As a start-up founder launching a SaaS product, determining how to price your offering is one of the most crucial decisions you’ll make. Set your prices too high and you risk limiting growth. Go too low and you leave money on the table and struggle to fund operations. Pricing a SaaS product is an art form that requires balancing multiple factors like customer value, willingness to pay, and operational costs. In this article, we explore various SaaS pricing models and strategies to help you land on a pricing approach that fuels growth while keeping your start-up financially stable in this competitive landscape. With the right pricing plan matched to your product and audience, your SaaS tool can take off and become a key driver of revenue and success. But get it wrong, and your business may never recover. The stakes are high, so read on to learn how to price your SaaS product for maximum impact.
Popular SaaS pricing models: Per user, per seat, tiered, and usage-based
There are several popular pricing models for SaaS products:
Charging per user is a simple model suitable for collaboration tools or CRM software. You set a price per user per month that provides access to your platform. For example, £10/user/month. This works well if you have a product that scales as more users are added. Consider offering volume discounts for larger teams to make it more affordable.
Similar to per user but specific seats or licences are purchased to access the software. For example, a “Pro” plan may allow 5 seats for £200/month. Unused seats can be reallocated to new users. This model ensures predictable revenue but may limit growth if prices are too high. Offer a free trial to overcome initial barriers.
With a tiered model, you offer different plans at varying price points based on features. For example, Starter (£20/month), Professional (£50/month) and Enterprise (custom). This provides flexibility for customers with different needs and budgets. Be very clear about what features are included in each tier.
For software where usage can vary significantly between customers, a usage-based model charges based on metrics like storage, bandwidth, transactions etc. For example, £0.01 per SMS message sent or £0.50 per gigabyte of storage. This model aligns costs closely with value, but your revenue can fluctuate. Consider minimum monthly fees or limiting excessive use.
In summary, analyse your product and customers to determine an optimal SaaS pricing model. A mix of models may work well too, but be careful not to confuse your customers or sales team in the process! Keep pricing simple and focus on the value you provide.
How to choose the right SaaS pricing model
As a SaaS business, choosing the right pricing model is one of the most important decisions you’ll make. The model you select will significantly impact your revenue, growth, and customer acquisition strategy. There are a few common options to consider.
Charging per active user is a popular model for SaaS products. It’s easy for customers to understand and scales with their usage. However, it may discourage some customers from adding more users. For a finance SaaS, a per user model could work well if you charge per finance team member.
With tiered pricing, you offer different service levels at different price points. For example, you could offer basic, professional, and enterprise tiers. This model gives customers flexibility and room to grow with your product. The challenge is properly differentiating the tiers and not cannibalising your higher price points.
Rather than basing prices on features or usage, value-based pricing focuses on the value delivered to the customer. You determine a customer’s willingness to pay by understanding their business outcomes and charging accordingly. This model typically results in higher revenue but requires additional effort to quantify and communicate the value.
A single flat monthly or annual rate is very simple but may leave money on the table if some customers would pay more for higher usage or additional features. For a finance SaaS, an annual flat rate could appeal to smaller companies wanting budget predictability. You would need to set a rate that balances affordability for smaller customers with viability for your own business.
In the end, you may use a hybrid model that incorporates multiple options. The key is understanding your customers and what they value, then developing a pricing strategy that aligns their needs with your own business goals. With the right model in place, you'll be well on your way to building a sustainable SaaS company.
Pricing factors to consider: Customer value, market conditions, competition
When determining how to price your SaaS product, several factors need to be weighed carefully. Getting the strategy right is key to sustainable growth and long-term success.
How much is your solution worth to your target customers? If it solves a critical pain point or enables key business processes, customers may be willing to pay a premium. Analyse how your product creates value and impacts key metrics like reduced costs, increased revenue or improved efficiency. Price accordingly.
What are competitors charging for similar solutions? You need to be in line with the overall market to be perceived as reasonably and competitively priced. However, don’t get caught in a race to the bottom. Focus on communicating your product’s unique value to justify your pricing.
