be much simpler.
The flip side of the package pricing coin is that you limit your revenue expansion because you’ll inevitably lose customers by changing the price. There will be some users who don’t consider the program “premium” enough any more, and there will be others who think the new price tag is too expensive.
Per-User Pricing
This model is especially used among SaaS companies, based on the same concept as the flat rate, this allows software makers to adapt to different sized businesses.
Your solution will, therefore, be more accessible to smaller-sized businesses than a flat rate with a higher price. What’s even more important is that they’ll have access to all the features at a comparatively lower cost than a fixed-rate program.
Calculating overall revenue will also be just as easy as the fixed rate model.
However, there are a couple of drawbacks:
- You could, potentially, be discouraging larger businesses, with a lot of employees, from pulling the trigger on your system.
- Some businesses might limit their usage to just a few employees to avoid paying too much, limiting your revenue expansion.
💡 Note: There’s also another variation of this model, per active user pricing. It’s used by Slack, and it allows businesses to sign as many users up as they want, while only being billed for the ones that regularly use the software. This model is definitely a good halfway point to convince sceptical or hesitant prospects to take the leap.
Per-Use Pricing
Also called “pay as you go”, this model, as the name indicates, charges customers only for what they use.
This could apply to several things:
- Certain options
- Storage space
- Number of emails sent
- Number of pages analysed, etc.
The advantage of this is that it can adapt to a wide variety of situations, and more importantly, businesses whose consumption varies each month.
The downside of this is that since customers only pay for what they use, it’s hard to predict overall revenue.
Feature Packs
Increasingly popular among SaaS companies, this model offers several versions of the same software, but with different features for different kinds of users, at varying prices. We’ll cover it a bit later in this article, but just keep in mind that if you do choose to go this route, you shouldn’t offer more than four versions, to avoid losing potential customers.
One advantage of this model is that feature packs are nearly always clear, the customer can easily see the hierarchy of versions available, which one offers more features compared to the others. By doing this, your customers focus on the comparison of your different offers instead of comparing them to your competition.
One disadvantage, however, is that this model demands a lot of effort, in terms of defining your marketing personas. In order to perfectly define your offers, you’ll need the following information:
- Essential features
- The most valuable features and services
- The price your persona is willing to pay to get them
This definitely is not our favourite model, far from it, but it can work if you constantly have an updated idea of customers’ expectations.
Freemium Model
This popular model allows companies to offer a free, base version of their software, with the possibility to add premium, paid features. The main idea is about getting rid of any barrier that stops prospective customers from discovering your system, all the while nudging free users towards paid options.
The free version must be both:
- Sufficiently developed and high quality to convince users to try it
- Limited, to make it difficult for users to resist trying the paid options
For example, you could allow users access to a specific feature, but limit it in scope, or completely block access to it.
The advantage of the Freemium model is that it allows users to try your software, without having to spend a dime. Prospects can easily try it out for some time, and then if they like it, they’ll be more inclined to go for the paid options.
7 Psychological Techniques to Find a Price That Converts
Reference Price
Everything in life is relative, that’s even more true when it comes to pricing. People, according to their point of view and life experiences, have different interpretations of what is expensive or not.
This technique, which is also called price anchoring, is based on the assumption that the first price listed will always be used as a reference to any future prices. If you see a lower price, you’ll be more inclined to buy, because your brain thinks that compared to the first price, it’s a good deal.
Example: Restaurants use this technique all the time on the front of their menus, they put a featured high price item first, so when you look at the other dishes they’ll seem less expensive in comparison.
In the example below, the software Convert places the most expensive version first. You first see $8,000, which is pretty steep, but when your eyes spot the $500, it seems cheap in comparison.
The Magic Number 9
Have you ever noticed that most prices end more often than not in a 9, not 0?
This psychological lever is also heavily used in the world of SaaS. When our brains read a number, we have a tendency to only retain the numbers on the left, therefore 499, for our brains, looks more like 400 than 500.
Gumroad Marketplace conducted a study regarding transactions on their own site, and they found that the conversion rates were much higher for the prices that ended in 9 compared to those ending in 0.
The results speak for themselves:
Reduced Price
This one is a little like the reference price tactic. If you ever discount your software, you should leave the original price next to the new, discounted price, for comparison. The brain will automatically associate the software with the more premium price, with the added benefit of paying a lower price.
However, you have to be careful with this one, it has the potential to degrade your software’s perceived value and negatively impact your entire business.
☝️ Profitwell did a study on the impact of discounts on 88 SaaS companies. What they found is that too high of discounts increase the churn rate or the rate at which customers stop doing business with a company.
Therefore, we’d recommend keeping discounts as a last resort sales strategy for your sales team.
Trial Pricing
Offering your software at a reduced price, for a limited period, can help encourage prospects to take the leap and subscribe to your program.
Even if the subscription price increases after the trial period, the discounted price allows them to try out the software and see if it actually corresponds to their needs and what they’re looking for. Those that do like the program will be more than willing to pay the full price after the trial period is over.
The advantage to this, compared to a free trial, is that users have to enter their payment information, which is a major barrier to get over. After that, it will be much easier to get them to continue using the software.
The Decoy Offer
Have you ever been browsing for a product and had to choose between two or three options, and one of them is ridiculously expensive? Well, more likely than not, that’s done on purpose.
Companies often offer three similar products, one clearly overpriced, one slightly lower, and then one that is significantly lower than the previous two. Just like with the reference price, your brain automatically thinks the lowest priced option is a good deal, compared to the expensive option.
The Middle Price
Mid-priced options tend to be the most popular among consumers. Normally, the price isn’t too low or too high, compared to its perceived value, and when it comes to software, it usually offers the majority of features that clients are looking for.
Taking this into account, your company can play off of this like many others. For example, put the middle option in bold in your pricing section to make sure the customer immediately notices it.
Here’s a good example:
Curate Your Offer’s Presentation
Not that long ago, pricing was a touchy subject, salespeople usually didn’t bring it up until they were sure that they closed the deal.
Thanks to SaaS and other companies, this has all changed. Businesses now proudly tote their pricing, and use it as a competitive edge against their competitors. They even dedicate a whole section to it on their website. We even go as far as to say that the pricing section of your website is the most important. Did we really just say that? Yes, we did. And we’ll tell you why…
The pricing page is the dealbreaker, even if prospects love the features, ultimately they’ll make their final decision based on their budget.
For each offer, make sure you include these three elements:
- the offer’s target audience
- key features
- price
That’s it? Yup. If you want, you can eventually add the discounted monthly rate for an annual subscription, to really reel in potential clients.
On the design side of things, curate your pages as much as you can. Think of the pages of your website as a shopfront, the better they look, the more willing prospects will be to try out your software. Add colour, make the call-to-action eye-catching, and do anything you can to draw the client’s attention to your offer.
When Is It the Right Time to Change Pricing?
As we saw, regularly optimising your pricing ensures overall better performance for your business. However, it also affects your clients too.
Make sure to:
- Justify pricing in case of a price hike, an example of a justification could be:
- additional features
- a revamp of the entire platform allowing for a smoother and overall better user experience
- Review your offers by creating new packages
- Don’t go overboard with changes, gradual modifications and price hikes will make sure clients aren’t too shocked
You probably shouldn’t change your price right after launching your software though, give your customers and prospects a little time to get a good sense of what your brand is about. Once you’re more established, then you can start playing around with the prices a bit.
Well, now that you know everything, when are you going to start reviewing your pricing strategy?