SaaS Pricing Guide

The SaaS Pricing Guide You Need To Achieve Maximum Revenue


Gone are the days when pricing your product simply meant evaluating your costs and adding a little extra for profit. Many business owners that sell SaaS online are skilled in developing products but get tripped up when negotiating a pricing model that reflects the product's value, yields a fair profit, and demonstrates what the customer is willing to pay.

A SaaS pricing strategy differs from traditional software pricing because customers regularly pay instead of making a one-time purchase. This lends itself well to allowing developers to offer many flexible pricing options.

Pricing significantly impacts revenue, therefore, getting the pricing strategy right is arguably one of the most important factors of SaaS success. While the different SaaS pricing strategies and models might feel daunting, this comprehensive guide shares what you need to know about pricing your SaaS product for maximum revenue.

Know Your Market by Using 2 Techniques

Identify Your Client and Their Needs

The first step is to figure out your target audience, as it often is! Then carefully look at how you can monetize this audience and then retain their business for the long term.  Simply put, this is done by determining your target market and creating detailed buyer personas.

Client Needs

Identify your customers’ pain points and needs and determine what problems your product can help them solve. Ask open-ended questions to extract information that will help when creating your pricing structure.

Then, segment your customers into target tiers. Each tier will have specific needs and create different values for your product. If you do this, you can easily create various pricing plans for these tiers based on a well-thought-out strategy.

Identify Current Pricing Trends

In the early stages of contemplating your pricing plan, research the most popular pricing models in the SaaS industry, and study the current trends, such as machine learning pricing and transparent pricing. Hyperlocalization, personalization, or automation are the focus right now, and understanding them will help you create the right pricing model. 

It’s essential to stay consistently aware of the changes in the pricing landscape because the consumer's behavior generally dictates the market. You don’t want to confuse customers. So, make sure you are getting your audience’s attention and responding to their needs appropriately. Always pay attention and follow SaaS pricing trends that have proven to be successful.

The 4 Main Questions You Need to Answer to Price Your SaaS

You need to know your SaaS product inside-out in order to value it correctly and create the best pricing plan for your business.

We suggest considering these questions:

What type of SaaS product are you offering?

What are your unique product features?

Who are your competitors?

What is your cost of development?

 

The answers to these questions will give you the necessary context for investigating all the different pricing packages.

4 Pricing Strategies for SaaS

A pricing strategy is a way of determining different price points for a product or service. Multiple pricing strategies exist in the market, but only you know what is best for your business. We’ve put together the pros and cons of the most popular strategies to make those pricing decisions easier for you. Read all about them and see which is the right pricing strategy for your company.

4 Pricing Strategies for SaaS

Cost-Plus Pricing

Cost-plus pricing is the traditional way of pricing a product: take your costs, add a percentage for profit, and there you have it: your price. Let's say your product costs $80 to produce. You may charge $100 to make a $20 profit. As a SaaS company, for instance, your costs may include research and development, design, and personnel among other things.

Because of its simplicity, this is a popular pricing strategy. It’s a safe choice since you’ll always make some profit. However, cost-plus pricing won’t necessarily maximize your revenue. For example, if your running costs are low, you could possibly be undervaluing your product. Additionally, you could end up losing revenue if there are unforeseen costs that weren’t covered in your early calculations.

Competitor-Based Pricing

The competitor-based pricing strategy involves setting prices according to what others in the same market or those with similar products are charging. This can be a good strategy if you’re just starting out and unsure where to aim your pricing. You don’t want to aim too high and scare customers away, or on the flip side, price too low and cause them to question the quality of your product. This delicate balance can be understood by knowing what is available to your potential buyers.

Competitor-based pricing is definitely straightforward but not necessarily foolproof. You should view your product as bringing in more value to the user than your competition and charge more for it. Don’t assume your competitors are pricing their products correctly. Do your research and then come up with an accurate price that suits your product and business plan.

Penetration-Based Pricing

With this strategy, many SaaS companies purposefully reduce prices to increase demand. The goal is to break into the market before your competitors do. This usually involves lowering prices for the short - and perhaps even medium-term to make up the revenue later by upselling and cross-selling to customers. For example, one tactic is to offer your first 100 customers an unbeatable deal before your pricing increases.