Who are your main competitors and what are their pricing strategies? You may need to price lower to win over their customers or gain initial traction. Alternatively, if you have a superior solution, you can likely charge a premium. Either way, keep a close eye on competitors and be ready to make adjustments to your pricing strategy as needed to stay ahead.
Additional factors to weigh include:
- Your overall business and revenue model.
- Costs to build and maintain your product.
- Expansion into new markets or customer segments.
- Current stage of growth (e.g. start-up vs. established company).
Getting your SaaS pricing strategy right is challenging but critical. By thoroughly evaluating various factors and combining data-driven analysis with experience and intuition, you can land on an approach that fuels sustainable growth and long-term success. Review and revise as needed to keep your pricing competitive and aligned with your evolving product and business.
Communicating value: Product differentiation, customer success, free trials
Communicating the value of your SaaS product to customers is key to adoption and retention. As a founder, you need to effectively demonstrate how your solution solves their problems. Here are a few ways to do this:
Highlight what makes your product unique. Focus on specific features and integrations that set you apart from competitors. Explain the key benefits and outcomes your product delivers. Case studies and customer testimonials are great for showcasing real-world value.
Demonstrate how you help customers achieve meaningful results. Share metrics around increased efficiency, cost savings, revenue growth or other KPIs. Explain your onboarding and support process. Highlight any partnerships or certifications that build credibility.
Offering a free trial is one of the best ways for customers to experience your product first-hand. A free trial allows them to onboard themselves and see exactly how your solution works to solve their challenges. Be sure to provide resources and guidance to help them get the most from the trial. Many customers will convert to paying subscribers if they achieve real value during the trial period.
Articulate your key differentiators, the problems you solve and the outcomes you drive on your website, in your marketing materials and when talking to prospects. Help them understand why your solution is the best choice for their needs. Focus on specific benefits and results, not just features and functions.
Using a combination of these techniques, you can successfully demonstrate the value of your SaaS product to customers and motivate them to subscribe. Be genuine in your messaging, provide real proof points and make it easy for them to experience your product for themselves. With a compelling value story and satisfied customers, you'll build a sustainable business poised for growth.
Optimising and adjusting your SaaS pricing strategy
Optimising your SaaS pricing strategy is an ongoing process that requires continuously testing, analysing data and making adjustments. As your business grows and matures, your pricing model and price points will need to evolve. Some areas to focus on include:
Regularly review key metrics like churn rate, lifetime value, and customer acquisition cost. If churn increases or lifetime value declines, it may indicate your pricing is too high. Adjust downwards and monitor the impact.
Track what your competitors are doing with their pricing. Are their price points higher or lower? Have they recently increased or decreased prices? Their moves can inform your strategy. You may need to reposition your pricing to stay competitive.
Survey your customers to determine how they value your product and what they consider a fair price. Their input can uncover opportunities to increase pricing without pushback. It can also highlight where you may be undercharging for the value provided.
Discounting and bundling
Use short-term discounts and bundle pricing to drive new customer acquisition when needed. But be very strategic, as frequent discounting can condition customers to only buy at a discount and negatively impact your pricing power.
If you significantly increase prices for new customers, consider “grandfathering in” existing customers at their current price to avoid pushback. But avoid giving away too much revenue by phasing in moderate price increases over time.
Freemium to paid conversion optimisation
For SaaS using a freemium model, continuously test ways to optimise the conversion of free users to paid subscribers. The more paying customers you acquire, the more flexibility you have with your pricing strategy.
Optimising your SaaS pricing strategy requires an iterative, data-driven approach. But with time and experience, you'll gain valuable insight into how to set the right prices to maximise revenue while keeping customers happy and churn low.
Pricing is both an art and a science, so continue testing and iterating to find the sweet spot that maximises your revenue and growth. Remember, your pricing is a key tool for communicating the value of your solution to customers. Get it right, and you'll accelerate your path to start-up success.