How to Determine Pricing for SaaS Products
The right Software-as-a-Service (SaaS) pricing model will help you attract more customers and sell more subscriptions, increasing your regular monthly income. However, figuring out how to accurately price a SaaS product can be challenging.
What is SaaS Pricing or SaaS Pricing?
Software as a Service (SaaS), is a type of software that is hosted online and distributed to customers on a subscription basis. So much about the success of a SaaS product depends on a smart pricing model. With this in mind, developing a well thought out pricing plan is essential
SaaS pricing is a software pricing model in which customers pay on a subscription basis for online software usage. The target market, revenue objectives, and marketing strategy of a product or service affect the price. If price is a determining factor when buying a SaaS product, then an attractive pricing model can help.
Why is SaaS Pricing Important?
Pricing the right SaaS is important for two reasons: it provides value to customers and gives the company a competitive market advantage. Customers may choose not to resubscribe if they feel your prices are too high, but you also need to charge enough to keep your company afloat.
In all cases the customer always makes sure that they are paying for something that is worth the money. They don't want to subscribe to your service and feel like they're not getting what they paid for.
A business wants SaaS software to think like the customer's point of view. You want them to reflect on their decision and say it was worth it. This is known as the cost-to-value ratio or cost-to-value ratio. When you choose a pricing model that provides the best cost-to-value ratio, you will become a viable market competitor.
How is SaaS Pricing?
Before deciding on the actual price tag to put on your SaaS product, first select a generic pricing strategy. After that, you can set SaaS fees for different subscriptions and tiers. The results of a good SaaS pricing strategy are cut-and-dried, but getting to this price can come from a variety of pricing strategies and models.
SaaS Pricing Strategy
1. Cost-based Pricing
Cost-based pricing is a basic pricing strategy. Companies will evaluate the costs they will incur from providing services, such as product development and employee salaries, and increase those amounts by a certain percentage point to ensure that they are generating a return on their investment.
Cost-based pricing is a safe option, and it's easy to understand and calculate. However, there are also disadvantages to using this strategy. Expenses are not always predictable in advance, and there is no way of knowing whether your income will cover all of your expenses. Problems can arise along the way that can derail your initial estimates, and you may lose revenue. Cost-based pricing also does not take into account competitor pricing.
2. Competitor-based Pricing
Competitor-based pricing involves using competitor pricing as a benchmark. Your product or service is valued above, equal, or below competitors. In this case, using a competitor's price point can give you an idea of the price you should be making, as you don't want to start too high or too low and make customers question the value of your product.
This model is a valuable strategy for companies marketing new SaaS software. Since your service hasn't been in the market long enough for customers to guarantee its value, you need other ways to capture market share.
Using competitor-based pricing is very easy. Basing prices from competitors means you are using their strategy and not yours. However, a company puts out new software because they believe that their software is the best on the market and is more valuable than competitors' offerings. If you use their standards as a benchmark, you may be looking down on your own business.
3. Penetration Pricing
Penetration pricing is a type of promotional pricing strategy in which a company reduces prices temporarily to generate demand quickly. This is usually marked with a set time frame, which you may or may not disclose to the customer.
For example, if you reduce product costs by 50% but only for the first 100 customers. The limited time frame may leave customers feeling the need to make a quick decision, which can be in your favor, especially if your prices compete with competitors' prices.
Penetration pricing is possible but only if your SaaS product is new and untested. This pricing model can be useful for generating immediate action. In the long run, however, you'll need another pricing strategy.
The continuous penetration pricing model might lead consumers to think that your service is struggling to gain users, prompting them to question its value.
4. Value-based Pricing
Value-based pricing is when products and services are priced based on how much value you will provide to your target audience and how much value they think they are worth. This strategy focuses not on the company's costs or competitors' prices, but on what the target audience wants from the software or product.
If customers are willing to pay for your services because they understand the value. You can price your services higher than your competitors and generate more revenue. This model also allows re-evaluation if you need to make changes or updates to your service.
This strategy is a more difficult SaaS pricing strategy to adopt. Value-based pricing takes a lot of time and commitment — it requires understanding who your customers are, what they want, and how much they're willing to pay.
The advantage is spending time understanding your customers. Talking to them in person can also help you develop a relationship with your intended target audience.
5. Freemium Pricing
Freemium pricing is a common SaaS pricing strategy in which businesses offer free and limited versions of their products to increase signups. Although the free version can be used for a long time, companies usually limit advanced features unless the user upgrades to a paid subscription.
This strategy offers an attractively priced version of the product — free. And when users are ready to upgrade, they turn into paying customers. This is an effective way to get more customers and grow your SaaS business.
However, the freemium strategy has its drawbacks. If you offer a strong free product, users can stay subscribed for free forever. That's why it's important to limit useful features without frustrating users. If you limit too many features behind a paid subscription, you may annoy users outside your platform.
It is important to determine which strategy suits your business and marketing targets. Understanding the wishes or perspectives of customers is also important with the maturity of business planning and sales of the goods or services you offer.
Therefore, the balance between these factors becomes a major role in the execution of your business. As can be learned by company executives through the Marketing Pricing Strategy program, the right pricing will also greatly determine the future of the product in the future.