Pricing your SaaS products isn’t only a matter of math.
Of course, numbers are involved. Weighing factors like ROI, production costs, and so forth, is crucial. If the margins become non-existent, then the price is wrong.
However, once you crunch the numbers, you’ll find they open Pandora’s box to an array of other questions about pricing.
Really, it’s one of the most precarious balancing acts out there, and there’s no precise formula that’s going to give you a magical answer.
Instead, you need to consider factors such as why customers need your product, how you positioned your solution in the market, customer behavior and psychology, and supply and demand.
The wrong price in even the right market will drastically damage your bottom line. If your model is too expensive, then people won’t pay. Conversely, if you charge too little, it’ll be more challenging to generate the return you’re looking for—and people may doubt the product’s quality.
These factors are only scratching the service of everything to consider with pricing. So, read on as we take a deeper dive into how you should go about uncovering the right SaaS pricing model for your business.
The Mentality Behind Pricing Your SaaS Products
How Do You Assess Value?
Comparing your value with that of your competitors flies in the face of sound price modeling.
Don’t limit yourself to thinking only as far as your competitors. Approach your product’s value through the lens of the currently accepted solution in the industry you’re trying to disrupt.
For instance, look at a company like ConvertKit. If they’re introducing new automation software to the market, their value won’t be estimated through the perspective of a company switching to them from HubSpot.
The sounder method would be for ConvertKit to calculate the value of their SaaS product based on how much an organization would benefit from adopting automation. This calculation, of course, is dependent on if the company in question has never used such technology.
In this instance, marketing automation software isn’t a sure thing for companies to have implemented. Many businesses rely on entire suites of marketing tools with less-than-stellar functionality.
In this scenario ConvertKit offers a seemingly simple solution. But what happens with SaaS products that are trying to catalyze a shift in industries with established solutions?
Where Valuing Your SaaS Gets Complex
Knocking renowned SaaS organizations off their perch isn’t what we could call a common occurrence.
Here’s a sports metaphor:
Imagine trying to start a new baseball team in New York, down the street from the Yankees and Mets. This new team can offer all the bells and whistles in the world, but there are organizations in the market that have a firm hold on things.
Here’s a more direct illustration of the issue:
CRM systems are a widely used tool by most web development agencies. So, if you’re trying to make a state-of-the-art SaaS product of that ilk, you might be fighting an uphill battle. That’s not to say it’s one you’re going to lose—but you have to offer literally 10-times the value of current players in the market to make an impact.
Meaning, you have to compare the revenues of a company using their existing CRM and ensure that you can increase that number by 1000%.
Even if your product is of superior quality, unless you offer exponentially more than the entrenched solution, corporations aren’t going to overhaul their sales operations. A slight improvement isn’t enough.
Make Pricing Flexible and Versatile
Most of the time, limiting your SaaS product to one kind of customer won’t pay any dividends.
Tiered pricing is a common strategy that’s utilized in the SaaS market because there are different kinds of customers that can use products for a variety of reasons.
Namely, a Fortune 500 corporation with 15,000 employees will have needs and generate value that drastically differs from a small business with 50 staff members.
Rely on Your Intuition
Many factors go into how much value a customer can gain from your products. They may not take the time to learn the various intricacies and how to use it with optimal efficiency. These types of consumers will gain very little from what you’re offering.
Whereas customers can end up spending every waking moment using your product and master it to the point that it makes them a fortune. And suddenly it seems like they’re paying you too little.
Only once your product has reached the market will you have a better idea of the average kind of value that it provides customers. You’ll have more metrics that allow you to form a more educated guess.
Always keep in mind, however, that nothing discussed in this post is set in stone.
Pricing is a lot like the Bruce Lee mantra of flowing like water. In other words, you must “go with the flow” when it comes to finding the right model for charging your customers.
Be ready to make adjustments when necessary and strike when the iron is hot when it’s time to increase—or even decrease, etc.
Pricing That’ll Inspire You
We could talk about the theory and mentality that goes into savvy pricing models for your SaaS products all day.
Unfortunately, it all means very little without practical examples of SaaS organizations that understand the finer points of pricing.
So, without further adieu, let’s look at who has got their fingers on the pricing pulse:
Upscope’s Per-Seat Pricing Sent Profits Soaring Upward
Upscope’s technology allows users to see what their customers are seeing with intuitive, interactive screen sharing.
The company notoriously struggled to find the correct pricing, with a laundry list of failed models behind them.
But now they’ve doubled revenue in charging per agent (with a minimum of three) and offering a tiered plan (i.e., starter, business, and enterprise).
Specifically, Upscope charges 1/10th of the value that customers get from the product.
We discussed how it’s unlikely that you can get a precise calculation of the value your clients can get from the product. Making it a more accurate hypothesis is the fact that Upscope ensures that the right businesses use their product, so they’re almost guaranteed to experience positive results.
In fact, Upscope is happy to let companies know if they don’t think their product will be an ideal fit.
Mention Stopped Mentioning their Free Plan as Frequently
Mention provides brands and agencies with SaaS technology that helps with monitoring the web, listening to audiences, and managing social media.
One crucial change helped spearhead a 269% increase in revenue for Mention—they stopped aggressively advertising their free plan. Pushing it so hard perpetuated the perception that the product wasn’t valuable.
Also, free services inherently make it more challenging to sell comprehensive packages.
Furthermore, Mention’s old pricing model focused on the number of users when it came to pricing plan selection. As a result, the organization struggled to find success within marketing teams or companies. On top of that, for any new user, customers would have to pay more.
With the new model, the number of alerts (Mention’s key feature) was the first selling criteria. Clients now get a fixed amount of users based on the number of desired alerts.
At the crux of Mention’s success is that it’s a tool for particular employees within an organization as opposed to everybody in the company. Therefore, the specified primary feature should be at the center of pricing.
Drift Only Charges Customers Using their Products
As the world’s top conversational marketing and sales platform, Drift helps businesses connect in real-time with the customers during that exact moment they’re ready to buy.
Drift’s free plan is the strength of its pricing model. It’s meant to give customers a taste of what they’ll get out of the tool. Once they start using the product and see the need for more functionality, they’ll begin paying.
Those who download the free package and don’t use it will fade away into obscurity. Whereas those using the app will be more than happy to pay for more. The amount being paid is distinctly reliant upon how much value the customer extracts from the product.
In short, if you’re charging people for NOT using your product, it’ll contribute directly to customer churn.
We previously discussed how Mention pushing a free plan was detrimental to the perceived value of your product. Still, note that the company didn’t REMOVE their free plan, they just stopped marketing it so aggressively. Having an unpaid, baseline package gives customers a taste of what your more versatile packages can bring to the table.
Pricing is a Delicate Art
The most essential aspect of pricing your SaaS products is to make it as much about the people you’re serving as possible.
You’ll find, most often, that consumers will happily pay if the product brings them genuine value. So, there’s no need to be a shrinking violet if your research shows that your product can bring a lot to the table.
Beyond that, ensure you’re charging customers who use your products and establish your technology as a difference-maker in its given industry.
From there, pricing your SaaS products won’t seem so overwhelming.