SaaS product pricing is one of the essential questions presented by digital disruption. As companies migrate operations to the cloud, pricing has only grown in complexity. Regardless of industry or location, it’s challenging to effectively transform products or services into reliable recurring revenue streams that enable scalable growth.
The options are almost endless, so teams must take a nuanced approach when considering the value of what’s for sale and their go-to-market strategies. No two plans will be the same. Unlike traditional pricing methods, a competitive analysis will only get you so far, particularly in industries where SaaS pricing disrupts customer expectations. The old rules no longer apply, and pricing should differentiate you from the competition rather than match the market.
Profitability will depend on your ability to understand the value of your offering and add value where it matters most. SaaS product pricing is as much about services as software, so most companies need to rethink how they approach everything from sales incentives to market research and even customer service.
SaaS migration is a complex process that requires strategic insights and flexibility. There are no one-size-fits-all solutions. The content below explores essential factors for getting the price right, but it’s not a template. Instead, companies should use these as guidelines for a deeper conversation around product pricing.
1. Consider the pros and cons of the top 8 pricing models
One of the core tenets of effective SaaS product pricing are the SaaS pricing models. Although the finer details of your pricing strategy will come later, it’s wise to familiarize your team with the most popular strategies up front so that you can make an informed decision about which models might be effective for your products and services. Fully understanding the pros and cons of each strategy should help you decide which one suits your needs, and it can be easier to consider the many other factors involved in pricing once you’ve an idea of the kind of billing model you want to implement.
Rather than simply copying what your competitors offer, consider the customer first. Would they prefer monthly or annual billing? Or perhaps a mixture of both? Does it make sense to charge them based on usage and do you think you could cost-effectively run a free trial? It’s hard to really understand the implications of each of these strategies without first briefing yourself on the common pricing models, which is why we’ve included a guide to each one below. Step one should be to brief your team on the strategies that align best with your products and services, so you can start narrowing down your options and making some decisions about pricing and billing structure.
Consider these pricing model guides to help with your SaaS product pricing
2. Let perceived customer value be your north star using buyer personas
One of the core components of any effective SaaS pricing strategy is perceived customer value. It doesn’t matter what you think your services are worth if your customers don’t also see the value in what you’re offering. Even more so than in traditional models, the perceived value of your products and services must be central to any conversation around price. It should be a higher priority than your billing model, the features, and competitor pricing.
Conduct a deep dive on your target customers and build buyer personas to guide your subscription strategy decisions. At all times, you need to advocate for these personas and understand what they get when they pay for your services, i.e. what pain points do you remove and the core benefits of your product. Understanding how much customers gain in measurable value from your services will make it easier to narrow your price range to something that best fits the target personas.
3. Understand Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC)
Several churn metrics will be part of your SaaS product pricing journey, particularly as you tweak pricing over time. However, it’s wise to focus on just two in the initial phase: Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC).
Even rough estimates will influence your sales strategy, and knowing the projected value of a new customer over time will impact the amount you can spend on customer acquisition. LTV needs to be substantially higher than CAC for your pricing to be effective. As common sense might dictate, you need to make more from a customer over time than you spend on acquiring them.
Those used to more traditional sales may want to create awareness that customers often spend minimal amounts upfront for their subscriptions in the SaaS world. Sometimes revenue and acquisition costs won’t align in the first months of a new product launch, and finance teams need to focus on the long-term projected revenue. Otherwise, they risk setting too high entry-level prices to attract a substantial market share.
4. Boost conversions with SaaS pricing psychology methods
When deciding how to price SaaS products, it’s essential to understand the role psychology will play in the customer journey. Whatever pricing you decide on, convincing customers of the value and getting them through the sales funnel will require effective implementation of UX and pricing psychology tricks. Not all these methods work for every strategy, but some combination will likely help you successfully launch your SaaS product pages.
5. Consider sales models and incentivization carefully
It’s also worth spending time considering the transformation for sales. Pricing often directly correlates to bonuses and incentivization programs in traditional pricing models, and with SaaS products, this may have to shift. People are the heart of organizations, and you need to include them in pricing conversations, particularly in departments like sales that the transition will directly impact. It’s better to have sales teams in these conversations and work together to reimagine how SaaS migration will transform roles and payment structures.
6. Understand the cost of delivering customer service from day one
Companies default to pricing based on features or product descriptions, often forgetting one of the most valuable components of their offering—people. If you intend to offer customer support and training, you need to include these services as a product feature when calculating how much you can charge. You’d be surprised how valuable the service side is over time. Chat support, knowledge bases, learning centres, and implementation managers are all resources customers will value.
Before you set the price of your product, ask yourself how you’re charging for support and maintenance. Question whether or not you’ve conveyed the value of the service side on your product pages. Excellent customer service may end up being what differentiates you from your competitors.
7. Long-term impact of discounts should be carefully weighed
It’s best to exercise caution when experimenting with freemium pricing or significant discounting. Sometimes these can be good techniques to secure market saturation or as part of a market penetration strategy. However, these strategies run the risk of creating a lower perceived value for your product and services. It can also be challenging to service a large influx of new customers if you estimate conversions inaccurately and find that more people are taking advantage of free or heavily discounted services than you intended.
Being wary of too many new customers might seem counterintuitive. Yet, if users do not receive the right quality of service or training, you may find higher than anticipated churn rates. It will be much more challenging to chase leads who’ve already trialed your service and had a bad experience. It’s much better to think about pricing from the ideal customer’s perspective (presumably someone who pays for your services and products) and limit discounts and free trials.
8. Hit the sweet spot by trialing hybrid strategies and tweaking approach
It’s relatively common in the history of companies to copy competitors. Yet, this approach lacks the strategic edge required to handle the levels of disruption industries are seeing today. It’s not that you shouldn’t take inspiration from what others have done before, but there’s wisdom in looking in unlikely places for ideas that might help you differentiate your SaaS product from all the rest. A hybrid approach to pricing allows you to mix and match between different billing models, frequencies, and psychological tactics, adopting a tailored strategy that best first your product and services.
Implementing the right SaaS product pricing
Once you’ve decided on a price or a range of prices, it’s time to determine how to implement your new strategy. You will need to build out collateral and product landing pages, but there’s also the back-end to consider. You will need the right tools to make the most of your pricing tactics and partner with a company that has experience handling more complicated pricing and billing models.
Subscription Billing Suite allows you to handle the complication of SaaS pricing models for revenue recognition and deferrals. So, whether you want to bill your customers monthly, quarterly, or annually, it may just be the solution for you. Why not find out more in the case study below.