The global SaaS market is expanding fast with the U.S. SaaS industry projected to reach over 191 Billion Euros by 2025, as stated in the latest Statista report. The leading SaaS companies such as Salesforce, Google Apps, Slack, and Dropbox, to name a few, are strengthening their positions even further, creating fiercer competition for all the new entrants.
For any SaaS business, the pricing model plays a vital role in determining its success. And amidst this tough competition, it often becomes crucial to choose the right pricing model or set up strategies to secure your position. While your pricing plans depend on various factors like product type, business model and target audience, here are a few strategies that can help you choose the right one in order to optimize your revenue.
What Does a Pricing Strategy Mean for SaaS Business?
Pricing strategy implies setting up pricing models along with a strategic approach for your products or services based on the customer demand, current marketing trends, customer purchase patterns, demand-supply curves and many more!
Simply put, it is strategic pricing to optimize your overall business revenue.
For the benefits of your SaaS business, here we have listed out some of the effective pricing strategies.
But before that, let’s know about some of the popular SaaS pricing models for better understanding.
Top Pricing Models for SaaS Business
Having a specific pricing model is of utmost importance for your SaaS business as it lets you have a better understanding of your present sales, revenue, business growth, as well as the possible loopholes. While determining the best pricing model can be tricky, once you opt for one it helps you in chalking out strategic plans more appropriately.
Let’s have a look at some of the popular pricing models which can be a good fit for your business-
Usage Based Pricing
As the name suggests, this pricing model utilizes the customers’ freedom to use the service only as much as wanted without worrying about the payment or billing. As they are only charged for what they use, it is a convenient pricing model for a broad range of customers who are not willing to pay more than their exact requirements.
Example: Platform or infrastructure related software companies (PaaS or IaaS) such as Amazon Web Services (AWS) often use this pricing model where customers get charged on the basis of their consumption e.g. servers utilized, data (Bandwidth or Storage) consumed, number of API requests, and others.
Suggestion: Use this model if your product has a usage model, e.g. email marketing companies can charge based on the number of emails sent or contacts uploaded.
Flat Rate Pricing
Flat rate pricing is the simplest and one of the most-used pricing models by the SaaS companies. Here the pricing is based on a single SaaS solution including specific features. Such pricing can be billed on a monthly basis too and it is quite popular among the customers for the simplicity and transparency it offers.
Suggestion: Use this model if your product helps the customers for a specific purpose and has no incremental cost to you. E.g. Social Media Posting.
Per User Pricing
Per user pricing is usually combined with a flat pricing or usage based pricing, and is generally beneficial for products that encourage teamwork and collaboration or more towards businesses and enterprises.
Example: Suppose, customer A for your SaaS business is paying a fixed monthly price of US$ 300. Now they want their team to also access and use the platform, they can share their own login or add a team member. Usually in businesses and enterprises, adding a team member is easy so that work flows are tracked independently. In this case you can offer an incremental per user pricing of US $25 per user, it’s cost effective for the business and brings additional revenue from the same customer for you.
Suggestion: You can go for such a pricing model if your tool is targeted at enterprises and businesses (B2B) and/or offers teamwork, collaboration features like video/photo editing and commenting.
Feature-based pricing or per feature pricing is another common pricing model widely used in the SaaS industry. Here the price is determined on the basis of how many features the customer is going to access. Higher the number of features, the higher the pricing.
Example: You can offer three different pricing plans for your SaaS business-
- Silver, where customers will get access to only a limited set of features
- Gold, where the number of features will be more than that in Silver
- Diamond, where they will have full access to all features
Suggestion: You can offer this to users where you can differentiate your product on the number of features or what they would like to opt for e.g. CRM or ERP tool.
Some other examples of other SaaS pricing models are tiered pricing, freemium model or a hybrid of the above.
No matter what pricing model you have adopted, you need to chalk out some strategies that accommodate your business requirements as well as customer needs and help you maximize your revenue.
Here are some of the pricing strategies which can help your SaaS business grow –
Top SaaS Pricing Strategies
Captive pricing is an effective strategy to increase the sales per customer gradually. Two simple steps to implement this –
- Offer a core product with high demand at a lower than the expected price or lower than the price of the similar products in the market.
- Charge extra for the additional products or services which are a must-have to make the most out of the core product.
Example: Many softwares like Adobe, are often offered free but users need to upgrade to the paid version to unleash its full potential.
Similarly, you can sell software at a nominal price but charge extra for the add-ons.
Free Trial Pricing
We often take free trials of products or services without knowing that it is nothing but a pricing strategy, this strategy is industry agnostic and not only limited for SaaS. Here you can simply offer the product/ part of the product for free or for a limited time (7 days/ 14 days/ 30 days) and charge the customers to upgrade to any plan after the trial ends.
This is a simplistic approach to boost your sales without spending anything extra. Also, for customers this is more reliable as they know what they will be paying for.
Example: Salesforce, the American cloud-based software company, offers free trial for each of its plans – group, professional, enterprise, unlimited etc.
You can use penetration pricing as an immediate pricing strategy, in order to beat the competition and secure your market share.
The logic is simple: lower the prices of your products significantly for some period of time to draw more customers to purchase them, while aiming to compensate for it by upselling and cross-selling in the near future.
This pricing strategy requires your thorough research about the current as well as predictive market trends, value and competitors’ approach to make the most out of it.
Skimming pricing is a frequently-used strategy across several industries including SaaS. Skimming pricing is – whenever a new product is released, the initial price is set high and then you gradually reduce it to drive the attention of the wider audience. It helps in increasing the value of your products and creates the much-needed hype among your customers.
To understand it better let’s have an example – whenever a new apple product releases, the price remains high and it gets reduced gradually. While it can be effective for your SaaS business, there are a few cons too that you need to keep in mind –
- Doing it wrong, such as making the price higher than needed may damage your brand image
- Unless done professionally, the sudden price reduction may frustrate the early buyers
It’s a pricing strategy adopted by many of the leading SaaS companies such as Salesforce, Adobe, Shopify etc. where high price is maintained in order to convey the high quality and brand value.
But, unless you are a well-known brand, it may not work that effectively.
In a Nutshell,
No matter what your pricing model or strategy is, you may need to change or modify those based on the present market scenario. It is always a good practice to weigh the pros and cons of each pricing strategy before you implement them as your brand reputation and customer experience depend on it. Most importantly, your billing system must be flexible and capable to support multiple pricing models and strategies.
Muvi Billing, the subscription billing software, lets you implement, add, and manage various pricing plans smoothly. Additionally, it provides you with the exclusive perks of 40+ payment gateways support, smart record keeping, analytics and insights about how your current monetization models are doing, and many more.
Take a 14-day free trial today, to learn better.