Saas Pricing

Some best practices to build your pricing model, the growth strategy and the packaging of your pricing, complete with price evolution pointers - for SaaS.

An entrepreneur does everything, and therefore also the pricing of her offer.
But between best practices, preconceived ideas and (literally) 1,000-dollar questions, they are often lost when it comes to assigning a dollar amount to their SaaS baby…
Here is an overview of the good questions to ask yourself and the good practices around pricing!

Table of Content

You’ll find in this post :

  • Why it is essential to spend time on pricing
  • The 6 + 1 pricing models
  • The 5 growth activation models, not to be confused with pricing models
  • The strategies for presenting the price (also called “packaging” the price) and for changing the price
  • Some tips to get started

A pricing strategy is essential in SaaS

SaaS Pricing change influence
Source : The Anatomy of SaaS Pricing Strategy, Price Intelligently

Pricing is an integral part of the offer (generally considered as the Product – Price couple), but very often, founders and their marketing teams spend a lot of time on the product and acquisition, a little less already on retention, and very little on pricing.
Yet the impact of a price change has been shown to be twice as effective as improving retention in the same order of magnitude, and 4 times as effective as improving acquisition.

Pricing models in SaaS

For physical products, we used to use the “cost+” method, i.e., to start with the production cost and add a margin; we also checked a little to see if we were in line with the competition. But for a SaaS, whose marginal cost of production is almost zero, this method is obviously not adapted.

Price is what you pay, value is what you get

– Warren Buffet

It is therefore necessary to wonder what is the value for the customer; value that you can define with them by talking to them, but also deduce from a certain number of analyses of usage data (preferred functionalities, the least used, those used together…)

There are 7 price construction models, or rather 6 models + 1 which is a mixture of several of the previous ones.

Flat-fee

The single price has many advantages: simple to communicate, simple to explain, simple to manage… But it also has disadvantages, including the fact that the product’s revenues do not grow in line with the growth of user customers.
Example : Basecamp

Usage-based

Pay-per-use billing is very transparent to customers. On the other hand, it makes revenue forecasting very difficult since any unanticipated change in usage can have a significant effect on revenue.
Example : Twilio pour le SMS

Credit-based

Based on usage but with an early “credit” purchase, cash flow is better. However, if the credit packages are poorly priced, the high frequency of redemption or on the contrary the slow consumption can irritate the customers… who will look for other solutions.
Exemple : HappyScribe

User-based

One price per user, it’s simple! At least on the surface. Because if the value of usage does not come from identifying users in a differentiated way, the potential for misuse and abuse of pricing, with login sharing etc. is significant.
Example : Slack

Feature-based

This seems like a good alternative, especially if the features have a different value for the user… but it is difficult to build without usage data to properly define what will justify the higher priced packages.
Example : Evernote

Storage-based

As the name suggests, storage-based pricing is attractive if storage is an important value delivered by the SaaS.
Example : Apple iCloud

Tier-based

Of course, things are rarely that simple, and in the majority of the above examples there is in fact a mix of several pricing axes.
Indeed, the value can be different according to the personas (typology of users), which will have different needs of functionalities, different frequency of use…
Example : Zapier

That’s a wrap

To choose the right pricing model, it is therefore very important to define the value for the user: to be identified as such (user), the functionalities used (feature), the storage needed (storage), or a mix of the 3.

A big reason so many businesses compete on price is because they can’t prove what value they offer, so they’re stuck with the one selling point that’s a breeze to communicate: cheapness.

Mish Slade

If you want to mix the 3, you absolutely have to know your Big Mac.
Like McDonald’s, you need to know the leading products, the high-value but low-adoption add-ons, the filler products (high-adoption, low-value), and the bundle-killing products not to include in your most popular packages.

Le Big Mac des fonctionnalités
Simon Kucher & Partners

Which features are essential? The ones that all customers like?
Structure your price offers around these, and package them with add-ons and fillers.

 

 

Growth enabling models in SaaS

Did you notice that I didn’t talk about Freemium in the first part of this article? That’s because Freemium is not a pricing strategy, but a growth enablement strategy. And it’s far from being the only one.

Freemium

The Freemium model, which consists in offering a small part of the functionalities without time limit, is interesting if the product is easy to use and/or has a “beginners” user target, if the cost per user is low, and especially if the experience is the best proof of value.

Free trial

The free trial period is an effective strategy if the product is easy to learn and the experience is the best proof of value. The big question is often “with or without a credit card”. Beyond not using dark patterns like automatic debit at the end of the trial without warning (beware of bad buzz for a few bucks), there is no single answer to this question. The loss in conversion on trial (in a with-card application) is usually compensated by a better conversion on purchase. If you have a sophisticated nurturing program, then it’s probably better to get a lot of customers in your database (without a credit card) to work on conversion in the long run. It’s up to you to do your own testing and philosophy on the matter…
The real defining issue is whether the trial time can be misused by unscrupulous users. This is what led AhRefs to abandon the Free Trial for the following model.

The selection criteria are the same as for the Free Trial model, but to protect against fraudulent use.

Money-back guarantee

The principle of “satisfied or refunded” is useful if the value is important (but the price is sufficiently low), and if the onboarding requires an important investment (data migration, for example).

Consultation

This model requires a demo or training to get the hang of it and understand the value. It is particularly adapted when the decision process is long and complex, when there are many products or modules sold together and therefore a choice to be made, or when the use of SaaS requires changes of habit or the learning of techniques or keyboard shortcuts.
SuperHuman is a great example – you can’t create your account on your own. It’s also a good demonstration of how the models complement each other and are not necessarily exclusive, since at the end of the consultation you start a free 30-day trial.

Price packaging and evolutions for a SaaS

Price packaging

Once the pricing model and growth activation strategy are defined, it is necessary to present this price to users…
The chart lists the different ways in which pricing can be presented, from the lowest to the highest degree of complexity, with examples of companies that practice these packagings.

What to consider

Of course, there are other elements to consider when setting and presenting the price accurately:

  • The positioning (entry-level, best-value, premium)
  • The psychological price (9, 0, 7; whole or decimal point…)
  • The different possible anchoring biases (competitors, alternatives, cheaper or more expensive first, starting price before promotion or discount…)
  • The included perks (migration, handover, partner discounts…)
  • and many more…

Price evolution

In pricing, there are two possible strategies: either start low and go up, or start high and go down.
In the case of the penetration strategy (a la Netflix), where you start at a low price and then go up, the so-called “grandfathering” practice, which leaves either the original price or benefits to the first customers, is to be considered in order to not antagonize those who were the first to trust you.
In the case of a so-called skimming strategy, frequently used for hardware innovations, the question obviously does not arise.
As for promotions and other discounts, they must reflect the value so they must be presented and granted in exchange for something in return: length of commitment, agreement to be featured in references, access to more data, etc.

How to get started in pricing your SaaS

1. Value metric
Be careful to take into account the different types of users, for whom this metric may be different.

2. Positioning and value proposition
This will determine the order of magnitude of the price (10 / 100 / 1000) and the associated packaging.

3. Optimization !
You should test a change at least every 6 months – packages, promotions, adjustments, add-ons…

In a nutshell

  • The way you build your price (model) is important
  • Pricing and packaging must reflect customer needs
  • You must know your Big Mac
  • Choose a metric that reflects the customer’s perceived value
  • Beware of competitors and alternatives
  • Only lower your price in exchange for something (commitment, data, payments…)
In all cases, pricing issues must be integrated "by design" into all product features and evolutions, and the product roadmap must be integrated into the sales strategy.

Photo by Angèle Kamp on Unsplash

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