You came up with a brilliant idea for a startup. After long-long months full of sleepless nights, you’re ready to present your SaaS to the public. The only question left is pricing. There must have been some pricing models for SaaS business. But how on the earth should you start with pricing?
You may guess.
You assume that people will pay $50 for the product, but you’d better make it $49.99 because the price tag looks better when it ends with $0.99. You also need a tier for enterprises. No specific price for them, let’s equip it with a “call us” button. And freemium. We need a freemium tier because everyone has freemium.
What’s wrong with guessing is that whatever price you put, it will fall somewhere between one that is too high to generate any demand and one that is too low to cover expenses. You’ll hardly know if you’re leaving money on the table or scare potentials away with the overpriced product. Or maybe the product is so cheap people doubt its quality?
You may choose competitive-based pricing.
If a competitor sells its subscription for $49.99, so do you. You won’t let to lure potentials by lower prices! Plus, the competitor must have done their homework and probably has a reason to put that figure on a price tag.
Needless to say that competitors may guess or look at other competitors or even at you trying to solve their pricing puzzle. And does it mean that your product is literally the same as your competitor’s if your pricing is the same?
I’ve recently analyzed the market of SaaS payment processing services and smashed into the fact that two main players charge just the same — 2.9% + $0,3 per transaction.
Do they have identical products? No. Do they have a reason to price their products identically? I don’t know, I will ask when I get a chance. Do they harm their positioning? Yes, definitely.
Another option is cost-plus pricing.
Cost-plus means selling a subscription for more than its cost price. You put together what you spend on product development and design, on marketing and sales, on tools that you use and salaries you pay, and throw a healthy margin on the top — say, 20%. That’s basically how business works, what could possibly go wrong?
The problem with the cost-plus pricing is that you can’t know if you’re going to cover your costs. Cost-plus may work if you sell a sack of potatoes or a teapot. After all, you can always put a new price label over the previous one if your teapot’s cost suddenly rises. You can’t reprice your SaaS subscription every time you hire a new CMO or buy a billboard on Times Square (don’t).
Value-based pricing is a widely accepted valid choice for SaaS.
You figure out how much value people get from your product and build pricing around that. If they believe it is worth $100, they’ll gladly pay you $50 for it.
Charge based on your customers’ beliefs makes more sense than pricing based purely on your expenses (no one cares what it costs for Starbucks to make your Frappuccino) or purely on your competitors (god, no).
With a value-based approach, you get to know your customers, you make the best possible product for your customers, and you get decently paid. Sounds like sunshine and rainbows, but what on the earth means “to get to know your customers?”
How to get to know your customers for value-based pricing?
You may use Van Westendorp’s price sensitivity meter. First, you show your product to a group of potential customers and ask four questions:
- At what price this product is a good deal?
- At what price is it getting expensive?
- At what price is the product so cheap you doubt its quality?
- What price is too expensive for you to consider a purchase?
Having a stack of replies ready, you collect the values and plot them as four histograms. An intersection between them shows a price range people consider acceptable. The MeetSpace video conferencing app has built its pricing based on this method.
Lincoln Murphy from SixteenVentures offers another research method with no surveys, histograms chock full of data, or other excuses not to do it.
You just call a group of target customers and pitch them your product giving the price at the end. If they say they’d buy such a product, you call a new group of people raising your price at 5%. Continue raising until 20% of respondents say it’s too expensive for them. As soon as it happened, you’ve groped your perfect price.
How to break pricing into tiers
SaaS companies often break their pricing into a few packages, and for a good reason. People are different, they all have different demands and price points, and we all know that one-size-fits-all fits none.
The easiest way to start is to small with minimum tiers, like free and pro, or free and call us. Observing how real customers behave with your product, what features they prefer and how do they use them, you’ll be able to create packages perfectly tailored to customers’ needs.
Another option to decide on pricing tiers is to use relative preference methodology. You list a set of features and ask people to choose the one the most important to them and the one the least important.
Collect a stack of replies, and you’ll get a comparable value for all your features. Break all the answers down into groups according to your buyer personas, and you’ll what features each persona can’t live without.
Wrapping up SaaS pricing
Since you sell your product to your customers, your pricing should start with customers, not with guessing. Find a way to call people, make a survey with them, or observe their behavior.
Don’t do it all once — pricing is not a set-and-forget type of task. Your product is changing, people are changing, the market is changing, so should your price. Pricing is liquid, just like cats. When an environment changes, pricing should adapt.