9 Most Common SaaS Pricing Mistakes
SaaS startups are always looking for ways to cut costs and increase profits. However, when it comes to pricing their SaaS products, they often make mistakes that end up costing them more in the long run. One area to look for mistakes is SaaS pricing.
According to a report by Invesp, four out of five SaaS companies offer new pricing schemes at least once per year, with most setting up new pricing structures multiple times per year. And this is a mistake.
There’s no doubt that you should periodically test new pricing models and schemes to see if they drive more sales, but it’s important to understand when and how to do it correctly.
In this post, we’ll cover 8 grave pricing mistakes that SaaS startups make and how to avoid them.
9 Biggest SaaS Pricing Mistake SaaS Startups Make
1. Failing to Understand Your Consumer
A lack of customer understanding and research is one of the leading causes of SaaS pricing mistakes.
If you don’t understand who your target customer is and what they’re willing to pay for your SaaS product, you’re bound to make pricing errors. Pricing errors lead to lower conversion rates and fewer customers.
Make sure you know who your target customer is, what needs they have, and how much they’re willing to pay for a solution before setting your prices.
To get a better understanding of your target market, start by creating buyer personas. These are detailed profiles of your ideal customers that take into account factors like their demographics, needs, and pain points.
If you’re targeting both individual consumers and businesses, you’ll need to create separate personas for each.
Once you have your buyer personas, you can start conducting customer research. This can be done through surveys, interviews, and focus groups.
This research will give you valuable insights into what your target market is looking for and how much they’re willing to pay. Use this information to set realistic and achievable prices for your SaaS product.
There will be instances, depending on who your customer is, that you’ll need to offer a lower price than what you wanted in order to acquire them. For example, if your target market is price-sensitive, you may need to offer a discount or free trial in order to get them to convert.
Meanwhile, a small business owner might be willing to pay more for a SaaS product that offers them a lower total cost of ownership (TCO). And an enterprise customer might ask for a customized package and be willing to pay a higher price for it if your software is mission-critical for their business.
It’s also important that you know what your customers value most in your SaaS tool so you can offer them a price that meets their needs. This means understanding what features they use most and how your tool helps them solve their specific problem.
Selling a SaaS product for higher than a customer is willing to pay is going to lead to many of your customers turning to your competitors who offer a better pricing for their SaaS.
2. Not knowing your customer lifetime value (CLV)
Your customer lifetime value (CLV) is one of the most important metrics for any business, yet many SaaS startups don’t know what theirs is.
CLV is the total amount of revenue that a customer will generate for your business over the course of their relationship with you.
Not knowing your CLV is a critical mistake because it makes it difficult to set prices that are profitable for your business.
If your prices are too low, you won’t be able to cover your SaaS startup’s costs or make a profit. If your prices are too high, you’ll miss out on potential customers and end up with a lower CLV.
The solution to this is simple, but it will require some work on your part. You need to calculate your CLV.
There are a few different ways to do this, but the most common is to take the average customer’s monthly spend and multiply it by the length of their relationship with you in months
For example, if the average customer spends $100 per month and stays with you for 24 months, their CLV would be $2,400.
Once you know your CLV, you can start to set prices that will allow you to cover your costs and make a profit while still providing value to your customers.
3. Not understanding the competition
SaaS startups often think they can charge whatever they want because their product is new and unique. However, customers will always compare your software to your close competitor.
If your SaaS product is more expensive, they will expect it to be better in a lot of ways. This can put a lot of pressure on your product to perform well and meet customer expectations.
Additionally, if you’re not familiar with your own competitors , you may not be able to price your own software effectively. Doing research on the competition is crucial to setting a fair price for your product since you don’t want to be too high or too low.
To find out what the competition is charging, look at their websites and see what their pricing plans are.
If they have a free trial, take advantage of it and use your competitor’s SaaS product yourself. This will give you a good idea of what features they offer and how much value their customers are getting.
You can also look at reviews of your competitor’s software to see what customers think about their pricing. Are they happy with it? Do they think it’s too high or too low?
