How to Price Your SaaS

To monetize your Software as a Service (SaaS), select the right pricing strategy. The pricing of your SaaS product can impact your revenue and customer perception, which can then influence your overall position in the market. With that in mind, let’s explore how to put together a pricing strategy that would work for your SaaS.

To support your choice, our guide provides a breakdown of the SaaS pricing model selection process and its alignment with your business needs and target customer segment.

Before diving into SaaS pricing models, you need to understand your ideal customer. This goes beyond basic demographics. Essentially, you need to know who they are, what they need, and what they’re willing to pay. To do so:

1.1. Define your Ideal Customer Profile (ICP):

• Demographics: Company size, industry, location, etc. For example, is your ideal customer a small business with less than 50 employees in the tech industry based in the US? Or are you targeting large enterprises with over 1000 employees in the healthcare sector across Europe?
• Psychographics: Values, goals, challenges, motivations. Are they driven by innovation, cost-saving, or increasing efficiency? What are their pain points and how does your software help alleviate them? For example, are they looking for a solution that streamlines their workflow, improves collaboration, or automates tasks?
• Technographics: Existing tech stack, preferred software, technical expertise. What kind of technology are they already using? Are they comfortable with cloud-based solutions or do they prefer on-premise software? For example, are they using specific CRM or project management tools that you need to integrate with?

To visualize the ideal customer, use tools like HubSpot or Salesforce to create detailed buyer personas. Imagine a specific person, give them a name and a role, and outline their needs and motivations.

1.2. Assess customer needs:

• What problems does your SaaS solve for your ICP? Be specific about the challenges your software addresses. For example, does it reduce manual data entry errors, improve customer response times, or automate marketing campaigns?
• What are their critical needs and frustrations? What keeps them up at night? For example, are they encountering barriers to data visibility within departments, limited collaboration capabilities across teams, or obstacles in tracking project performance??
• Compared to available alternatives, how does your SaaS adapt to these requirements more effectively? What are your unique selling points? For example, do you offer better integrations, a more intuitive user interface, or superior customer support?

To obtain relevant insights, conduct customer interviews, surveys, and focus groups to collect feedback. Actively collect and listen to their feedback and identify patterns in their responses.

1.3. Determine willingness to pay:

• What is the perceived value of your SaaS to your ICP? How much value do they see in your solution? For example, can you quantify the time or cost savings your software provides?
• It is important to understand the price point customers are willing to accept to solve their problems. Conduct pricing surveys or experiments to gauge their price sensitivity. For example, you could offer different pricing tiers with varying features and see which ones are most popular.
• Are there existing benchmarks or price points in your industry? Research your competitors and analyze their pricing models. Consider the industry standard of $50 per user per month. If you plan to deviate from this standard, ensure you have a clear understanding of the rationale behind pricing your service higher or lower.

1.4.  Analyze market and competitor’s pricing:

For a data-driven approach, analyze competitor pricing and conduct market research to gauge price sensitivity. After all, you need to know what you’re up against.

• What pricing type do they use? (Flat subscription, usage-based, tiered pricing, freemium)
• What are their price points for different plans?
• What features are included in each plan?
• How do their prices compare to the value they offer?

1.5. Clearly articulate your value proposition:

• What are the key benefits of your SaaS?
• How does it differentiate from the competition?
• Quantify the value your SaaS delivers (e.g., increased efficiency, cost savings, revenue growth).

To capture this, develop a value proposition statement that is concise and resonates with your ICP. This statement should be clear, and easy to understand. 

Choosing the right SaaS pricing model is a decision that will impact your revenue generation and customer acquisition. Analyze a variety of structural configurations, keeping in mind the needs of both your SaaS product and your customer base.

Consider the following factors when evaluating different models:

• Value proposition: How does your pricing model reflect the value you deliver?
• Target audience: What pricing model best suits their needs and budget?
• Competitive landscape: How does your pricing model compare to competitors?
• Revenue goals: What pricing model will help you achieve your revenue targets?
• Implementation complexity: How easy is it to implement and manage the pricing model?

