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How To Price Your SaaS Product: Strategies & Tactics To Boost Your Conversions

How To Price Your SaaS Product

 

Pricing is one of the most important things when it comes to starting and growing a SaaS business.

 

You need to know how to price your SaaS product correctly.

If your product costs too much, you’ll have a hard time getting customers. If it costs too little, you might end up crippling your business instead of growing it.

SaaS pricing is a complex topic, and there’s no easy answer when it comes to setting the right price.

But don’t worry, we’re here to help.

In this blog post, we will talk about pricing strategies, models, and psychological tactics that will help you find the right price point for your SaaS product.

 

3 Major SaaS Pricing Strategies

 

There are three major pricing strategies that most businesses use: cost-plus pricing, competitor-based pricing, and value-based pricing.

Let’s talk about them one by one.

 

Cost-Plus Pricing

 

With cost-plus pricing, you simply add a markup to the cost of your product.

Right off the bat, we’ll say that cost-plus pricing is not the best choice for SaaS businesses.

That’s because the value that SaaS products offer is significantly more than what it costs to develop them.

Still, it can be a good strategy if it’s a part of your value proposition.

For example, if you’re the only company in your space that offers cost-plus pricing, it can be a selling point for customers who care about transparency.

So how do you price your product based on its cost?

Cost-plus pricing is easier to understand when you have a tangible and manufactured product. You simply take the cost of the raw materials, add overhead and labor costs, and add a markup on top of that.

It’s even easier if you’re in the retail business. All you need to do is take the wholesale price of the product and add a markup on top of it.

But how do you do this with a digital product that you’re charging on a recurring basis?

You need to consider your customer acquisition cost (CAC) and overhead cost.

Overhead costs for a SaaS business can include things like server costs, employee salaries, office space lease and bills, and licenses for SaaS products that you use for your operations.

And your CAC will depend on how you are doing your customer acquisition efforts.

Costs For Sales-Based Customer Acquisition: If your SaaS business is sales-based, you probably have a lot more resources on your sales team and activities. You will need to consider your expenses for the following:

  • Salaries and commissions for the sales team
  • Lead generation costs
  • Expenses for making calls
  • Travel costs for face-to-face meetings

Costs For Inbound-Based Customer Acquisition: If you’re doing a product-led growth model, then you’re probably focusing on inbound marketing to attract customers.

Your costs will probably be lower. But you’ll still need to consider the following customer acquisition costs:

  • Employee salaries
  • Content creation costs
  • SEO and PPC costs
  • Social media advertising expenses
  • Support for free trials or freemium accounts

Once you have all of these numbers, you can start to think about how much you need to mark up your product in order to cover your costs and make a profit.

 

Competitor-Based Pricing

 

With competitor-based pricing, you price your product based on what your competitors are charging for similar products or services.

This is a common pricing strategy, especially in markets where there are a lot of comparable products.

It can be a good way to price your SaaS product because customers already have some idea of how much they should be spending on a product like yours.

To do this, you need to understand your competitor’s pricing models and how they structure their prices.

You also need to consider what kind of value your product offers that is different from your competitors.

For example, if your competitor’s product is cheaper but doesn’t offer as much value, you might be able to charge more for your product.

The great thing about competitor-based pricing is that you can be sure that you have a competitive pricing point. In other words, they fall under the standard price ranges accepted by your target market.

But the not-so-great thing about it is that it’s not really based on YOUR strategy. It’s based on your competitors’.

That means if your competitor decides to lower their prices, you’ll need to lower yours too.

So how do you price your SaaS product in a way that truly reflects its value?

Let’s talk about this last (but definitely not least) SaaS pricing strategy.

 

Value-Based Pricing

 

Value-based pricing is a way of pricing your SaaS product based on the perceived value it provides to your customer.

This means that you price your product based on how much your target market is willing to pay for the benefits that your SaaS product offers.

This is a great way to price your product because you’re not just guessing how much your target market will be willing to pay. You’re actually basing it on actual research and data.

And getting value-based pricing requires A LOT of research. How do you even get that data?

Well, you can start by surveying your target market.

Find out how much they’re currently spending on similar products or services. And ask them how much they would be willing to pay for a product that offers the specific benefits that your SaaS product offers.

Value-based pricing is not an easy way to price your product. But it’s definitely the most accurate.

 

SaaS Pricing Models

 

Now that you know how to price your SaaS product, let’s talk about the different types of pricing models.

Having the right SaaS pricing model is important because it can have a big impact on customer experience and even the scalability of your SaaS product.

There’s no one-size-fits-all answer when it comes to picking the right pricing model. It all depends on your product, your target market, and your business goals.

Let’s take a look at some common SaaS pricing models:

 

Flat-Rate Pricing

 

With flat-rate pricing, you charge a single price for your SaaS product, regardless of how much the customer uses it.

This is a common pricing model for SaaS startups because it’s simple and easy to understand. Customers know exactly how much they’ll be paying every month.

