Is Your SaaS Long Overdue For a Pricing Update? Here Are 10 Ideas To Improve Your SaaS Pricing Strategy
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If you were to re-launch the current version of your product today, how much would you ask your customers to pay?
Your product keeps evolving and you keep providing more and more value to your users, but are these improvements reflected by your price?
If you’ve ever thought about making changes to your product’s price, these 10 ideas should help you identify a viable SaaS pricing strategy which you can implement and increase your revenue:
1. Offer multiple pricing brackets
You may be leaving a lot of money on the table if you only offer one pricing package to your customers. A study ran on beer prices revealed how the vast majority of people will always choose a more expensive option instead of going for the cheapest bargain.
Once a third option was introduced, the research showed that
no one purchased the cheapest beer which was priced at $1.6,
80% of the people purchased the beer priced at $1.80
20% of the customers went for the premium beer which was being sold for $2.50.
The seller actually lost revenue through bracketing because he bracketed his price down
However, the third time around they removed the $1.60 beer and replaced it with a super premium $3.40 beer. Most people chose the $2.50 beer, a small number $1.80 beer and around 10% opted for the most expensive $3.40 beer. Some people will always buy the most expensive option, no matter the price.
Alex Birkett, Growth Marketer and Content Strategist
The study was written about in William Poundstone’s book, Priceless. It’s a very good example that outlines the buyer psychology, but it’s showcasing very small prices. SaaS products are priced at much more than $2.5.
But my question is: would a SaaS company get the same results as the study if they ran a similar experiment?
Trying to find a case study on SaaS pricing felt like I was a pirate on a treasure hunt. There are lots of article claiming great results, but I wasn’t able to find anything backed by insightful data, or anything that would provide a framework good enough to convince me to start a similar experiment.
I wonder if the folks from Price Intelligently could shed some light on this. They have a lot of experience when it comes too SaaS pricing and I’m sure they’d be able to guide us in the right direction.
Nathan Barry, Founder and Designer at ConvertKit wrote an awesome piece about how he overcame the challenges of setting a price for his product: Are You Making the Most Common Pricing Mistake?. Be sure to give it a read because he shares some valuable lessons that also apply to your SaaS.
2. Changing Your Subscription Pricing by re-evaluating it every couple of months
Your SaaS product is constantly being iterated and updated as you discover more efficient ways to deliver value to your customers. It only makes sense that as your product gets better and delivers more value to your customers, the pricing should also keep up with the changes. Right?
Changing your prices seems so hard and complicated, because it’s probably something you’ve put off until: 1. It was absolutely necessary – launching a product, drastic change in direction, etc, or 2. Your board, investors, or customers are complaining so much, it’s finally jumped to the top of the priority list. –
3. Experimenting with annual/monthly pricing plans
Annual pricing plans require a lot of commitment from your customers. However, you get to benefit of receiving upfront cash which will ultimately allow you a lot of space to breathe. Depending on your funding and how much cash you have at your disposal, receiving upfront payments from yearly subscriptions could be a lifesaver for some businesses.
Depending on your funding and how much cash you have at your disposal, receiving upfront payments from yearly subscriptions could be a lifesaver for some businesses.
Depending on your funding and how much cash you have at your disposal, receiving upfront payments from yearly subscriptions could be a lifesaver for some businesses.
Some companies decide to offer discounts for their yearly plans (we’ll talk about that a bit later in the article), but what’s important at this step is to realize that having a yearly package is essential for any Saas pricing strategy.
In a case study published by Price Intelligently they found out that annual plans also help reduce churn:
Add a yearly option alongside your monthly plan. Even if only 10-20% of customers take the option, it will improve your cash flow immediately and boost your customer retention in the long-term.
A yearly payment option is important for every SaaS company, and particularly so for bootstrapping SaaS companies. Securing more business up front allows you to focus on your customers, increase your cash flow, and make more money overall.
There are lots of psychological tricks you can use to influence your customer’s buying decision. Here’s a really long list of strategies you could experiment with, but we’re going to talk about a few strategies that we’ve seen being used in SaaS:
Freemium: this strategy is often used by SaaS companies. You often see products with a basic set of features being offered for free, and you get to asked to subscribe if you want to use a premium set of features. Lincoln Murphy of Sixteen Ventures broke down the seven types of freemium subscriptions and provides examples for each of them.