This strategy suits new businesses whose products are not yet tested. Generally speaking, this kind of pricing yields immediate results. However, it’s not a long-term strategy and can result in making your customers think your product doesn’t hold much value. It’s also not financially sustainable, so it should be used only as a first step towards a more permanent and long-term pricing strategy.

Value-Based Pricing

Many experts view value-based pricing as SaaS businesses' most effective pricing strategy. This is because rather than focusing only on your business needs or looking to other competitors, you focus on the customers who matter most.

This pricing strategy aims to meet the customers’ needs while pricing the product at the value they are willing to pay. Simply put, if the customer is willing to pay more, you can charge a higher price.

This strategy is flexible because you can usually keep in touch with your customers and adjust as needed when you see fit. Another benefit is that you are building relationships with your customers, which is also advantageous in many other business spheres.

However, the downside is that it takes a lot of initial effort to generate the necessary data. You have to connect with your customers deeply. Also, different tiers of customers may find different value in your products, so it may be tricky to lock down pricing.  This is a rather complex strategy that requires careful analysis and continued thoughts on working through the structure.

7 Best Pricing Models for SaaS

A pricing model is how you package the pricing of your product or service. Once you’ve chosen a pricing strategy, you can select a pricing model that best suits your SaaS business and makes you feel comfortable that you will generate the maximum revenue. Many SaaS companies use one or more of these seven major SaaS pricing models we discuss below and do our best to help you work out which is the best pricing model for your business.

Pricing Models for SaaS

Freemium Pricing

In a freemium pricing model, you offer a basic free-to-use product, with paid packages available in order to access more features. This is part of a tiered strategy. The idea is to draw more customers in with a free version, which generally has limited capabilities. Later, sales and marketing teams follow up and encourage users to upgrade to acquire more functionality. One example of a SaaS business using freemium pricing models is Zoom's video conferencing platform.

The benefits of the freemium model are quick initial adoption and low customer-acquisition costs (CAC). Your product can also become widely known through word of mouth. It’s possible to monetize, as you can use ads in the free version and push reminders to upgrade as customers come up against the limits of the basic functionality being offered. The free version makes for a great place to test new features without affecting the area of your business that is generating revenue.

However, there are downsides as well. Free users don’t generate revenue for the company so you’re carrying the costs of acquiring both free and paid customers. Typically, only a small percentage will convert to paying customers. Churn is also high with free customers, as they are less likely to value something for which they aren’t paying and then decide to no longer use it. And if your product offers real value to users when it’s free, they may not be willing to pay for it later.

Freemium should be seen as a first step to driving leads and should only be attempted by businesses who know how to convert these leads to paying customers.

User-Based Pricing

User-based pricing model means SaaS companies are charging per the number of customers they have, so obviously more customers mean more revenue. It’s a simple system that makes it easy to forecast revenue, so it has become a popular model. An example of this model is the graphic design platform Canva, which uses the model.

The most significant benefit here is simplicity. Customers can calculate their monthly costs, and then efficiently work out their revenue as the business scales. It also gives all users full access to the product, unlike freemium or other models.

On the other hand, the user-based pricing model can put your revenue at risk of being compromised with login abuse, where multiple people use a single login to avoid paying more. Also, if financial situations change for the worse with your customer, their organization may limit the number of customers using your product to save money. And your pricing isn’t value-based, meaning users might not appreciate the actual value of your product and therefore churn out.

Meet PayPro Global.
Your Unique eCommerce partner

Stop guessing the right price for your product. Trust PayPro Global to help you with your SaaS pricing strategies and start growing your business with our complete payments solution. Driving revenue has never been simpler.

Flat-Rate Pricing

Flat-rate pricing keeps it simple ‒ a single product, one set of features, and one price. A one-size-fits-all strategy, where customers are charged one rate no matter how many users there are or what amount their usage is. The communication tool Basecamp is an excellent example of flat-rate pricing.

This model is easy to sell and communicate to customers. They can sign up effortlessly, as the decision-making process is very straightforward.