The tradeoff for this pricing model is that it doesn’t really reflect the true value that all customers get from your SaaS solution.

For example, let’s say you have a SaaS product that costs $100 per month. A customer who only uses 10% of the features is essentially paying for features that they’re not even using.

On the other hand, a customer who uses all of the features is practically getting a bargain, compared to the other one. They’re getting a lot more value for their money.

 

Freemium Pricing

 

With freemium pricing, you offer a basic version of your SaaS product for free.

Customers can use this free version as long as they want. But if they want access to the more advanced features, they need to upgrade to a paid plan.

This is a great way to get customers in the door, because who doesn’t love free stuff?

The downside of this SaaS pricing model is that it can be hard to get customers to upgrade to a paid plan.

After all, they’re already getting everything they need from the free version. Why would they pay for something that they’re already getting for free?

The key here is to make sure that the paid version offers enough additional value that customers are willing to pay for it.

 

Usage-Based Pricing

 

With usage-based pricing, you charge customers based on how much they use your SaaS solution.

This is a great way to price your product because it ensures that customers are only paying for what they’re actually using.

And there can be a lot of different forms of usage-based pricing, such as the following:

  • Active user pricing: It charges per active user.
  • Credit-based pricing: Customers get a certain number of credits that they can use to access the features of your product.
  • Time-based pricing: It charges per minute that a certain feature is used (i.e. VoIP solutions charging calls by the minute)
  • Storage-based pricing: Customers are charged based on how much storage they’re using.

The great thing about usage-based pricing is that it is easy to scale. 

As your customers grow, they will use more of your SaaS product. Consequently, as they use more of your product, they’ll be automatically charged more.

The downside of this pricing model, however, falls on your end. It can be hard to predict how much customers will use your product. And this can make it difficult to forecast your revenue.

 

Feature Pricing

 

With feature pricing, you charge customers based on which features they use.

This is a great way to price your product because it allows customers to only pay for the features that they need.

The downside of this pricing model is that it can be hard to keep track of which features each customer is using. And this can make billing and invoicing a nightmare.

But if you have a small number of customers and you’re able to keep track of which features they’re using, then this can be a great way to price your SaaS product.

 

Tiered Pricing

 

This is one of the most popular pricing structures in the SaaS industry today,

Tiered pricing is when you offer different levels or tiers of service at different prices. Each level has its own set of features and benefits.

One great thing about having a tiered pricing model is that you can create a tier for each buyer persona.

As a growing SaaS business, you’re probably targeting customers of different sizes and categories.

For example, let’s say  you’re offering a B2B SaaS product. You’re probably targeting businesses of all sizes, such as startups, small to medium-sized businesses (SMBs), and enterprises.

Having a tiered pricing model allows you to craft a subscription plan that is perfect for each of those buyer personas.

Another benefit of the tiered pricing model is that it makes it easier for you to upsell to your existing customers.

For example, let’s say you have a basic plan for $50 per month and a premium plan for $100 per month. A customer who is using the Basic plan might be tempted to upgrade to the Premium plan if they see that it has more features that they need.

The downside of tiered pricing is that it can be confusing for customers. They might not know which tier is right for them. Or they might end up paying for features that they don’t even need.

To overcome this, you need to make sure that your pricing structure is clear and easy to understand. You also need to make sure that you’re offering a good value proposition at each pricing tier.

 

Hybrid Pricing Model

 

The hybrid pricing model is a mix of two or more SaaS pricing models.

For example, you can have a mix of usage-based and tier-based pricing. You would have different pricing tiers, but the cost in each tier may vary depending on the number of users it would accommodate.

Some SaaS businesses also do this by including a preset number of seats for the plan, usually for 2 to 10 active users. Seats for additional users would be charged as add-ons.

A hybrid pricing model is a great way to price your product because it allows you to tailor the pricing structure to each customer’s needs.

The downside, however, is that it can easily get complicated. If your pricing table is too complex, it might confuse your potential customer and scare them away.

Simplicity is key when it comes to pricing. So if you’re going to use hybrid pricing, make sure that it is easy to understand and follow.

 

SaaS Pricing Psychological Tactics

 

Knowing how to price your SaaS product isn’t just about figuring out the right price range and pricing model. It’s also important to know the best ways to present your prices.

In fact, there are some psychological pricing tactics that you can use to make your pricing pages more appealing to your target customer.

Here are some of them:

 

Charm Pricing

 

In whatever industry, chances are you’ve seen a price tag that ended with the number 9.

For example, you might find a dress that costs $99 instead of just simply $100.

This is called “charm pricing.” And it’s a psychological tactic that has been proven to be effective in getting people to buy.

Charm pricing works because our brains tend to round down when we see prices that end with 9. So instead of seeing the price as $100, we would see it as $90.

Which makes the product seem like it’s cheaper than it actually is.

However, charm pricing is so common nowadays that people have adapted to round up instead of down. So it might not be as effective as it used to be.

Still, it’s worth a try if you’re looking for ways to make your prices more appealing.

