SaaS Pricing Strategies: Which is the Right One for Your Product?

Creating a flawless software product guarantees high returns.

However, not choosing the right pricing strategy may lead to the loss of significant potential gains.

So, before offering your product to your customer, the team responsible for pricing should first review various SaaS pricing strategies and determine which is right for your product or service.

Below, we will be discussing various SaaS pricing strategies to assist your business in gaining a competitive advantage and providing value to users.

But before we help you choose the ideal SaaS pricing strategy for your business, let's first learn what a SaaS pricing strategy is and why it is crucial.

What is a SaaS Pricing Strategy?

SaaS pricing strategy is the approach a SaaS business adopts to determine the pricing models and packaging for its products and services. With a great pricing strategy, you will know how to format and structure your product’s packaging and pricing.

The pricing strategy you choose depends on:

• Target market
• Competitor's prices and products
• Value of your product
• Buyer persona
• Company size
• Business goals

Why is Pricing Important in SaaS?

SaaS pricing is crucial because it determines whether your software product will make profits or incur losses.

A successful pricing strategy should meet these two objectives.

First, it should provide value to your customers. A customer-centric product will help you attract new customers and retain existing ones.

Secondly, an effective SaaS pricing strategy should offer your business a competitive advantage. You can have an edge over your product’s rivals by ensuring your pricing strategy aligns with your brand goals.

1- Cost-Based Pricing Strategy

Cost-based pricing involves evaluating the costs incurred in providing a product or service and raising the total amount by a certain percentage point to make a profit.

Below are the factors you should consider when calculating cost-based pricing:

• Cost of goods sold (COGS): COGS refers to the costs the company requires to manufacture a product or service. SaaS product input expenses include product development, employee salaries, customer support, cloud infrastructure, and software engineering when calculating your COGS.
• Customer acquisition cost (CAC): CAC is the average amount of money you spend acquiring a new customer. The expenses you may incur in acquiring a new customer include marketing costs and customer onboarding costs. Below is how SaaS acquisition costs are calculated.

CAC = total marketing and sales expenses/number of customers acquired

• Markup percentage: The percentage you will add to your costs to ensure profit will depend on your company's goals, target market, and competition. We recommend a markup percentage of at least 20% for small businesses and up to 50% for large firms.

Pros

• It is easy to understand and calculate.
• Profitability is guaranteed.

Cons

• It’s hard to predict future costs. If prices drop, you may lose revenue.

2- Competitor-Based Pricing Strategy

In competitor-based pricing, a SaaS platform compares its rival's pricing and decides to sell its products or services at a lower, similar, or higher price. Therefore, factors like production costs, product value, and consumer demand aren’t considered in the price calculation.

Competitor SaaS pricing strategy sets the standard by aligning your pricing with the market. Therefore, it ensures your prices aren’t too high to scare off potential customers or too low to incur a loss and have customers question the quality of your product.

A competitor-based pricing strategy is ideal for new startups that have not been in the market long enough for customers to vouch for their value.

Here are the steps on how to calculate competitor-based pricing:

1. Identify your competitors.
2. Next, group them by characteristics such as tenure and market share.
3. Determine competitors who closely match your brand’s profile.
4. Research their pricing models and positioning strategies to build a map of current trends. Review how they have packaged their pricing models, the types of tiers they use, and the features they differentiate on. Doing the analysis will help you understand what types of pricing and positioning customers expect in the market.
5. Next, sum up the prices of the competitors' products and divide the total by the number of competitors. The result is the average price for your product type across competitors. Knowing this average, you’ll have a benchmark price to compare your own product’s rates to.

• Higher than competitors: Setting prices higher than other players in the market indicates that you have distinctive, valuable features and benefits that aren’t offered by your competitors.
• Lower than competitors: Offering products at lower prices than your rivals can help you attract users. However, a lower price may create skepticism about your product's quality and credibility.
• Equal to competitors: Focus on highlighting your product’s value by increasing marketing and branding efforts to stand out from competitors with similar-priced products.