Finally, you can reach out to your network and see if anyone has experience using your competitor’s software. They may be able to give you some insight into their pricing strategy and how it compares to your own.
After you’ve done your research, you’ll be able to set a price for your SaaS product that is competitive and meets the needs of your customers.
Many SaaS startups make the mistake of being overconfident when pricing their software.
And by this we mean that they assume that their SaaS product is so great that people will be willing to pay whatever price they set.
However, this is often not the case. SaaS products are becoming increasingly competitive, the consumers’ standards are getting higher, and customers are becoming more price-sensitive. This means that you can’t just charge whatever you want and expect people to pay it
You need to be strategic about how you price your SaaS. This means taking into account the value that your product provides, your target market, your competition, and your overall business goals.
If you’re not careful, you could end up pricing your software too high and missing out on potential customers. Or, you could price it too low and not make enough profit to sustain your business
To avoid this, take the time to develop a clear pricing strategy that takes all of these factors into account. This will help ensure that you’re able to charge a fair price for your product that meets the needs of both your customers and your business.
Also, avoid underestimating the competition. Just because your software is new and unique doesn’t mean that people will be willing to pay whatever price you set
Competitors will always pop up, and you need to be prepared to compete with them on price. This means that you can’t charge too much for your product or you’ll risk losing potential customers to your competitors.
Another mistake that many SaaS startups make is over-promising on their product.
This happens when you try to sell your software as being better than it actually is. You might make grandiose claims about its features or benefits, or you might overhype the potential of your product.
Unfortunately, this can backfire. Customers may feel disappointed when they realize that your software doesn’t live up to their expectations, and as a result, they may be less likely to use it or recommend it to others.
To avoid this, make sure that you’re being honest about what your SaaS product can do. Be realistic in your claims and don’t try to oversell your product. Instead, focus on highlighting its key features and benefits, and let customers make their own decision about whether or not it’s right for them.
Now, when customers see that they’re not getting what they were promised, they’re likely to be disappointed and even angry. This can lead to them churning and unsubscribing from your SaaS.
On the other hand, if your customers feel like they’re getting more than what they expected, they’re likely to be happy and satisfied with your product. This can lead to them sticking around for the long term and even becoming brand advocates.
6. Not being data-driven
SaaS startups are under immense pressure to grow quickly and achieve profitability. In their quest to reach these goals, there are some of them that commit another common mistake: they do not base their pricing on data
Not being data-driven when it comes setting their prices can lead to a number of problems for SaaS startups. Here’s why.
First, without data, it’s difficult to determine what price point will be most effective in achieving your business goals. Do you want to maximize profit? Or do you want to acquire as many customers as possible?
Second, without data, it’s also difficult to determine how much value your customer is actually getting from your product. This makes it hard to price your product in a way that’s both fair to your customers and profitable for your business.
Third, not being data-driven can also lead to making decisions based on gut feeling rather than actual evidence. This can lead to sub-optimal pricing that doesn’t take into account all of the relevant factors.
To avoid these problems, it’s important that you base your pricing strategy on data. Use analytics to track your customer’s behaviour and see how they’re using your product. This will give you insights into what price points are most effective in achieving your business goals.
But what data are we referring to? To set the right price points for your software, keep in mind these key metrics:
- Monthly recurring revenue (MRR)
- Customer churn rate
- Average customer lifetime value (LTV)
- Customer acquisition costs (CAC)
- Customer Lifetime Value
By tracking these metrics, you’ll be able to gain a deep understanding of your customers and how they interact with your product. This will give you the insights you need to set the right price points for your SaaS product.
And did you know that having the right price points for your SaaS product can actually help you to scale your SaaS business? This is because the right pricing can help you to acquire more customers while also reducing customer churn.
So as a SaaS founder, you better make sure that you’re not making the mistake of pricing your product without taking the important metrics we’ve mentioned into account.
