9 SaaS Pricing Strategies For Generating The Best Possible Revenue
For a SaaS business, knowing how to price your product is one of the most essential steps toward success. It could make or break your business.
SaaS businesses have to think about how to monetize their product in a way that’s both fair to the customer and makes financial sense for the company.
The right approach for your business will depend on your product, your customers, and your business goals.
In this article, we will talk about different SaaS pricing strategies that can help you get the best possible revenue for your business.
1) Cost Plus Pricing
With cost-plus pricing, you simply charge the customer enough to cover your costs and make a profit.
This pricing strategy makes more sense if you’re selling a tangible product that you can sell per unit. The cost would include the manufacturing cost and the shipping cost. Then, you would add a markup on top of that to make a profit.
For SaaS products, however, it can be more difficult to determine how much it costs to produce the product.
So what does cost plus pricing looks like for the SaaS business model?
One way to implement cost-plus pricing for SaaS is to take your cost of goods sold (COGS) and customer acquisition cost (CAC) into consideration.
COGS includes operational expenses, such as hosting fees, office utility fees, licenses for the software you use, and salaries for your employees.
Your CAC would include your sales and marketing spend.
Now, computing your CAC already involves finding the amount you’re spending for each customer you acquire.
You would also need to do the same to your COGS. You would need to divide your total COGS by the number of customers you have.
Let’s have an example. Let’s say you have a CAC of $100 and a COGS of $50 per customer in a month. If you want a 30% profit margin, you would price your SaaS product for around $200 per month.
2) Competitor-Based Pricing
This strategy is exactly what it sounds like. You price your SaaS product based on what your competitors are charging for their similar products.
The goal here is to have competitive pricing to attract customers away from similar offers.
It’s a race to the bottom, in a way, but it can be a viable pricing strategy if you have a unique selling proposition (USP).
Your USP is what makes your SaaS product different from your competitor’s. It could be that you offer more features, that you’re more user-friendly, or that you have better customer support.
Whatever it is, if you have a compelling USP, you can still charge a higher price than your competitor while still being the more attractive option.
3) Value-Based Pricing
With value-based pricing, you price your SaaS product based on the value it brings to the customer.
This is different from cost-plus pricing or competitor-based pricing because you’re not basing your price on your costs or what your competitors are charging. You’re basing it on the perceived value of your product.
This means you need to outright ask your target audience how much they are willing to pay for the benefits that your SaaS product can provide.
You can do this through surveys, interviews, or focus groups.
Once you have an idea of how much your potential customers are willing to pay, you can arrive at a price range that you think is fair.
Having a value-based pricing strategy can help you maximize the profit you can get from your SaaS product while making sure that your customers are happy with the price.
4) Penetration Pricing
Another approach to pricing your SaaS product is to use it to attract as many customers as you can.
And that’s what penetration pricing is all about.
Penetration pricing is when you price your SaaS product at a low rate to attract customers, with the goal of getting a large market share before your competitors do.
Then when you have secured a large chunk of your target market, you can upsell your existing customers to increase your revenue.
This pricing strategy is quite risky because it involves lowering your prices to unsustainable rates for the short to medium term.
That’s why you’ll need a solid SaaS upsell strategy to make it work.
5) Charm Pricing
This is a psychological pricing strategy also known as “9-ending pricing.” And it’s exactly what it sounds like.
You price your SaaS product with the number 9 instead of an even number, such as $100.
The reason for this is that the human brain processes numbers differently.
For example, when people see something that costs $89, they would likely think it’s closer to $80 when, in fact, it’s just one dollar away from $90.
However, you still need to be careful in using this strategy.
When charm pricing was first introduced, it was found to be quite effective in getting people to buy products. But recent studies have shown that it might not be as effective as it once was.
Charm pricing has been so overused that people have learned to adapt to it. They’ve become more aware of how it works and are now able to see through it more easily.
So while charm pricing can still work, don’t expect it to be a magic bullet that will increase your SaaS product’s sales instantly.
6) Odd-Even Pricing
This SaaS pricing strategy is quite similar to charm pricing. The only difference is that, with odd-even pricing, you offer your product at a price that ends with a different odd number instead of 9.
So, for example, instead of $89, you would price it at $87.
Like charm pricing, odd-even pricing is based on the principle that the human brain processes numbers differently.
When people see an odd number, they tend to round it down. So if they see something that costs $87, they would think it’s closer to $80 than $90.
However, it’s not just the psychology toward odd numbers that you can take advantage of. The even numbers have their purpose too.
Generally speaking, people tend to see odd-numbered prices as good deals and even-numbered prices as premium offers.
So you can adjust this pricing strategy depending on which buyer personas you’re targeting.
If you’re looking to sell a pricing plan for budget-conscious buyers, an odd-numbered price point would be more effective.
But if you’re targeting buyers who are willing to spend more for a premium SaaS product, an even-numbered price point might be the best way to go.
7) Bundle Pricing
This SaaS pricing strategy is quite simple and straightforward. You just need to offer multiple products or features altogether at a discounted price.
This can be very useful if you have multiple types of SaaS products under one brand.
For example, let’s say your primary product is a customer relationship management (CRM) solution that costs $30 per month. But you also offer an email marketing tool for $20 per month and a social media marketing solution that costs $15 per month.
You could offer all of these three integrated solutions for a bundle pricing of $60 per month.
This would give your customers a significant discount while also increasing your revenue per user.
8) Decoy Pricing
With decoy pricing, you intentionally make some of your plans too expensive or not functional enough so that you could make one or more offers look more appealing.
For example, let’s say you have a tiered pricing model with three subscription plans: Basic, Intermediate, and Premium.
The Basic plan might be too limited in functionality while the Premium plan could be quite expensive. But the Intermediate plan would have just the right amount of features at a price that’s not too high or too low.
In this case, the Basic and Premium plans are acting as decoys to make the Intermediate plan look more enticing to your potential buyers.
9) Discounted Pricing
Everybody loves discounts. And SaaS users are no exception.
One of the most popular SaaS pricing strategies is to offer a discount for buyers who commit to a longer period of time.
For example, you could offer a 10% discount for customers who sign up for an annual subscription instead of a monthly subscription.
Or you could go one step further and offer a 20% discount for customers who sign up for a two-year subscription. If you offer multi-year plans, that is.
Discounted pricing is a great way to increase customer loyalty and reduce customer churn.
It’s also an effective way to generate more revenue in the long run as customers who sign up for longer periods of time are less likely to cancel their subscriptions.
Just one more tip if you plan to use discounted pricing: make sure your pricing page spares no detail in showing the discount.
You could add a simple line that says “10% off when you sign up for an annual subscription” or something similar.
But it would be even better to show the actual pricing with and without the discount. This way, visitors can instantly see how much they’re saving by signing up for a longer period of time.
Final Thoughts On SaaS Pricing Strategies
As you can see, there are a lot of different SaaS pricing strategies that you can use to increase your revenue.
The best SaaS pricing strategy for your business will depend on a variety of factors, including your target audience, the features and benefits of your SaaS product, and the competitive landscape.
You’ll need to experiment with different SaaS pricing strategies to find the one that works best for your business. But once you find the one, you’ll be well on your way to increasing your SaaS company’s revenue.
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