We suggest using it with another pricing strategy, like a value-based strategy, to enhance its effectiveness. Doing this will ensure your prices aren’t divergent from your rivals and will help you cover input costs and maintain a competitive advantage.

Pros

• It’s a low-risk strategy, assuming your competitors have pricing intelligence.
• It reduces the chances of stakeholder rejection, as they expect the prices of your products to be within the market range.
• Doesn’t require lots of research and tests to implement

Cons

• By using your competitors as a benchmark, you may be selling your product or service short.

3- Penetration Pricing Strategy

Penetration pricing is a type of promotional strategy where a company reduces its prices for a designated time to gain a significant market share for its product. After the predetermined period expires, the firm adjusts its prices to align with the value of the product.

How long a SaaS platform reduces its prices varies depending on factors such as the size of the target market, the level of competition, and the costs associated with developing and delivering the product. In most cases, the period ranges from 6 months to a year.

SaaS companies may choose to disclose or not this period to their customers and then quietly raise it after the time expires.

This product pricing strategy is ideal for:

• SaaS platforms entering a new market or facing intense competition
• Established companies that want to introduce a new product to the market
• Products with high price elasticity. Price is said to be highly elastic if a small price change creates a large change in demand. A company may slightly reduce its price to achieve the benefits of price elasticity.?

The key to ensuring the penetration pricing strategy is successful is having a plan on how to retain newly acquired customers. You can achieve this by sending a follow-up email with other product offers or services to new customers at a later date.

Pros

• Excellent pricing strategy for increasing market share and sales volume quickly.
• Effective when there is a large market for a product or service.

Cons

• Low prices will hurt your revenue.
• It’s only effective in the short run since using it, in the long run, will have your customers questioning the value of your production as it seems your product is struggling to attract customers.

4- Value-Based Pricing Strategy

The value-based pricing strategy involves determining the price based on the value it offers customers.

So, SaaS business owners can sell their products and services at a higher price and generate more revenue if customers are willing to pay for their service because they understand its value .

SaaS platforms selling unique or highly valuable features and services will benefit more from this pricing strategy than those with commoditized products . These platforms sell consumer-focused products, meaning any improvements and added features will benefit the consumer.

Here are five considerations for implementing value-based pricing in SaaS:

• Understand your customers' needs: Knowing about your customers' wants means understanding their pain points, how your platform solves their problems, and the outcomes they achieve from using your product or service.
• Identify your value proposition: Your value proposition should communicate your platform's benefits to customers. Product features, functionality, ease of use, integration capabilities, and customer support are some elements of a captivating value statement.
• Determine your pricing tiers: You can implement value-based pricing through multiple pricing tiers offering different levels of value to customers. Consider providing a base tier with core functionality and additional tiers with advanced features and services.
• Use data to set prices: Use customer data and feedback to set prices that reflect the value your platform provides. You can gather buyers’ data and feedback by analyzing customer usage patterns, identifying the value of specific features or functionality, and monitoring customer satisfaction.
• Communicate the value to customers: Communicate the value of your products and services to customers through marketing and sales messaging, case studies, and testimonials. Explaining the product’s benefits will help your customers understand the importance of using your platform to solve their problems and, therefore, justify the price they pay.

Pros

• Pricing above your competitors may increase brand value and create a positive perception of your business.
• Bigger profits since customers are willing to spend on your product.

Cons

• A value-based pricing strategy requires a considerable amount of time and commitment. You need to first understand your potential customers, what they want, and how much they are willing to pay.
• Different subgroups may quote different values for your SaaS product, making it hard to price it.

What’s Next After Choosing the Right SaaS Pricing Strategy?

Once you have selected your ideal SaaS pricing strategy, it's time to create a pricing model and implement it. ProfitWell , Prisync , and PriceBeam are websites that will help you create an excellent pricing model and monitor its performance.

Next, create a marketing plan that will communicate your product's benefits to customers. We also recommend asking for their feedback and using it to evaluate and optimize your pricing.

Remember, SaaS pricing is an ongoing process that requires monitoring, adaptation, and refinement. Continuously evaluate and evolve your SaaS pricing strategy to ensure the long-term success of your business.

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