Did you ever have a lemonade stand as a kid?
If you did, you probably put a lot of effort into crafting the perfect “Lemonade Stand” sign. You might’ve made some halfway decent lemonade and maybe even corralled a friend or a sibling into helping you out. But what did you charge for your lemonade?
A dollar? 25 cents? Three dollars? Most likely, you picked an arbitrary price, slapped it on your sign, and called it a day.
This strategy might’ve worked for a summer lemonade stand, but for your SaaS business? Disaster.
You’ve put a lot of blood, sweat, and tears into your SaaS business, and you don’t want to do everything right but whiff on your pricing strategy and model. Pricing impacts your growth which then affects your revenue, so you need to design a strategy and model to deliver results.
If you’d charged 25 cents for a cup of your lemonade, you probably would have attracted a lot of customers, but you wouldn’t have made much of a profit, especially if you were using premium, organic lemons. If you’d charged a higher price, say three dollars, your lemonade stand would have been a ghost town, especially if there was a cheaper option down the street.
Overall, developing the right pricing strategy and pricing model isn’t difficult, but plenty of decision-making goes into the process. Below, we’ll cover everything you need to know to set up a successful SaaS pricing model, starting from the very basics of what this even is to which one is right for your business.
In a hurry? Or just want to skip around? Use the handy links below to jump to a section:
Now, on to the good stuff.
A SaaS model is built around a customer receiving a service via subscription through a cloud-based system. Remember back in the day when you’d go to Office Depot, buy the software you needed, pop the installation CD into your computer and then install it? And only then could you finally use the software?
Yeah, thankfully, those days are over, and SaaS is one of the reasons why.
The SaaS model takes all the hassle out of the software for the customer. SaaS companies handle storage, security, and updates. All the customer has to do is log in, and they’re good to go. Best of all, customers can access SaaS products from almost any device.
A SaaS business model is subscription-based, and its difference from a one-and-done “traditional” purchase of a service or product allows your business to benefit from recurring revenue. But you also need to put more thought into pricing the service.
If you’ve recently downloaded an app or signed up for any kind of subscription, then you’re already familiar with what a SaaS pricing plan looks like. A SaaS pricing plan is the cost you set for your service and how you package that pricing.
Traditionally, manufacturing variables and a profit percentage margin determine a product’s cost. For example, if you buy a blender, you’re paying for what it costs to produce that blender and a bit extra, but then you own that blender forever. SaaS pricing is more complex, with endless variables because you’re pricing your product’s value to your customers.
Because of SaaS’s complexities, determining its pricing is often challenging. Below are some of the stumbling blocks you might encounter when setting your pricing model.
Correctly valuing your SaaS pricing is essential to both your business and your customer. You want to attract customers with fair yet competitive pricing and the value of the product offered, but you don’t want to sell yourself short. You want to increase profitability and grow your business. The appropriate SaaS pricing strategy will enable you to achieve both of these goals.
Finding a SaaS pricing model that works for your business and your customer involves many moving parts. If the thought of pricing a SaaS model seems overwhelming, take a deep breath. The following steps will walk you through the process.
Consider the make-up of your target audience when pricing your SaaS product. You’ll want to keep your current target market in mind, but you may also want to consider attracting new markets with your pricing strategy.
How do you want customers and potential customers to perceive your brand? Keep in mind your ultimate market position when creating your SaaS pricing. Tiered pricing models can help you get the best of both worlds, with premium users and free users, allowing you to expand your brand.
What are you offering the customer? Can your product be broken into different packages that will attract different audiences? Can you convert free users with add-ons? Know your service inside and out to determine the best pricing breakdown.
What level of customer volume can your business handle? Pricing your service too high or too low can drastically affect customer volume. You want to shoot for a customer volume that works for your SaaS while also encouraging steady growth.
Use market research to determine how long your average customer will continue to use your product. Utilize buyer personas to target customers that will stick around for the long haul. Analyze customer retention and churn rates and use this information when pricing your strategy.
85% of management teams at B2B companies think their pricing strategies need work. Whether you cater to businesses or customers will have an impact on your SaaS pricing. As the two segments have different needs, your pricing strategy will need to address the differences. For example, a B2C company might take advantage of free versions of its product, while a B2B company might utilize a flat-rate pricing model.
Keep in mind the key considerations mentioned earlier. Analyze customer data and market research. Ensure your pricing reflects your product and what it provides your customer. Don’t forget to set up a periodical review of your pricing strategy, be it weekly, monthly, or annually.
When your customer gets to your pricing page, they’ve already done their own research and perused your website. Keep your pricing page clear and focused. Detail the features of each price package thoroughly so that it’s easy for the customer to choose the best option for them.
In line with keeping it simple, at this final stage of the purchasing journey, make sure any customer questions can be answered quickly and with minimal interruption. This will enhance the customer experience and your conversion rate. Relevant information may include FAQs, guarantees, or customer reviews. Remember to keep the page as clean as possible.
Allow your customer to pay in their local currency if you service a global market. Take into account your customer’s local market and adjust prices based on local market data. This attention to detail can help to bolster customer retention and the customer’s lifetime value.
