Global revenue for SaaS products is expected to hit $117B USD by 2022 making it one of the fastest-growing verticals. Though those numbers sound promising, many SaaS companies still won’t be successful. Company growth is driven by monetization and retention — charging customers and keeping them so they can keep being charged.
If your company provides a valuable service, that value can be monetized. It just needs to be done the right way. One of the easiest — and obvious — ways to increase revenue per user is to play with the pricing.
Pricing your service for your customer personas
How can you truly know what to charge if you don’t know who your ideal buyer is? Your current target may think your product is great but just can’t afford you. In that case, you either need to sell to someone else where you can charge that amount or you need to change your pricing.
Customer demographics are just the beginning of understanding your buyer personas in light of their spending power. Go beyond demographics and prospects’ willingness to pay. Consider the vertical and industry you’re in and tailor your company’s values and the benefits you provide your customers’ by targeting them with the right product mix and an appropriate value proposition.
Use data to identify your value metric
Your pricing strategy should be connected to a metric you use that demonstrates the value that a consumer is deriving from your product. Ask yourself the question what drives your growth? If there are different ways that someone could derive value from your product, try testing each of those value metrics connected to a pricing strategy to see which comes out on top.
One of the big questions to ask yourself in determining business growth factors is does our value metric align with our customers’ needs?
What is your pricing strategy?
Your pricing needs a cost structure that makes sense to customers. There are several common strategies businesses use to determine the pricing. Some approaches you could try include:
Cost-based pricing. This pricing model is good for establishing a baseline price you’d want to charge your customers. It is derived from how much it costs to bring the product to market based on the profit margin that you want. However, it doesn’t take into account the perception your customers or market may have of the value of your service. If your service is inexpensive to produce but has a high value in your customers’ minds, you could be significantly under-charging. People prefer to pay an amount equivalent to how much they value a product.
Value-based pricing. Contrary to cost-based pricing, this pricing model encourages you to consider the value that the market places on your product. The general rule for this pricing is that the intrinsic value to the customer should be 10x what they pay. In fact, if you price your product too low, you could lose credibility with your prospects.
Competitor-based pricing. This model uses your competition and their pricing as a benchmark. Don’t use this method if you are trying hard to differentiate yourself. But, at minimum, you need to understand who and how you differ in pricing compared to your competition. This is something your prospects will be trying to figure out themselves so if you can speak to it all the better.
Apart from these, other pricing approaches include penetration pricing, captive pricing, premium pricing or promotional pricing. Read up on them in our inclusive eBook Pricing for Success in SaaS: An Essential Guide.
How to choose a pricing model
Your pricing model should be linked to the value that you provide your customers. Now is a good time to revisit your value metric if you have forgotten what it is. There are numerous pricing models you could employ here, often used in combination with one another.
Per feature pricing.
This is a common pricing model that features banded pricing with different feature access at each level. As your clients have greater feature needs they are driven to upgrade to the next plan with each subsequent plan costing a bit more. This model’s one pitfall is that the feature combinations need to be just right. Netflix seems to have mastered it, though.
Per-user pricing is generally based on team size. For example, if your team has up to 50 users, we charge $5/user. If your team has 50-100 users, we charge $4/user. Unfortunately, your competition might offer unlimited seats, so this could become tricky. But, the upside is that using this pricing model frees up your marketing to revolve solely around product benefits. This is the pricing model that Google Suite uses.
Usage-based pricing is like pay-as-you-go. Email campaign tools such as Postmark and Mailchimp use this model. Some common features of these types of plans are rollover of unused units, shared usage within a single account, and charges for exceeding usage.
But from these, SaaS companies also employ flat-rate subscriptions, tiered pricing, metered, freemium, premium, free trials or mixed pricing. Download our Pricing for Success in SaaS eBook to review all pricing models.
Market and regional considerations
For SaaS companies selling internationally, those that prioritized localized pricing grew 2x more than those that didn’t. Kind of makes you want to investigate this, doesn’t it?
There are some easy steps you can take to show consideration for regional pricing. Here are 2. The first is just cosmetic: convert and display prices in local currencies. The second is market-based and allows customers to pay with regionally popular payment methods and encourages you to base your prices on the local economic outlook and competitive landscape while showing local price sensitivity.
What is the best way to package your product or service?
It’s valuable for your company to offer multiple plans so that you can maximize your customers as their companies grow. You may have the inclination to offer lots of different package options to accommodate different user needs, but only offer the plans that you can truly support. If you’re not able to support a plan well that ends up reflecting poorly on your company.
When defining your plans focus on the core differentiators between each plan, the quality and value that you provide, and the costs you incur for your services as guides for your best package structure.
How to position your pricing
Pricing can be a touchy subject. You want people to be so sold on the value you provide that, when it comes to telling them the price, they are willing to pay almost anything. Pricing for enterprise customers frequently isn’t revealed on a pricing page. Why can’t you follow suite? Fully transparent pricing in SaaS companies is frequently a key selling point that people like and appreciate. Here are a few ways your company can be transparent and help prospects fall in love with you:
- Include free trials and demos
- Keep your pricing page simple to give buyers confidence in what they are getting
- Offer support to those who aren’t sure which plan to get
Support for the pricing strategy you’ve chosen
Once you’ve decided on a pricing strategy, model, and display you’ll need to be able to provide all the necessary support to keep them alive — in the form of both personnel and technology. Here are some questions you should be thinking through:
- How will you manage subscriptions, billing, invoices, and payments? All of these tools must all be synchronized with your ranges of pricing and feature options.
- How will you keep your customers happy? It doesn’t count just to provide a service and take your customers’ money. You need to keep on keeping them happy. Make sure you have a CRM that helps you assist your customers on all the right channels.
- How will you process revenue from different streams? If you have different sources of revenue such as direct, affiliate, or channel sales, you need to have customized pricing for each of these agreements in addition to having a way to process them.
- How will you avoid passive customer churn? You can avoid losing customers just because their credit card expired if you select the right payment processing system. What does this look like?
You may have the perfect product, but if it’s not priced for your target market then it can all go down the drain. 2Checkout’s new resource, the eBook Pricing for Success in SaaS: An Essential Guide, includes extensive, actionable helpful pricing insights, tips, and examples.
Plus, the eBook features a guest chapter by our friends at ProfitWell – don’t miss the chance to check it out!
Update your company’s pricing approach today and infuse more growth in your brand’s DNA.