Now explore the different SaaS pricing models:

• Flat-Rate Pricing: One pricing option is a single plan with a fixed cost. This model is simple to understand and manage but may not cater to diverse customer needs. Basecamp, a project management and team communication software, utilizes a flat subscription model charging a single price for unlimited users.
• Usage-Based Pricing: Charges customers based on their consumption of the service. This model is transparent and aligns costs with usage but can be unpredictable for customers. It’s popular for infrastructure-related SaaS, like Amazon Web Services, where users pay for the resources they utilize.
• Tiered Pricing – This method offers various plans with differing levels of features and costs. This model caters to different customer segments and encourages upselling but can be complex to manage.
  A common example is Zoom, which offers a tiered pricing model with different plans for individuals, small teams, and large enterprises, each with varying levels of features like meeting duration and cloud storage.
• Freemium: Offers a free basic plan with limited features and paid plans for premium functionality. This model is effective for acquiring users and driving upgrades but requires careful balancing of free and paid features.
  Dropbox employed a freemium model which allowed for free access to basic features There is a potential correlation between this approach and their initial growth.
• Hybrid Pricing: Combines elements of different pricing models to create a customized solution. This offers flexibility and allows businesses to capture value from various customer segments and usage patterns.
  For example, a SaaS company might offer a tiered pricing model with a usage-based component for certain features, such as API calls or storage.

Evaluate the pros and cons of each pricing model in relation to your specific needs. Select the model that best aligns with your overall business strategy. Here’s a breakdown of the most common SaaS pricing models, along with their pros, cons, and examples. 

Once you’ve chosen a SaaS pricing model, you need to determine your specific pricing strategy. This entails setting your price points and positioning your offering in the market. To get specific and figure out how much to charge consider these pricing strategies:

• Cost-Plus Pricing: Calculate your costs and add a markup to determine your price. This is a straightforward approach but may not capture the full value you offer.  For example, if your costs are $10 per user per month and you want a 50% markup, your price would be $15.
• Value-Based Pricing: Price your SaaS based on the perceived value it offers to customers. This requires a deep understanding of customer needs and the ROI your SaaS delivers. One company that utilizes value-based pricing is Salesforce. Their CRM software is marketed as a solution that could potentially improve business efficiency and potentially lead to increased revenue.ue.
• Competitive Pricing: Align your prices with your competitors’ offerings. This can be a safe approach but requires a strong value proposition to stand out. 

To set your price points, analyze key metrics like Customer Lifetime Value (CLTV), Customer Acquisition Cost (CAC), and desired profit margins. Vary your pricing methods according to different scenarios.

Pricing isn’t a one-time decision. It’s a process that requires continuous monitoring and optimization. Stay flexible and be willing to adapt to effectively track the following key metrics:

• Conversion Rates: The percentage of visitors or trial users who convert to paying customers. This metric tells you how effective your pricing is at converting potential customers into paying customers. When assessing conversion rates, consider the possibility of pricing or value proposition affecting the results.
• Churn rate: Measures the frequency of customers ending their subscriptions. This metric helps you understand how satisfied your customers are with your pricing and your product. Analyzing a high churn rate could reveal insights into the potential misalignment between pricing and perceived value, or the existence of more attractive options influencing customer decisions.
• Average Revenue Per User (ARPU): The average revenue generated per user. This metric reflects the dynamics of your revenue growth and serves as an indicator of your pricing strategy’s impact. ARPU growth provides insights into pricing strategy effectiveness.

Experiment different pricing with A/B Testing: test different price points, plans, and offers to see what aligns best with your target audience. Use different pricing models or strategies for specific customer segments. Analyze the results to identify what drives the best outcomes. Consider using price optimization software to potentially streamline the pricing process.