However, it does leave you with just one opportunity to get the customer on board. There’s no personalization, flexibility, or customization. If they aren’t happy with your offering, you’ll lose them. You can’t upsell them. And generally speaking, your pricing is aimed at a specific market, so breaking into new markets can be challenging to say the least.

Usage-Based Pricing

This model is “pay-as-you-go”. If you use more of the product, you’ll pay more. Use less, and your bill decreases. In SaaS, you could use a purely usage-based pricing model or combine it with a base subscription fee. One example is Huminos, an OKR and growth culture software that uses this pricing plan.

For customers, the benefit is that the price only scales with usage. This is attractive to low-usage customers since they know they can start small and increase costs over time. On the flip side, heavier users are then accounted for, and no spending is wasted on them. It’s a fair system that is adaptable, and it can and does attract a broad audience.

The downside is that this model disconnects your product from its value. You could lose out on per-user revenue since you would not be charging e based on the size of an organization. It’s also tough to predict revenue as your customers’ usage may vary significantly from month to month. This also means it’s difficult for customers to predict and monitor costs. Some customers may churn because their expenses get too high, and, in their minds, usage doesn’t equate with value.

Tiered Pricing

Tiered pricing models are some of the most popular amongst SaaS business owners. A tiered pricing strategy offers a number of different packages to customers. The packages may provide access to various product features or be based on the number of seats and usage, each priced differently. The number of tiers can vary across businesses, but most often, it’s low, middle, and high price points. Developer of software products Hubspot uses this model.

Here you can cater to multiple buyer personas, from low users to heavier. The customer chooses what suits them best. You don’t undercharge customers or raise prices based on what they are willing to pay, and it’s easy to upsell for increased MRR (Monthly Recurring Revenue) since when a customer reaches the limits of their monthly fee plan, they can then upgrade.

But too many pricing tier choices can become confusing and difficult for a customer. From the business side, offering too many options can make pricing overly complicated. It’s worth noting that if you have any heavy users, you can’t collect any extra revenue from them past a certain point.

Feature-Based Pricing

The feature-based pricing model is similar to tiered pricing, but the tiers are based on features as the valued metric. More features and functionality equal a higher price. The customers, therefore, scale along with the product as they grow. Evernote uses feature pricing to price its note-taking app.

It allows customers to only pay for what they need, saving them valuable dollars and making this an attractive option. And they can always upgrade when they need more functionality making it affordable for businesses. You can put your most costly features at the highest tier, managing your margin effectively.

The tricky element of per-feature pricing is knowing what features customers will want and need. Sometimes they don’t even know this themselves, and you’ll have to tell them. They need to be able to access enough features not to feel resentful of what is locked in the higher tiers. At the same time, you ensure that the functionality, and therefore your profit, is not concentrated in the lower, cheaper tiers.  

Per Active User Pricing

The per-user pricing model is a variation of the user-based model. Businesses choosing the user pricing model only bill customers who are actually using the software. A team can sign up as many users as they want but will only be charged for those who use the software. Messaging app Slack is a popular example of per active user pricing.

This is beneficial for customers, since, at an enterprise level, they don’t take as much risk when trying a new product. But it doesn’t work as well for Small and Medium-Sized Businesses (SMBs). You may also come up against the problem of multiple logins as companies try to cut corners.

Meet PayPro Global.
Your Unique eCommerce partner

Stop guessing the right price for your product. Trust PayPro Global to help you with your SaaS pricing strategies and start growing your business with our complete payments solution. Driving revenue has never been simpler.

 

9 Steps to Choosing the Right SaaS Pricing Model

Selecting a pricing model is an ongoing process that needs to be not only customer-focused but regularly revisited. You’ll need to gather data and consult various sources. Only then can you put the pieces together to finalize your pricing. We suggest these  tips for getting started:

1. Check your finances against projected revenue.

This will help you evaluate where you are financially and where you’d like to be in the future.

2. Conduct research on what your competitors have to offer.

This can be done through a competitive analysis focusing on their strengths and weaknesses. Then, you can either decide to beat their price or their value.

