How to price a SaaS product?

Your company is about to launch a fantastic product or service with tons of top-notch features. There is just one vital thing to take care of - pricing. You want happy clients, but you also want that ROI. How to find the golden middle way? There are a few aspects to consider as you develop your pricing strategy. If you get those right - you are well underway to keeping both your customers and yourself happy.

1) Who are you selling to?

Too often, pricing becomes an afterthought. Companies design products and ship them at a price that is most likely to generate a decent ROI. While getting the money’s worth is essential for any business wanting to survive, thinking more in-depth and long-term about pricing will give you the best results.

When discussing price, businesses usually refer to pricing strategies, models, or levels, but it should begin with assessing your product-market fit. This seems obvious, but it does often get overlooked. When you kick off your pricing planning, the first thing to do is to know your market and understand your customers’ needs. What is your product? How does it fit the market you are targeting? Does your product even have buyers? Who is your ideal customer? How should you structure packages to serve different segments?

Find the answers to these questions through research. Use the market and customers as your guide to design packages and set pricing. In a fast-driven SaaS world with fierce increasing competition, it is crucial to know where your business stands and how it differs from others.

2) Focus on providing value

We are back to customers with this one. People only pay for what they see value in. The more you can link pricing to value, the more favorable your customer response will be. It will also contribute to boosting the robustness of your pricing strategy.

In other words, it is the product that makes customers happy, but it is the tech around it that can make them really unhappy. This could be, for example, when customers’ payment method fails, they are invoiced wrong and charged for the whole month while only using your service for 10 days.

As you shape your products and add features, ensure to include things people actually value and are willing to pay for. Many unsolicited add-ons with no added value will confuse and frustrate your customers. If you have a good grasp of how your customers perceive the product or service in terms of value, then you are well-positioned to set an accurate price as well as minimize churn.

Read more: Best subscription management software

3) How much is too much?

A common misconception is that a high price will scare off potential customers. It’s why so many companies look at their competitors and try to pick a slightly lower price. While it is true that if you set a price too high, you might struggle to attract customers, the same goes for a low price. You may leave people wondering: “Why is it so cheap? It must not be that good.“

So it is not always about pricing lower than your competitors. Sometimes aiming higher is a better strategy, provided it still aligns with the value you are providing. People tend to associate high prices with premium value - just look at Apple as an example.

If you have a diverse pool of customers, your best bet would be tiered pricing aimed at different customers and their specific requirements. Start from the lowest price (or even a freemium) and go up as you add more features and value.

4) Evaluate costs and pricing elasticity

For your SaaS business to be profitable, any costs associated with developing and maintaining your product must be reflected in the price, together with customer service, marketing, and sales efforts. And revisit pricing every few months or so to adjust for inflation or increased spending.

Keep pricing elasticity in mind when making adjustments. Price elasticity measures the relationship between product demand and price, specifically when these variables change. For example, if you know your product is inelastic, you can forecast sales and revenue in advance while also factoring in a planned price change. Understanding pricing elasticity can also allow you to adopt specific pricing strategies for your business.

5) Which pricing model are you going with?

Tiered, user-based, usage-based… lots of pricing models to choose from. Whether you are about to scale up or a budding startup, you can always explore different pricing setups until you find one that fits your product and your customers best.

As you evaluate pricing model options, one of the most important things to evaluate is pricing flexibility. Will this model be flexible enough for you to tweak it without adversely disrupting the whole setup? Will it enable you to maximize both customer value and business revenue?

“You are on a good track to sell if you can design a pricing model that scales with value and fits your target audience. Most SaaS businesses are looking to scale and grow, and pricing is definitely a lever in that game.”

- Martin Bergholdt, Strategy Principal at Visma e-conomic

CTA: Learn more about SaaS pricing and billing on our on-demand webinar

6) Test, test, test

The only way to determine if your preferred pricing model works is to ship it. Don’t hesitate to try out different setups - the only way to find the optimal solution is through trial and error. So test early and test often.

SaaS product pricing is a core part of the recurring business model, and you need to validate it as soon as possible as you go through product development cycles. For example, use A/B testing to gauge customer behavior and test price sensitivity before and after product launch.

Make sure you got the tools to handle pricing

The value you can provide your customers goes beyond the product. In most cases, it is about the whole buying experience. Do they have the right plan assigned to their account? Can they change to another plan easily? Are they billed correctly? Can they choose between monthly or annual billing? Is their contact information or credit card details in your system correct?

Manage this with an all-in-one recurring revenue management platform such as Upodi. Equip your team with a capable solution that puts your recurring billing on auto-pilot and allows for any pricing experimentation.

Got any questions for us? Reach out and learn how Upodi can help you manage any pricing changes you might need.