7. Not testing your pricing
Lower prices doesn’t usually equate to more customers. In fact, sometimes, it can actually lead to less customers.
This is because when you lower your prices, you’re not just competing on price. You’re also competing on quality and features. And if your product doesn’t have the same quality or features as the products of your competitors, then you’re likely to lose out.
Also, lower prices for a SaaS tool gives the impression of a lower quality product. This is because customers tend to associate low prices with inferior quality. So even if your product is just as good as your competitor’s product, customers might still perceive it to be of lower quality because it’s priced lower
And on the other hand, if it’s priced higher than your competitor’s product, customers might think that it’s of higher quality, even if it’s not.
This is why it’s important to test different pricing points to see what works best for your business. Try running A/B tests on your pricing page to see how different price points impact your conversion rate.
And remember, when you’re testing your pricing, it’s important to focus on your business goals. Are you trying to increase revenue? Or are you trying to increase profit margins? Your pricing points and model should be aligned with your SaaS business’ goals.
8. Offering too many features at once
When you first start out, it’s tempting to offer as many features as possible. After all, the more features you have, the more attractive your product will be to potential customers. Right?
Offering too many features can actually make your SaaS product less appealing. This is because when customers see a long list of features, they might feel overwhelmed and not know where to start. Potential customers will also have a harder time understanding what your product does and how it can benefit them.
They might also think that they won’t be able to use all the features, so they’ll just stick with the tools they’re already using.
It’s important to remember that customers don’t always need or want every single feature. They just want the features that will help them solve their specific problem
So instead of offering a long list of features, focus on the core features that your target customers need. Once you have a solid foundation, you can always add more features later on
But what does this have to do with your SaaS product’s pricing?
Well, if you’re offering too many features, you might be overcharging your customers. This is because customers will only be willing to pay for the features that they actually need and use.
So if you’re offering a long list of features, but your customers are only using a few of them, then you might want to consider simplifying your SaaS pricing model.
This way, you can focus on the features that your customers actually care about and are willing to pay for. And as a result, you’ll be able to increase your profit margins.
9. Not aligning your pricing with your value proposition
Your SaaS product’s pricing should be aligned with your value proposition. Your value proposition is the unique benefit that your SaaS product offers to your target customers.
For example, if you’re a project management tool, your value proposition might be that you help teams get their work done more efficiently.
Or if you’re a CRM tool, your value proposition might be that you help businesses increase their sales.
Whatever your value proposition is, your SaaS product’s pricing should reflect that.
But how do you do that?
Well, first of all, you need to make sure that your pricing is in line with the benefits that your customers will get from using your product
For example, if your SaaS product saves customers time, then your pricing should reflect that. Customers should feel like they’re getting a good deal and that they’re paying a fair price for the value they’re getting.
But it’s not just about the benefits. Your SaaS product’s pricing should also be in line with your target market, as we’ve said earlier.
For example, if you’re targeting small businesses, your pricing should be affordable for them. But if you’re targeting enterprise businesses, your pricing can be higher because they have a larger budget.
And finally, your SaaS product’s pricing should also be in line with your competition. You don’t want to price yourself out of the market, but you also don’t want to undercharge and leave money on the table.
Competitive analysis is a great way to see how your pricing compares to your competitors. And it can help you determine where you should price your SaaS product.
Remember, customers are more likely to pay for a product if they believe that it’s worth the price. And if your pricing doesn’t align with your value proposition, then customers might not see the point in paying for your product. This is not unique to the SaaS industry, so make sure you don’t make this common mistake.
Pricing your SaaS isn’t a guessing game. You can’t just throw a number out there and hope it sticks.
You need to have a solid understanding of your target market, your value proposition, and your competition. Only then can you determine what price points are right for your SaaS product.
If you’re having troubles determining the right price for your SaaS product, then don’t hesitate to reach out to a SaaS pricing consultant. They can help you come up with a pricing strategy that’s tailored to your specific SaaS business.
And if you want to learn more about pricing, be sure to check out our other articles on the topic in our blog.