Defining Your SaaS Pricing Strategy

Defining your SaaS pricing strategy is not as difficult as you may want to believe. Just as with any other business, you need to price your product in order to sell it and make some money. It goes beyond making a profit to ensure you’re not leaving any money on the table. Let it be known that your pricing model will also determine your market position – whether your target customers will be able to buy from you or whether you will be a position to provide the service that your customers require.

Defining Your SaaS Pricing Strategy

Below are pricing strategy questions you should ask and answer:

Quantity vs. Quality: Would you rather have many customers or fewer, but more profitable customers? Note that there are pros and cons to both.

Market Position: Do you intend to be the low-price leader in the low-end market or super-premium, high-end SaaS offering targeting society’s elite customers only? How do you intend to compete with the people you wish to pick a fight with in the same market that you’re entering?

Once you have an idea of what you’re looking for, then you can move on to customer-facing pricing model questions:

Who is your target customer? Who is your ideal customer? This is especially important if you are new to market. You need to figure out whom you built your SaaS product for. Who is ready, willing, and even able to purchase your product or solution today? On the other hand, if you are already operational, define your market segment by looking for patterns within your SaaS customer base. Or if you’re selling to different segments, then you need to determine what value they’ll be getting from your SaaS offering. Forget about the features and benefits and just think about the value they’ll derive from your product offering. But you have to thoroughly understand your customer first. What will be the return on investment on that value? This is usually the hard part, but it is critical.

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Determine the metrics that your price will be based on:

If it’s a seat, the metrics could be… named user or concurrent user, etc. Your product or service must be offering something your customers will want more of. Base your price on something of value so that it does not devalue your offering. In addition, basing your price or segmenting your pricing bundles on something of value also ensures you avoid forced upgrades. If this is done right, your customers will be more than happy to upgrade because your offering has helped them achieve a greater level of success.

Determine the “Deal Size” – How many they will buy

For instance, of you sell bundles of 12, how many of these will your customers sign-up for? And how many will they be willing to sign-up for at onset? In addition, how many of these will they add over their entire lifetime as a happy customer in order to drive expansion revenue? You obviously want this figure to be much higher that the figure “at onset”. You also have to know the estimated customer value (CL).

In the beginning, you may have to rely on your gut or/and any market data available to determine estimated CL. If you’re already in-market, you can depend on historical data to make some improvement. For instance, if your churn is high because you have done very little to keep your valued customers around, it is time to make some changes and work on retaining your customers.

Consider this… If a customer pays $500/mo but only stays for 3 months and yet you paid $2,000 to acquire them, then you have lost $ $500 plus operating/ support costs. This can be very bad for your company.
What is your customer’s buying process?

This is important because it determines the path you’ll take – whether you’ll take the e-commerce or the higher-touch, human-powered path. Complex products and some markets often need a human touch or more human interaction. While you may want to believe that you can drive this element, it is actually market-driven, unless you are big and powerful enough to change consumer behavior. You have to be realistic. Therefore, the only way to go is to choose the right SaaS pricing strategy by selecting a market segment to target. Most businesses don’t care much about the pricing model used as long as the profit margins are good. Depending on your competitors, the market can have a complex sales model coupled with a high-touch sales force. In that case, you may want to go the e-commerce way.

What level of service do you want to provide your customer?

If you are running critical applications for your high-end clients, then your level of service needs to be top-notch, including uptime guarantees, backed with the necessary infrastructure to support it, and 24/7 phone-based customer support teams that perform proactive monitoring of critical systems to ensure a fantastic customer experience. This cost-side input determines your SaaS pricing strategy.

You have to be able to provide the level of support they expect, and are willing to pay for. On the other hand, if you are running a low-end application, uptime is still good, but expect a few hiccups along the way. And support can be email/ticket-based and asynchronous. Data loss and other forms of security breach are not tolerated. So ensure your margin is enough to allow you to provide the level of support required.

If you enter the market “cheap,” they might be savvy or sophisticated enough to determine whether you’ll be in a position to provide the required level of service with just a handful of customers, who might pass the moment they realize you can’t do it even though your pricing may be lower than that of your competitors’.

Conclusion

Once you have most of these questions answered, you can start putting together an ideal pricing strategy and the right price you’ll be charging your customers for accessing your SaaS offering. Developing a pricing model is not rocket science; it is just a high-priority task requiring high-level strategic initiative with different inputs that ultimately determines whether your business will thrive or die. Just as with other businesses, your company needs a pricing strategy for your SaaS offerings, which you have to sell and make some money. Defining your SaaS pricing strategy is not just about making a profit, but it also determines your market position.

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Omri Erel
Omri is the Head of Demand Generation, as well as the Lead Author & Editor of the SaaSAddict Blog. Omri established the SaaSAddict blog to create a source for news and discussion about some of the issues, challenges, news, and ideas relating to SaaS and cloud migration.
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