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How to design an optimized SaaS pricing structure
Pricing a SaaS Service is not very different from anything other Software Pricing Strategy.
While you want to keep renewal friction at a minimum, all other "rules" of pricing psychology still apply.
While most companies out there have intuitively embraced the 'rule of 3', I often encounter teams who don't really know where this rule came from, and have not completely optimized for it.
The Rule of ‘Three’: Designing your SaaS pricing structure
Most SaaS Marketing Leaders understand the concept of having multiple price levels with three distinct tiers:
- Decoy: A- (meant to make A look attractive)
- Hero: A+ (what you want to sell your prospects). This comes from your ‘Hero’ customer.
- Anchor: B (an expensive alternative meant to make A look like a great deal)
Looking at most SaaS Model Pricing Strategies out there, I see a lot of threesomes. I'm not sure though if the Anchor and Decoy price points are always really designed for their purpose.
Remember, you don't want people to buy your Decoy, and you don't count on them buying your Anchor. Here’s an example of the three-tiered pricing approach we described above:
Don’t forget to tie your pricing back to SaaS KPIs
What often gets forgotten is to make sure the Hero SKU/Price/Plan is optimized for the correct SaaS Key Performance Indicator (KPI) given the maturity of your SaaS business.
When you're still in the early stage of your growth, you may want your Hero SKU to be optimized around driving customer satisfaction and market share.
Once you’re getting further down your product maturity journey your Hero should be the optimal choice to drive Revenue growth, and ultimately Profitability (don't create a Hero with a high Cost-to-Service).
Create a Hero price option, and align it with the right KPIs for your growth stage.
How to optimize your SaaS pricing models
You can price based on cost (of service), value delivered or what the market bears. Here is an easy model that I learned when doing Product Marketing for Microsoft Office.
It still is very useful to think through your pricing model.
1. Rank your SaaS Product Features
First, rank the capabilities (or "features") of your SaaS Product that generate value for your customers along two dimensions.
How unique is each capability (vs. the competition and alternatives) and how to popular is it (how frequent is it needed/used)? Use a scale of 1 - 10, where 1 is the least unique/popular and 10 is the most unique/popular.
|Feature||Unique (1-10)||Popular (1-10)|
2. Plot & analyze SaaS features
Now plot the features above in a 10x10 matrix using these two Axis. You should have the following quadrants:
- Freemium: Capabilities that are needed by many, but you don't have a competitive advantage. Consider making this part of your Freemium Plan.
- Premium: Since these capabilities are both desired by many, and you have something special to offer, this is your Premium Upsell opportunity.
- Add-On: If you have unique capabilities that a few customers really value, consider making these add-ons that you charge for separate.
- Noise: The rest? Don't talk about it and leave it out of your product pricing page. It's not going to help, just confuse.
Finally, when do you use a Trial/Buy model vs. Freemium/Premium?
They are not mutually exclusive.
A trial program is ideal to let many people test drive your Premium SKU before you ask them to pay. It can get confusing to have Trial/Buy next to Freemium offerings so I recommend you pick one (or test).
Next steps for optimizing SaaS pricing structure
Building a scalable and profitable SaaS pricing structure takes research and time. Don't create prices out of thin air -- use these guidelines and our SaaS pricing guide to map out your pricing design.
In the long-run, you'll be glad you invested the time and resources to build this.
To learn more about SaaS pricing, check out the following resources: