Software and SaaS product pricing strategy is the topic that raises the most questions among start-ups and seasoned enterprises alike. After all, this is the most crucial factor of your business success and a wrong approach in the product pricing strategy can cost a business a lot of money. Various company departments usually have strong personal opinions on the topic and reaching a consensus between them becomes increasingly difficult. This is where mistakes are made.
Often we can observe a charge less than competition approach, which many companies perceive as safe and can never go wrong approach. This is wrong only by the fact that a low price can result in money leak, and it can also affect your brand credibility as a result.
Unfortunately there is no golden rule or silver bullet when it comes to developing a successful product pricing strategy, there are several universal steps that can help in your decision making.
Step1: What are your goals?
A good starting point of each product pricing strategy is developing a goal framework. As many company departments are involved in this process, it is important to reach an agreement on what pricing and packaging should look like to satisfy each team in the pursuit of their goals. The two initial steps in this process would be:
- Develop the intended customer profile
- Identify the goals that sales, marketing and product development teams are trying to achieve.
The typical product pricing and packaging components are:
- Price point
- Billing term (one-time, monthly/annual subscription, on demand etc)
- Pricing model (Freemium, free trial, paid only)
Your business goal priorities can help you identify which price points, pricing models and terms are appropriate and effective. The common business goals usually include:
- Conversion (new customer acquisitions and user base growth)
- Market share
- Profitability (factors and margins that support the business model)
- Long-term value creation (optimizing for expected LTV and repurchase over customer acquisition)
- Cash (funds available at hand and maximizing it to fund the business)
- Inventory balancing (using discounting and bundling to maximize the product sell-through)
Step 2: Identify your target customers
The target customer profile plays an important part in sales and marketing decisions, pricing model and price point are key decisions here. For a start, ask yourself these questions:
- What is the main purpose of your product – Is it a productivity application, entertainment or development software?
- Is your product intended for personal or work related use? – Is it intended to serve consumers, freelancers or businesses?
- How many people would be involved in the purchase decision making? – if your product is business oriented, oftentimes business users need to be differentiated as end users, or top level management who have company-wide authority.
Step 3: Focus on value
This is the most important step in developing your product pricing strategy, as customers care only about the outcomes and how they affect them (in pre-purchase phase of course).
To do this, it is important to understand your customer’s goals, opportunities, problems etc.
For example, if you sell a marketing automation solution which can be replicated in-house, it is important to calculate the cost of doing so. In other words, if your solution saves $10k for your customer, this is the exact value that your product delivers. Divide this number by 10 and you get your product price point. If you can explain to your customer that your solution delivers 10 times the ROI, then you are on the right track.
Starting from this, you can explain why your company charges a premium price for this product – so that you have a large enough margin to provide this extraordinary value and experience.
Conclusion and takeaways
If your company departments agree on who your target customer is, the business goals and their priorities, product’s perceived value, then pricing and packaging decisions can be made much more efficiently and result in a more successful product pricing and stronger purchasing rates.
Remember to always put yourself in your customer’s shoes to understand their motivations.
Keep an eye on competition. Never forget that buyers always do their homework when it comes to comparison shopping. Your competition can be a good example to identify the price point your customers are comfortable with. It is always important to know, who your potential clients compare you with.
If your pricing is complex (which is sometimes unavoidable), make sure your throw in extra effort into buyer education as part of your sales & marketing efforts.