3. Analyze and optimize the relevant metrics.

Know your LTV/CAC value, as this can help you determine whether a pricing model will be good for the general health of your business.

4. Pull other teams into the pricing conversation.

Marketing, Product, Sales, and Management teams can all offer valuable insights.

5. Utilize your buyer personas.

Using the information you have previously gathered, create buyer personas to effectively position your product in the market and reach the correct audience.

6. Develop pricing tiers.

Create different pricing structures that fit all your buyer categories, from startups to enterprise-level customers to package and sell your product effectively.

7. Consult your current and prospective customers

Always ask for feedback. It is very important to stay in close contact with your audience and to seek out customer opinions because frankly, they know best.

8. Make sure you don’t undercharge or overcharge your client.

If you undercharge, they’ll most likely undervalue your product. However, if you overcharge, you could send potential customers to your competitors.

9. Choose a strategy and plan

Always take the time to develop an operating method that best suits your business model while continuing to make small changes to your pricing plans until you reach the best solution.

Using SaaS Pricing Models to Boost Your Revenue

By choosing an optimal pricing model, you’ll be able to gain an advantage over your competitors. A Price Intelligently study found that pricing is four times more effective than the acquisition of customers in terms of improving growth. FOUR TIMES!

In SaaS, success means your LTV must be much higher than your CAC. By pricing effectively, you’ll be lowering your CAC by targeting ideal customers and increasing your LTV through higher prices and better retention of customers.

Optimizing pricing is vital for better growth, a more resilient business, and higher revenues.

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How can PayPro Global Help?

Our complete, all-in-one eCommerce solution gives you the tools you need to test various pricing strategies. From trials to freemiums or demos, PayPro Global helps your SaaS business identify the right way to engage different customer profiles and, ultimately, validate the best-performing model for your needs. 

Additionally, thanks to our AI-power SaaS metric and BI tools, you can back all your business decisions with real-time data. You can easily monitor the entire SaaS sales process, use the over 70 reports we offer, and decide on the correct pricing strategy capable of significantly boosting your revenue.

The Right Guidance To Help You Grow

It’s true. One of the key growth drivers for SaaS businesses is identifying the correct pricing strategy. And that means experimenting. Before you get on the testing boat, make sure you know all there is about the pricing game. Dig deeper into the subject with PayPro Global’s Founder & CEO Meir Amzallag, and make the most of your pricing.

Concluding Thoughts On How To Price Your SaaS For Maximum Revenue

Pricing for SaaS products can be confusing and overwhelming, but it isn’t impossible. Do the research, keep your customers top of mind, and try strategies and different pricing models until you find the one that suits your business and will generate the maximum revenue. 

At PayPro Global, we’ve been in the business of helping companies that sell video games online, software, SaaS, and other digital goods grow their business globally through localization strategies. Our platform is robust, offering you the marketing and sales tools you need to scale, and our team is experienced in payment solutions and able to get you up and selling immediately.  We can help you strategize not only your pricing but work with you as your trusted partner in all things eCommerce.

FAQ

What is SaaS pricing?

SaaS pricing is a business model where you charge customers a recurring subscription fee for access to your software. This can be done on a monthly or annual basis, and usually allows customers to cancel their subscription at any time.

How is SaaS pricing done?

SaaS pricing is generally done in two ways: subscription-based or usage-based.

1) Subscription-Based sass Pricing

With subscription-based pricing, customers pay a recurring fee, typically monthly or annually, to access and use the software. The amount they pay is generally based on the features and functionality they need, as well as how many users will be using the software.

2) Usage-Based SaaS Pricing

With usage-based pricing, customers are charged based on how much they actually use the software. This could be measured in terms of data storage, number of transactions, number of users, etc.

How is SaaS price tested?

SaaS pricing is tested in a number of ways, but the most common way is using something called a price elasticity test. This simply means testing how sensitive users are to price changes. For example, you might release two versions of your software, one at $10/month and one at $20/month, and see which one generates more revenue.

 
Bloggers
Meir Amzallag

Co-founder and CEO of PayPro Global

Ioana Grigorescu

Content Marketing Manager at PayPro Global

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