New tools to improve performance
on December 27, 2021 (last modified on December 20, 2021) • 18 minute read
98% of SaaS companies have reaped positive results from the core changes they made to their pricing.
Want to make sure you’re among these companies seeing positive results? Remember: the right price offers value to customers as well as to your business.
So, in this guide, let’s walk you through how to price your SaaS product the right way. We’ve got experts sharing tips to price your SaaS tool as well as advice on which pricing models work best.
Here’s what you’ll learn:
Pricing any product correctly – not just a SaaS – does two things: encourages customers to buy and gives you the profit you deserve.
Without it, at least one of the two sides is at a loss. For example, if customers think you’re charging more than they can pay, they’d switch to competing SaaS products.
On the other hand, if you’re providing value and charging customers less than what your product’s worth is, you’d be at a financial loss.
To add, pricing your SaaS is often influenced by several factors such as the product’s marketing strategy, your revenue objectives, and the market you’re targeting.
All this sets the need for taking the time to work out how to price your SaaS product.
With that, let’s look at SaaS pricing models that you can explore for your software.
This pricing model is based on how much a customer uses your product – similar to postpaid phone services. In that, you only pay as much as you use the phone.
This pricing is best for SaaS providers serving both small businesses and enterprises. Why? Because it ensures both are paying as per their pocket’s allowance.
Meaning: small businesses don’t have as much usage as large ones so they only pay for what they use.
The user-count pricing model is based on how many users in a company are using your tool.
For example, a customer may have only three team members, whereas, another may have a team of 25 people. Both will pay for your SaaS based on their users.
One caveat here: some of your customers might not appreciate the pricing model since it doesn’t allow them to grow without raising their costs.
This model provides your service in packages based on a fixed price and specific features. In doing so, different tiers have different features and users can select based on their preference.
The tiered pricing model is great for offering your SaaS based on buyer personas such as small businesses, single users, and more.
Keep in mind: limit offering too many tiers as those can cause choice paralysis or an inability to make a decision based on the wide variety of options available. Unsure how many tiers to provide? Stick with the market average of 3.5.
The flat-rate model offers what its name suggests: one price for all product features. In a way, it’s the opposite of tiered pricing and it gives access to the entire tool to all customers.
Although simple to strategize, the flat-pricing model comes with a downside: some of your features may remain unused by certain customers. The same feature may be more frequently used by others. This means some of your features might not get the exposure (and, subsequent, appreciation) that they deserve.
To overcome the downside of flat-rate pricing, there’s the per-feature pricing model. This one charges based on features availed. So customers pay only for features they want to use and you can encourage them to upgrade by educating them further.
If certain features aren’t used by enough customers though, you won’t be able to get your hands on the usage data.
It’s not easy to know which KPIs to track for sales, marketing, and customer success in a SaaS company. There are many possibilities, and so much to do! Why not start with the basic metrics that determine the health of your company?
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To set up this Stripe dashboard, follow these 3 simple steps:
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Let’s now walk you through proven tips on how to price your SaaS product. Keep in mind that these are expert tips coming from the horse’s mouth itself – folks in the SaaS industry.
Of these, 77.3% run SaaS companies. 18.2% of respondents come from agencies working with SaaS brands and the remaining, 4.6%, are SaaS investors.
Here’s an overview followed by the details:
“A value metric allows you to have essentially infinite price points, maximizing your revenue potential,” opines Adam Korbl from Amplify Ventures, Fill App, and iFax.
“In practice, you’ll never show infinite price points on your pricing page, sales deck, or mobile conversion page, but you may have a customer come in at a certain level and then grow.”
Says Korbl: “Think about the ideal essence of value for your product? What value are you directly providing your customers? In addition, quantified personas and segments are beautiful tools when used properly, personas act as a constitution within your business to centralize your focus and arguments about direction.”
“For SaaS, the most important pricing tip is to identify the different customer cohorts your product has, then to offer different price tiers tailored to each cohort,” Castos’ Craig Hewitt highlights.
Taking this approach means you need to take a thorough dive into who your customers are and the features valuable to them. It’s only then that you can plan and offer useful tiers.
“This approach ensures you provide the most value to your customers, while at the same time maximizing your revenue,” Hewitt points out. “Once you have implemented a tiered pricing strategy you can run tests to further optimize it.”
“Don’t be afraid to charge more,” advises Jane Portman from Userlist.
It’s counter-intuitive, but high price communicates high value, high quality, and also improves adoption.”
This doesn’t mean you don’t stick to your promise though. When you charge well, your product and service should reflect it too. That’s how you’ll be able to retain customers who were attracted by the high-price-high-value concept.
