Congratulations, you’ve developed your SaaS product and it is time to put it on the market. There is still one more hurdle to jump, though — developing a pricing strategy.
The price you set for your SaaS product will affect your entire business, from marketing to sales. It can even determine whether or not your product will succeed. Needless to say, it is important to do this right!
Here is an 8-step guide to help your organization develop your first SaaS pricing strategy.
1. Identify the Buyer Persona
The first thing you need to do to select a price for your SaaS product is to identify the buyer persona and the most strategic use case.
A buyer persona is a representation of your ideal customer that is backed with research and data. This persona will serve as the framework for your target audience, and as a result, the pricing strategy you choose should be one that aligns with it.
For instance, if your buyer persona is one that looks for bargains and lowered costs, your pricing strategy should be developed in a way to cater to their needs. They are not necessarily willing to pay a premium for extra features — perhaps they just want a basic product that can get the job done, at a fair price.
2. Define the Value Metric
Next, you must define the value metric. A value metric is what your buyer perceives as the primary benefit of your SaaS product. This will help you determine how much you should charge for your product, and how to limit the various pricing tiers.
It is easier to conceptualize this by looking at a simple example: if your brand sells cookies, then the value metric is per cookie!
Getting this piece right is important, and many SaaS companies make the mistake of fixating on a pricing model that is based on per-user pricing. According to the CEO of Price Intelligently, 80% of companies that use a per-user pricing strategy should be using another value metric.
The key is to understand what your customers need from your product and where they derive the most value. Think about Dropbox, which charges based on storage because that is what their customers value. If they charged per file, no one would want to use their service!
3. Consider the Goals Behind the Pricing
The third step in setting up your initial pricing strategy is to consider what the goals are.
Is your company looking to maximize profits or maximize revenue? Or perhaps your goal is to focus on the quantity of your product that is sold or to differentiate from your competitors.
Maximizing profits can be a risky goal for a first-time pricing strategy since it generally involves selling your SaaS products at a premium to boost your bottom line. However, if you price to maximize quantity, you can gain brand recognition and increase your market share in a relatively short time.
4. Explore Various Pricing Models
Once you have selected the goal for your pricing strategy, it is time to explore different models. A few common pricing models include cost-plus, competitor-based, and value-based pricing.
Cost-plus pricing is usually what people think of when they start deciding on what they should charge for their SaaS product. It is very basic and involves adding up your costs and then including a few percentage points for profit margin.
Competitor-based pricing is just what it sounds like — use your competitors’ pricing as a baseline for you. This can be useful when you are a new company that does not have access to existing sales data to drive decisions.
Value-based pricing is the sweet spot for SaaS companies. Look towards your customers to see what the right pricing is since they will be the ones paying for it! This strategy aims to determine what your customers would be willing to pay for your products.
5. Check with The Entire Team
When you develop a pricing strategy, you must check with your entire team — that means sales, marketing, engineering, and the rest of the organization!
All the departments in your business have unique perspectives that will help you determine the right price for your SaaS product. Marketing, for example, will be the ones communicating with your customers to raise brand and value awareness, and engineering understands your product features better than anyone else!
6. Get Input from Potential Customers
Speaking of working with the entire team to develop your pricing model — this includes your potential customers too!
If your customers are individuals, try asking questions like these to get some insight into what they would be willing to pay for your SaaS products:
How much did you spend to solve this problem previously?
What kind of comparisons did you do when choosing a product?
If you are marketing to business, however, you should include some additional questions like what budget these funds would come out of and how large that budget has been the last few years. Similarly, you should ask them who decides to buy software at their company!
You want to speak with as many potential customers as you can so that you can get a sense of what they will be comfortable paying.
7. Fine Tune the Pricing
Now that you have developed your SaaS pricing model, it is time to fine-tune it further using psychological pricing tactics like price anchoring and charm pricing.
Since price is a relative concept, it is helpful to show a reference point for your products. Start by drawing attention to the most expensive option you have — even if people don’t choose that one, that becomes the anchor, and your other options look more affordable!
With charm pricing, you use amounts that end in the number 9. The “left digit effect” causes our brains to process numbers with the first digit, so a price of $399 seems closer to $300 than it does to $400!
8. Review Your Strategy Regularly
You should review your pricing strategy regularly — expect to make changes at least every six months! If your SaaS organization is changing and evolving, so should your pricing models. Be sure that you are always reviewing your strategy so that you can be confident that it is still relevant and effective.