 

Odd-Even Pricing

 

This pricing tactic works based on the same principle as Charm Pricing.

The idea is to use a lower odd number to make your pricing seem cheaper. So instead of $100, you would price your product at $97 or $95.

It can be a good workaround for people who have adapted to round up instead of down when they detect a Charm Pricing tactic.

However, Odd-Even pricing also involves knowing when to end your pricing number with an odd number or an even number.

Our minds tend to view prices ending in odd numbers as good deals, while we unconsciously associate even-numbered prices with premium products.

So if you want your product to be seen as a good deal, go with an odd-numbered price. But if you want to convey that your SaaS solution is a world-class product, you may want to use an even-numbered price.

 

Decoy Pricing

 

This pricing tactic is all about using a “decoy” option to make your other offers seem more appealing in comparison

For example, let’s say you have a tiered pricing model with three plans: X, Y, and Z. Plan X includes two features, Plan Y includes four, and Plan three includes five.

Now, let’s say you want people to buy Plan Y because it has the most value for the price.

To do this, you would make Plan Z seem like a worse deal by increasing the price without having significantly better inclusions than Plan Y.

So you set the price point for the three plans at $10, $20, and $40 per month, respectively. This would make Plan Z a lot more expensive than Plan Y, but not really that better in terms of benefits.

 

pricing table with a decoy pricing tactic

 

So now, people who compare Plan Y with Plan Z would see that the former is a much better deal. And that would increase the chances of them signing up for it.

 

Bundle Pricing

 

This pricing tactic is all about selling multiple products together at a discounted price.

It’s often used in supermarkets and fast food restaurants. But it can also be used for SaaS products.

For example, let’s say you have a project management tool that costs $10 per month. You could create a bundle that includes the project management tool plus a video conferencing tool and a to-do list app. And you could sell the bundle for $20 per month.

People would be more likely to buy the bundle because they would see it as a good deal. They would be getting three different products for the price of two.

And since they’re already buying the bundle, they would be more likely to use all three products. This would likely improve their overall experience with your brand and SaaS products.

 

Price Anchoring

 

Have you ever seen SaaS pricing pages that show the more expensive options first?

This is called price anchoring. And it’s a psychological tactic that’s often used in pricing strategies.

The idea is to show the more expensive option first so that the other options would seem like better deals in comparison.

For example, let’s say you have three subscription plans that cost $30, $50, and $100 per month.

If you use price anchoring, you would list the $100/month plan first, on the leftmost side of the pricing table. And then you would show the $50/month and $30/month to the right.

 

pricing table with a price anchoring tactic

 

If you do it right, people would see the $100/month plan first and think “Wow, that’s expensive.” But then they would see the $50/month and $20/month plans and think “That’s not so bad in comparison.”

And that would increase the chances of them signing up for one of the cheaper plans.

 

The Center Stage Effect

 

The center stage effect is a psychological phenomenon where people are more likely to choose the option that’s in the middle.

For example, let’s say you have three subscription plans that cost $20, $50, and $100.

If you use the center stage effect, you would list the $50/month plan in the middle and show the $20/month and $100/month plans on either side.

But more than that, you can also work with design elements to make the middle option more enticing.

For example, you could use a bigger font size or a different color. You could also give it a thicker outline. Or a statement that says it’s the most recommended option or the one with the best value for money.

These design elements would make the middle option stand out more. And that would increase the chances of people signing up for it.

 

pricing table with the center stage effect

 

Slashing The Original Price

 

Slashing the original price is a pricing tactic that’s often used in sales and promotions.

The idea is to show the original price with a big strike-through. And then show the discounted price next to it.

This would make people think that they’re getting a good deal because they’re getting a discount on the original price.

For example, let’s say you have a subscription plan that costs $89/month. You could slash the original price and show it as $100/month with a big strike-through. And then you could offer it at $89/month. This would make people think that they’re getting 11% off.

 

pricing table with slashed original prices

 

When using this tactic, however, make sure you’re not overdoing it.

If you slash the prices too much, people might think that there’s something wrong with your product. Or if you do it too often, people might think that it’s just a marketing gimmick.

On the contrary, what will likely work is offering these discounts temporarily. For example, you could offer it for the first month or the first three months.

The limited-time discount would create a sense of urgency. And that would increase the chances of prospective customers buying your SaaS product while the prices are slashed.

 

Final Thoughts On How To Price Your SaaS Product

 

Pricing your SaaS product is a tricky business. But it’s something that you have to do right if you want to be successful.

Generally speaking, the value-based pricing strategy is the best way to price your SaaS product.

Still, there are some exceptions. There are a few cases where cost-plus and competitor-based pricing strategies would come in handy.

But it’s just not about setting how much your SaaS product costs. It’s also about presenting it in a way that would get your prospective customers to buy it.

That’s why you should also take into account the different pricing models and psychological tactics that would help increase your conversion rates.

Want more tips to grow your SaaS business? Visit our blog here.

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Ken Moo