“A tool that costs a noticeable amount of money will be treated seriously,” adds Portman. “In 2020, we ran an experiment at Userlist and introduced a $9 plan. This looked like an amazing idea, but it turned out to be a failure,” Portman explains backed by an example.
“Nobody from that cohort became a successful customer. Some of these users failed to convert to a regular plan, others just kept paying $9 without ever using the tool. We removed this plan after 3 months, and never looked back. Moreover, we increased the pricing further, and it only brought us great results.”
The right positioning encourages customers to realize your SaaS product’s worth. Get your positioning wrong though and your tool would never speak to (and attract) your target audience.
“The most important thing you need to establish is the positioning of your SaaS product,” shares Philipp Wolf from Custify. “Why? Because that’s how you choose the pricing strategy as well.”
Wolf shares an actionable mini-guide: “Before you decide between freemium, free trial, a combo of the two, or neither, you must consider these factors:
In short, “answering these questions, you’ll see if the price is correct and if customers are willing to pay it,” continues Wolf. “To choose the right pricing strategy (and price) you must know if and how your SaaS product is going to help potential customers.”
In a nutshell: Understand the value your product offers and position it in the market based on that. Then, price it accordingly.
Deepti Chopra from Btw.so summarizes what we’ve discussed so far: “Pricing is based on two key factors: charging for the value that a user would derive from your product and targeting the right audience.”
Chopra also points out that the best way to find the best answer is to talk to your target audience. Or, if you’re an established tool, looking to revise your pricing strategy, talk to your customers.
“Decide pricing by conducting qualitative interviews with your target audience,” in Chopra’s words. “Understand if the pricing you have in mind fits well with your target audience. Run A/B tests to determine which price is more sensitive to an increase or decrease and choose accordingly.”
Wingmate’s Oscar Henderson agrees. “We’ve found when pricing our different solutions that the single most effective strategy is to speak with your current customers and understand how they perceive your offering’s value.”
“Due to the competitive world of B2B SaaS companies, price is possibly the biggest separator,” Henderson observes.
“Many of our competitors are priced far higher than any Wingmate product, however, we built each solution to reflect the same value.”
Put simply, what helps is: “A SWOT analysis of both your current market and your own operation is critical when pricing your products,” Henderson recommends. “I’d suggest being realistic about what your target audience is willing to pay and adjusting accordingly.”
This works when your aim is to maximize profitability according to Matt Arceneaux from 301 Digital Media (Nashville, TN).
In that case, “the best way to price your SAAS product is to ensure that the CAC (customer acquisition cost) is lower than the customer LTV (Life Time Value),” Arceneaux shares.
“The best way to attract new customers is to back-load your profitability by front-loading discounts, coupon codes, and free trials.”
On the other hand, “If the objective is to grow your customer base without a focus on profitability, try a mix of multivariate pricing testing, qualitative research and offer strong lifetime discounts and then convert and upsell as their needs and businesses grow, etc.,” writes Arceneaux.
Related: 12 Tried and Tested Tips for Increasing your SaaS Average Deal Size
Inheritance Advanced’s John Marsano agrees with keeping your CLTV in mind when determining how to price your SaaS product.
To this end, Marsano shares, “Your pricing strategy is influenced by your business model. SaaS pricing, on the other hand, restricts your sales model alternatives. It is important, for example, to ensure that your customer LTV is high enough to support a costly field sales staff,” Marsano says.
“Over a two-year period, you’ll struggle if your average consumer spends $50 per month in total sales. As a result, it is critical that you have a clear picture of the buying process in mind while creating your buyer persona,” Marsano suggests.
Related: 16 Essential SaaS Sales Metrics You Should be Tracking
“The biggest tip is to nail down the right metrics for the SaaS product and not blindly copy whatever your competitor is doing,” advises Jae Jun from Gorilla ROI.
“Look across different industries at similar business models to see how the products are priced.”
Sharing the team’s experience, Jun explains, “In our case, we copied the competitors and offered a similar low-cost and flat pricing model. What we found was that our unique selling proposition clearly differentiated our product from the competitors and we were attracting upper-end customers rather than beginner or small customers.”
“We were losing money by offering a cheap price for complex and technical customers who were more concerned with making their work easier and faster using a good tool, than saving an extra $50 a month,” Jun continues.
Our cheap prices were also a turnoff to potential customers as it was perceived as a low-end product. A clear pricing metric also clarifies the roadmap for how and what we should offer our target customer.”
This is crucial so that your pricing covers these costs rather than putting you at a loss.
“Operating costs are connected with the help and association of a business regularly,” Mobitrix’s Jonathan Tian points out.
