Pricing SaaS Software
Developing your pricing strategy for SaaS is one of the most strategic activities of the SaaS Chief Marketing Officer. Your companies SaaS pricing strategy will have a major impact on product market fit and thus impact churn, ARPU, conversion rates and LTV. SaaS Pricing is not that different from a Software Pricing Strategy, but it has some specific angles that I'll explore in this article.
Pricing Strategy Foundation
What's your pricing approach based on?
- Cost based - What's your cost-to-service (CTS) a client? This is critical to get your SaaS business to profitability at some point.
- Market-based - Understand the pricing that your prospects will encounter during their buyer's journey. Mystery shop your competition. You can price your service higher (position yourself as premium), on par (win on reputation and experience) or below and play the market-share game (as long as you're ready for a race to the bottom), as long as you make this decision deliberately.
- Value-based - Ideally you get to value-based pricing asap. This is best aligned with how you can do your messaging and selling based on a meaningful value proposition.
SaaS Pricing per what?
Consider what the "denominator" of your pricing should be. Getting this right will help you build value based pricing (see #1)
Which of the following best reflects the way you can count customer outcomes?
- Price per User
- Price per Device (i.e. sensor/phone/PC/outlet/car)
- /feature/- speed
- Price per usage (i.e. data volume, calls, zaps, transactions, revenue, time)
Now and tomorrow
Don't make pricing strategy decisions overnight. Don't let your desire to close a deal develop your pricing strategy. You run the risk of optimizing for low friction (sales people will reduce friction, and not always optimize profit). You will also have to "grandfather" your current customers into some of the plans you'll develop in the future. This all impacts how you should be thinking about pricing today.
Make it easy
While reducing sales friction should not be the main factor to drive your pricing strategy, you still need to make sure your pricing is simple enough to make selling easy. And your finance department should not have to jump through hoops to create a customer invoice. Create your pricing strategy with the sales job-to-done and your billing and accounting system in mind.
Pricing and SaaS Billing Systems
Speaking of billing systems in #4, you need to make sure your SaaS Pricing Strategy fits with the way you want to be able to manage your various SaaS Pricing Plans (SKUs, Price Levels) in your SaaS Billing Platform (i.e. Recurly, Chargify, Zuora). Make sure it's easy in the future to use things like discount/promo codes, and allow for cohort analysis coming from your billing system (it's not something you want to do manual...).
What SaaS Pricing Plans?
You need to plan your plans. Here is an easy exercise to map your service/product capabilities to differentiation vs. the competition and potential market size. It's a great tool to help you plan your various SaaS pricing levels.
HERO SaaS Price Level
After you decide what you want your ideal customer to buy (your "Hero" offering) you can now develop the Anchor/Decoy price-levels to support your Hero.
Have 3 SaaS Pricing Plan
The "rule of three" has been proven in Marketing and Behavioral Science in many ways. A great read is the book "Thinking Fast and Slow", or just read this blog.
Freemium or Try/Buy?
This article dives into the need for a Trial/Buy approach to customer adoption, or the need for a Freemium plan to get people started. Doing both is hard. Pick one.
Length of Trial
If you decide to employ a Try-Buy model for your SaaS Pricing strategy, make sure to pick the right length for the trial period. More here.
Best and Only
All of the above pricing decisions are easier if you can answer two questions:
- What are we better at than anyone else?
- Why can customers only get this from us?
So to conclude, your SaaS Model Pricing Strategy should be simple and straightforward, as long as you think about the above 11 areas of consideration.