Blog / InspirationThursday, June 11, 2020
One of the most challenging aspects of marketing and selling a product is deciding its price.
Pricing can represent a puzzle and is one that every SaaS business will face.
However, pricing your SaaS platform doesn’t have to be a stab in the dark.
A price that is too high might struggle to attract customers. A price that is too low might leave you wishing you had set the price higher.
As well as looking at pricing from this perspective, you should also look at it through your customers' eyes. The reasons why a high price might put a customer off are clear. However, too low a price might also put customers off. People are smart. People will question why a price is low. Many people will even pre-judge that a product can't be particularly useful because it isn't expensive enough.
Many business owners look at pricing as a simple dynamic. That's why many businesses opt for a price that's a little cheaper than the competitor they most want to mimic.
However, doing this might not just be short-sighted; it risks massively underselling yourself and your product.
That’s not to say that it won't ultimately be the best approach to take. Still, you should ensure you consider many options and find the optimal pricing strategy for your business and SaaS platform.
You might also want to look at price elasticity, which we cover in another recent article[KT1] .
Choosing the right pricing strategy will help you to maximize both profit and revenue from your SaaS platform. Let’s look at some of the most common pricing strategies that are relevant for SaaS businesses and the dynamics of them.
Competitive pricing is what we alluded to earlier. You use your competitors as a benchmark and then price your SaaS platform accordingly.
What could you do?
Competitive pricing can be a great strategy to follow as it gives you a foothold against your competitors and a reference point for anyone comparing you.
However, it can also lead to your product being significantly under or over-priced. Under-pricing can be particularly dangerous if your service costs a lot to maintain. Over-pricing isn't as big a risk, but ideally, you should look to sell your product for whatever you feel it is worth.
Freemium pricing is popular in the SaaS niche. Many companies use freemium plans to offer users a basic version of a platform.
The main idea behind freemium pricing is to give users a flavour of how a SaaS product works. Companies that offer freemium versions want you to love using freemium so much that you feel like you need to pay for a better version with greater functionality. It's also an opportunity for you to build trust with customers before you take payment details or their money.
One of the biggest problems attached to freemium models is that many customers never "convert" to a paid package. Consequently, you still have the maintenance and customer service costs of dealing with them. You're making a loss on every freemium customer that doesn't start to pay for your services.
For this reason, it can be better to offer a free trial rather than a freemium pricing tier.
When you offer a free trial, you can time-limit this, putting a sense of urgency onto the customer to try everything you have to offer before deciding on whether to purchase. The free trial also means you aren't continually making a loss, hoping people convert. However, you will need to monitor how many people "stay on" as customers after their free trial and take constant action to maximize conversions.
Another benefit of offering a free trial as an alternative to freemium is it gives you a chance to show off your product in full. Free trials with full product access give users a much greater appreciation of what you offer and may improve your chances of earning conversions.
High-low pricing is uncommon in the SaaS space. Still, if you have a platform that targets customers in a specific niche, it could be something that works for you.
In a retail context, high-low pricing is the cycle most products go through. A product has a high price when it’s fashionable and in-demand, and a low price when it’s out of fashion and no-one wants it. You’ll usually find such products in a clearance section.
How can high-low pricing be adapted for SaaS, and why might it appeal to you as a seller?
The first thing to acknowledge is that it won't look the same for SaaS as it will for retail. You don't want your platform to lose popularity to the point where you need to reduce prices to get people to sign up!
However, you can reduce the price at certain times of the year. Alternatively, you can hold events such as "Flash Sales" where you send out promotions to your mailing list segment of subscribers who aren't customers. Your low pricing can be anything from a reduced monthly cost to a free period of use, depending on your revenue model.
While high-low pricing can be a great way to spike demand, you can also quickly alienate customers who signed up at the full price or who have been loyal to your brand for some time.
Another potential drawback will be that people will quickly realize that you periodically offer discounts for signing up. You might see new subscriptions dramatically slow while you're offering a higher price.
A penetration strategy can be a fantastic way to get attention to your SaaS product. It can help to kick start your revenue and cash flow if you're launching a new product.
The idea behind penetration pricing is that you will initially price your product much lower than you plan to in the long-term. Thus, you will attract customers quickly and penetrate the market, hence the name of this strategy.
Once you have subscribers and become better known, you would then start to increase the price. How you do this is up to you. Many SaaS and other subscription-based businesses follow a grandfather pricing strategy, which locks in the price existing customers pay. While there is some debate over the effectiveness and worth of grandfather pricing from a business perspective, it can be an excellent approach to reward early adopters to your platform. However, you will need to be able to drive new subscribers to your SaaS product even as you increase the cost. Do your research, too. There is likely to be a sweet spot where your existing customers will pay a little more without unsubscribing. The same price may also be an attractive price to new customers!
We touched on premium pricing when discussing the potential merits and ways to approach competitor pricing.
In a nutshell, the purpose of premium pricing is both to project an image that your product is of high-value. Still, if it costs a lot to provide, then you may want to price it higher regardless of the image you're trying to convey.
Premium pricing is not usually a wise strategy for new or lesser-known SaaS brands. Why would a person pay what you ask for when they haven't heard of you, and you're asking for far more than the brand they've used for years? Unless you have a vast suite of added features, it's unlikely to work.
That said, premium pricing can be something that you work towards as a business target. One day, you want your platform to be good enough that you can justifiably charge $X per month! If you plan to continue to develop your SaaS platform, you can gradually increase the pricing and eventually reach a point where you'd be at the premium space in the market.
Value-based pricing can have some worth for a SaaS business.
Value-based pricing is where you price your product or subscriptions at the price customers are willing to pay. Offering value-based pricing can be useful from a business perspective in terms of building loyalty and goodwill. However, if you're continually changing your pricing, it may become confusing for both existing and potential customers. It may also play havoc with your forecasts as you look to project future revenue and plan business investment and growth.
As you can see from the dynamics of each pricing strategy discussed, there is a lot of overlap between them. Likely, you will eventually settle on a plan that encompasses two or three of the options included here, while also keeping a close eye on your competitors and what they're doing.
Whichever option you choose, remember that the best means of building customer loyalty and growing your business is to provide an extensive range of features and benefits. Deliver these alongside exceptional value and service to make a genuinely successful SaaS business!
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