“Working costs consolidate direct costs of items sold and other working expenses as often as possible called selling, general, and legitimate, which join rent, finance, and additional overhead expenses, similarly as regular substances and upkeep costs.”
“Working costs reject financing-related non-working charges, similar to income, adventures, or new cash understanding,” adds Tian.
In short, Tian says: “you ought to have a complete perception of what it costs to offer the help.”
“Finance managers routinely don’t fathom their applicable costs and worth their SaaS things improperly, leaving a slight advantage. Fortunately, development utilitarian costs will by and large float down, helping keep your edges strong over the long haul that is on the off chance that you esteem your organization suitably from the start,” notes Tian.
Related: 11 Experts Share Their SaaS Growth Hacking Secrets
Now that you have a fair idea of how to price your SaaS product and what to look at as you create a pricing plan, let’s show you which strategy is the most valuable.
Briefly, value-based pricing comes on the top with 63.6% of our contributors agreeing that the pricing strategy works best for SaaS.
18.2% also say competitor-based pricing is the best while 4.5% think cost-plus pricing is good.
Let’s now explore why these pricing strategies are the most preferred:
Competition-based pricing is pricing your SaaS product based on what others in your industry are charging.
This is mostly valuable for new software ventures that don’t have a name in the industry yet. So they work out a pricing plan that doesn’t charge more than the market price without first establishing their value and positioning. Plus, the competition analysis also saves them from setting a price on the lower-end.
If you can explain the value you offer though – think: excellent marketing and product positioning – then “don’t be afraid of setting higher rates than the industry average,” advises Dmitriy Bobriakov of Youhodler.
“Even if you’re a beginner, never be afraid to set high rates if you feel your product is worth paying for. Deliver an increased value that your competitors don’t deliver,” Bobriakov comments.
“Then, sort out how to tell people that you deliver that value – to develop a perception that you deliver it. You can sell your product for higher prices if your product is providing a much better solution.”
“There are many ways to do this and it depends on your market,” points out Bobriakov. “Your chances of success also depend on the market. Some markets carry such a heavy perception of a commodity that this is tough.
It may be useful to narrow your market definition in order to make that value more specific. In other words, one segment of the market may be more receptive to what you can offer than other segments. In that case, adding focus can be a tremendous advantage in trying to maintain price integrity.”
Content Base’s Jay Bats also commends competition-based pricing. The reason? “You’re in business because your product is designed to answer a specific need, so keep that objective in mind when you consider price and the marketing effort you’ll put behind it.”
“Maintain a level of competition when entering the market without needing to be the cheapest. Don’t put yourself in a bind by underpricing your offering.
If your price is unusually cheap, you may face a marketing conundrum, as potential customers may believe you’re selling a poor product.”
Summarizing Bats says: “With the pricing strategy you use, there should be a certain level of prestige associated with your brand and product. New pricing may be necessary as the value of your program rises.”
This strategy prices products based on their perceived value to the product’s user.
“Value-based pricing is the only pricing model that your SaaS business should pursue,” opines,” VinPit’s Alex Wan.
“With value-based pricing, you look outside rather than internally at your own company or laterally at your competitors,” Wan observes. “You ask your customers for pricing information because they are the ones who will make a decision based on your price.
As a result, your pricing matches exactly what customers are willing to pay for the value you deliver.”
Michael Redd of Quala.io is of the same view. “SaaS businesses should strive for value-based pricing: the price should reflect the value the consumer receives.”
Redd points out, “there are two important considerations for this strategy:
In summary, here’s what Paul Burke from Groupshop concludes, “In general, value-based pricing makes the most sense but the stage of your company can also impact your pricing strategy. Charging a lower price in order to grow market share can be a smart move if there is a high cost to switching products.”
“No two companies are equal, so the best pricing strategies differ,” Jennifer Stapleton from Social Rise notes.
“I’d avoid cost-plus pricing, as I see it as a lazy way of setting prices. Notice how others all have some sort of logic behind them (e. g. price low so we grow quickly). While cost-plus is just a wild guess.”
What’s more, Impact Pricing’s Mark Stiving goes on to say, “there is not a single answer. If your product has network effects, then definitely use penetration or even freemium to build the user base quickly.”
“If you are entering a competitive landscape, you need to be priced relative to your competitors,” notes Stiving. “Customer perceived value and your costs should always come into play as you set pricing.”
In conclusion, it’s clear that there’s no one answer to how to price your SaaS product. The correct answer, however, depends on your unique product, market, and target audience.
Having said that, it’s important to note that value-based pricing is highly applauded. Base this strategy on conducting customer or target audience interviews to research what they are willing to pay.
At the same time, look at your SaaS tool’s value internally based on growth and churn, for example.
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