Consider the power of psychology in your website’s design, especially on your pricing page. Use descriptive language to convince your customer that your product is essential. Make use of design elements to highlight options, like feature pricing.
Avoid generic call to action buttons on your pricing page. Highlight your CTAs with bold colors and unique text that corresponds with your branding.
Brightpearl uses their CTAs effectively on their website, as seen below:
The CTAs are clear and match Brightpearl’s branding strategy. Their “Book a Demo” buttons also entice the customer to test the service before they purchase.
Reward customers for paying in full at the start with discounts. Offer an increased discount for purchasing an annual membership. Give thought to your customer acquisition costs when determining whether to bill annually or monthly. You could also offer a discount for your highest-priced tier if using a tiered pricing model.
Gather data regularly to inform pricing adjustments. Check in on your free plans and your paid plans and make sure their features and price points are accurate. Survey customers and use this feedback to develop new packages and pursue new markets.
This pricing model gets right to the point; you base your pricing strategy on your competitors’ prices. A benefit to this strategy? If you’re new to the market and unsure of what your prices should be, this will give you an idea. You can charge less than your competitors to attract some of their customers or charge more to establish your business as a premium service.
This pricing strategy does have its disadvantages. Pricing your service below the competition could paint your business as inferior. Pricing above your competition may discourage customers from trying your service if they’re happy enough with the competition. Competitor-based pricing is tricky but may benefit startups bringing lots of new features to a service and looking to make a splash.
Another simple pricing strategy, cost-based pricing, is a one-and-done model. Evaluate what you spend to provide your service, add a little extra to ensure a profit, and price accordingly. This strategy is most similar to conventional pricing strategies, or cost-plus pricing, mentioned earlier.
And because of those similarities, it does suffer some shortcomings. You may not be able to forecast what your SaaS costs will be at the beginning. Employee costs and marketing budgets may change, eating into your profit margin and rendering your pricing strategy ineffective.
Cost-based pricing is simple and may cut it when you first start your SaaS business, but as a long-term strategy, it’s best to adopt an alternate method.
Ready to go big or go home? Consider market penetration pricing. This pricing strategy involves entering the market with low, low prices to grab customers from your competitors before they have a chance to corner the market.
Risky but effective if done correctly, this strategy sacrifices profits initially and recoups these losses once you’ve hooked your target market. Slowly increasing prices later on is one way to recover these losses, but cross-selling and upselling new products might go down better with your customer base.
With value-based pricing, you price your service according to the perceived value of your product to the customer. This diverges significantly from the other pricing models we’ve explored. Having an idea of who your customer is and using market research to gauge the benefits of your product to potential customers is essential when adopting a value-based pricing model.
If you presented a customer with your service and a competitor’s and these were priced within a few dollars of each other, which would they choose? You need to be able to quantify the value your customer sees in your product so that when the difference comes to a few dollars, they go with your service.
Because of its simplicity, per-user pricing is one of the most popular SaaS pricing models.
It works like this: Company X signs Anna from accounting up for a SaaS product using a per-user pricing model. She is one user costing Company X, say, eight dollars a month. Then, Seth from sales signs up—that’s two users, so now Company X pays 16 dollars a month. And so on and so forth.
Salesforce uses per-user pricing in their small business solutions packages. In this case, small businesses are charged per user and billed annually.
The idea behind per-user pricing is that as a company adopts your SaaS, revenue will increase.
But, there are some downsides to consider. Companies can limit the number of users to cut costs. Customers could also share log-in info, defeating the purpose of per-user pricing. Churn is more likely with larger corporations as only a few people within a company would be using the product instead of the entire company.
Per active user pricing attempts to correct some of the faults of per-user pricing. This model enables a company to adopt a SaaS product across the board and only charges for users who actually use the service. This increases usage amongst a company, ultimately leading to more widespread onboarding and increased revenue for the SaaS.
Slack is one of the best examples of a SaaS using per active user pricing.
With different pricing tiers (more on that below), Slack gives companies the option to be billed monthly or annually per active user.
For smaller teams and businesses, per active user pricing isn’t always a good fit. Small outfits often make every penny work for them, and unfortunately, per active user pricing is too much of a budget drain.
If you’ve recently purchased any kind of SaaS, you’ve probably come across tiered pricing. Tiered pricing is generally three to four packages that cover low, middle, and high price points. Each package will contain different features catering to the tiered price points.
Toggl track offers four tiers in their pricing model with packages suited to companies at different stages of growth.
Psychological pricing tip: Toggl track utilizes two psychological pricing tricks. First, they use price anchoring—The largest package, “Enterprise,” is listed first, followed by lower-priced tiers. The trick? Your brain thinks you’re getting a deal (and you probably are) because it sees the higher-priced packages first, making the other packages seem more enticing.
And the second trick—the use of the “center stage” effect. By highlighting the “Premium” choice, the eye is drawn to that package, and the mind automatically thinks it’s the best option.
Tiered pricing has the advantage of catering to multiple audiences. Small businesses and larger corporations can usually find a package that works for them with tiered pricing. And if that small business grows into a large corporation? You’ll have the opportunity to upsell to a larger package down the road.
