What is Cost-Plus Pricing in SaaS?

Cost-plus pricing for SaaS is a monetization strategy where on top of estimated production expenses, a percentage is added to establish the final price. 

The added markup represents the desired profit margin. 

When using this strategy, SaaS founders avoid underpricing their products, especially in the beginning.

Here are the steps to correctly calculate your product’s worth using the cost-plus pricing strategy: 

• Step One: Start by identifying all production costs, direct and indirect, associated with your SaaS solution. These include product development, upkeep, and marketing expenses. 
• Step Two: Determine your profit margin, also known as the markup, and set it as a percentage of the total production costs. 
• Step Three: To calculate your product’s price tag, add the markup on top of the overall expenses. 

For example, assuming your SaaS solution costs $10 to develop and you want to have a 15% profit margin on each sale, you would add a markup of $1.50 to your total expenses. Thus, your SaaS would have a price tag of $11.50.

Cost-plus pricing has advantages and disadvantages. Here are the major ones: 

Pros 

• Simple monetization practice: This pricing strategy provides a price tag calculation method.
• Assured earnings: By determining your product’s total ownership costs and adding a profit margin, each transaction can generate revenue. 

Cons: 

• Overlook willingness to pay: Cost-plus monetization doesn’t consider competition pricing.
• Underrate product value: This strategy puts development expenses first.

This approach can be used in: 

• Highly-customized software development: SaaS products that provide targeted solutions to specific requirements can employ the cost-plus strategy.
• Infrastructure services: This monetization strategy is suitable in the case of organizations like Amazon Web Services or Microsoft Azure due to higher development and maintenance expenses, as well as possible customization requirements.
• Startups and Early-stage SaaS Businesses: For businesses found in the initial growth stage, cost-plus pricing is an alternative as it offers additional expansion resources.

Cost-plus pricing can be used as a baseline. 

Having production expenses laid out, you can move on to market research and competitor pricing evaluation. Doing so, you will be able to understand your customers’ willingness to pay. 

Additionally, use value-based pricing to adjust your monetization approach and increase the markup, considering the value your offering brings users. This will help you differentiate your software from others on the market.