The key to success with tiered pricing is keeping the package options and different prices clear and only giving the customer three to five package options to choose from.
Flat rate pricing harkens back to the old days in that the customer pays one fee upfront per month or annually. This pricing model is easy to present to the customer and leaves little room for confusion.
Basecamp is one of the best examples of a SaaS using flat-rate pricing.
Their messaging emphasizes that the company will only pay $99 per month no matter the number of projects or users. This is a simple and effective way to attract customers and offers an appealing alternative to the complicated per-user pricing and active per-user pricing models.
A lot of pricing models are based on users and the number of users per package.
Feature-based pricing focuses on the different features each package provides per price point. Lower-priced packages have a basic set of features, middle-priced packages add a few more on top of the basic features, and higher-priced packages will have the most features.
A clear example of this is Quickbooks’ pricing tiers.
The pricing tiers are organized left to right in order of ascending price. Each package highlights in bold text additional benefits from the previous package. This shows the customer exactly what they can get with each package so they can choose the best option to fit their needs.
This pricing model takes advantage of the boom in cloud storage in recent years. Users are billed based on the amount of digital storage they use or need. SaaS companies can make this attractive to users by offering a certain amount of free storage, followed by a tiered pricing strategy based on the required storage.
A stand-out in storage-based pricing is Dropbox.
Dropbox’s “Basic” package is free and provides 2 GB of storage for one user on up to three devices. Their next package, “Professional,” jumps to 3 TB of storage, for one user, on unlimited devices.
Similar to cell phone data plans, even referred to as the “Pay As You Go” model, usage-based pricing bills users more if they use more of the SaaS product and less if they use less. Simple.
It works well for startups and small businesses trying to cover their CAC and start small with a SaaS product. Usage-based pricing also caters to heavy use customers better as those customers will be billed if they use the service more. Usage-based pricing is popular with social media SaaS products, so it’s something to consider if that’s what your SaaS covers.
A freemium pricing strategy is one of the best ways to bring new customers in, with the hopes of converting them to paying customers later on.
Mailchimp offers a generous freemium model with basic features to hook in the customer in the hopes of their upgrading later on.
A freemium model allows businesses to get in there and use your SaaS product. Hopefully, as their business grows, they’ll upgrade to a higher tier package.
The cons of a freemium pricing model? You won’t get any revenue from freemium users. You also risk having a high churn rate as users who don’t pay for a SaaS may be less likely to stick with it.
Hybrid pricing models combine one or more of the above pricing models to serve the target audience’s needs betters.
Hubspot is a leader in the hybrid pricing model game.
They combine a tiered pricing strategy with feature-based pricing. Their “Starter” package builds on their “Free Tools” offering, a freemium option for startups and small businesses.
Finally, they work in usage-based pricing to address any growth a customer might have in their chosen tier:
If a customer outgrows their chosen tier, they can pay for more as they go.
A hybrid pricing model offers a lot of advantages. You can mix and match pricing models to find the best fit for your SaaS. Just be smart and don’t get carried away mixing in too many different models.
Choosing the right pricing model and strategy for your SaaS business isn’t going to happen overnight. If you’re starting from scratch, evaluate the different strategies and models we’ve covered and pick the ones that will work best for your business. Get comfortable with continually revisiting your pricing strategy and model to confirm it’s working for you.
Already have a pricing strategy and model you’ve been using for a minute? Pick it apart and see how well it’s been working. Is your growth where you want it to be? Is your churn rate a little too high? Compare your current setup with a different model and strategy combo. Plan in advance to implement your new pricing and make sure it’s clear to your new and existing customers.
If you’re concerned about losing existing customers once you flip the switch on the new pricing model and pricing strategy, don’t panic. You can simply test the new model and strategy on new customers and grandfather your existing customers. Or examine the metrics on your customers and their relationship to your product. It might make more sense to bite the bullet and move everyone to the new pricing strategy and model.
One of the simplest ways to optimize your pricing is to invest time in your pricing strategy. Simply setting it and forgetting it won’t benefit your business in the long run. Conduct market research to make sure you’re pricing your product correctly. Survey your customers to make sure your product’s value for price ratio is balanced. And don’t forget to keep an eye on your competitors.
On the ball when it comes to pricing strategy maintenance? Try out some psychological pricing tactics to drum up results. One effective psychological pricing tactic is to price packages with an amount ending in the number nine, or “charm pricing,” as it’s known. While $500 and $499 might not seem that different, your brain will see $499 as a better price because of the “left digit effect.”
Shopify uses the “charm pricing” effect below:
Not sold on charm pricing? Try highlighting your bestselling package; a banner reading “most popular,” as per the Quickbooks page earlier, will increase mental messaging, indicating that it’s the best option to choose.
To sum up, the functionality of your SaaS pricing model is going to depend on many factors. What works for one SaaS business might be a total disaster for yours. Create your pricing strategy and model combo, give it a test run to see what works, and regularly follow up with your plan.
As they say, when life gives you lemons, make lemonade; or, a banging SaaS pricing model.