Decoy pricing: a simple explanation for this would be to provide a pricing package that’s more expensive, but it doesn’t look just as good as the first two options. The purpose of the decoy product is to boost the sales of the first two options. Paul Olyslager, UX Lead for Home24, wrote a great piece on Decoy Pricing where he also provides concrete examples of how this strategy is used by companies to increase revenue.
Premium pricing: increase the price of the product to influence the perception of the buyers. People are more likely to trust a product that’s more expensive, rather than one that’s cheap. The idea is to portray the high quality of the premium-priced product.
Price discrimination: another way to experiment with pricing by setting different prices different segments of your market, or trying to get the customer to pay the maximum price he is willing to.
Value-based pricing: using this strategy you can set the price for the exact value your product provides to the customer, and not on your cost of production. How do you answer to David Skok outlines this as the perfect strategy to justify your product’s costs to the customers:
As the CEO of my own startups, I used to spend a lot of time in front of customers selling. As any salesperson will tell you, one of the hard parts of the sales job is justifying to the customer why they should pay you so much money.
I found myself wanting to be able to answer that question with ease and comfort. And the only way that I could do that, was to make sure that my pricing was clearly aligned with the value that the customer would derive from using my product.
Studies have also shown that the number of syllables in your price has a direct influence over the user’s decision to purchase.
In this paper, we demonstrate that including commas (e.g., $1599 vs. $1599) and cents (e.g., $1599.85 vs. $1599) in a price’s Arabic written form (i.e., how it is perceived visually) can change how the price is encoded and represented verbally in a consumer’s memory
The researchers tested three different pricing brackets and found out that keeping it simple keeps the friction to a minimum, and the potential customer is more likely to complete the purchase.
It goes back to making things as easy as possible for your user. The harder it is for him to read the price, the more expensive they will perceive it to be.
If you want to learn more about pricing psychology, you can head over to HelpScout’s blog and be inspired by their post on 10 Timeless Strategies to Increase Sales where Gregory Ciotti takes a look at how behavior can influence pricing strategies.
6. Cost Per Acquisition
This might be a bit more difficult to identify if you’re an early stage start-up, but it goes a long way in figuring out how much a customer is worth to you over your product’s lifetime.
If it costs you $400 to bring a customer, but you charge him $30 per month, how long would you have to make sure that he keeps renewing his subscription in order for you to make break even?
Make sure the numbers add up and that you set a price that will help your business survive and thrive.
Marc von Brockdorff, the Co-Founder at HotJar wrote about the main challenges he faced during his career in the tech industry:
Throughout the past few years, I have had the pleasure of working with extremely talented individuals on a number of tech startups.
I love the process of taking an idea and turning it into a product that users are actually happy to pay for – it’s incredibly rewarding to see that happen. But there is one part of that process that I find extremely frustrating: choosing the right pricing structure for your startup.
Charging your customers by how much they use the tool could be a different way to experiment with your pricing strategy. You could try and offer a couple of custom pricing packages which are tailored to their needs.
Think about helpdesk software as an example. There would be no point in paying for a package that is suited for 10 support agents if your support team is only two people strong. This is why you’ll often find the strategy used by companies who develop CRM software.
Ed Sanville of Aria Systems wrote a comprehesive analysis on The Benefit of Usage-Based Billing. Definitely worth looking into if you’re interested to test this strategy on your product.
8. Using discounts
Offering discounts to customers in order to persuade them to go for a yearly plan is a strategy often used in SaaS. Whether it’s a 20% off, or a 12 + 2 months, it’s pretty much the same thing. It’s purpose is to drive people to purchase yearly plans in order to stimulate cashflow for the business.
Lincoln Murphy from sixteen ventures argues discounts could benefit a SaaS business if used correctly, but also cause quite a bit of damaged if they’re implemented the wrong way:
Sometimes discounts are cool, like when you can get people who convert to pay you MORE than they were originally going to… by offering a discount.
Let me explain.
If someone self-selects the $50/mo plan when they start your trial, or if their usage during an unlimited trial or trial not tied to a pricing tier indicates they should select the $50/mo plan, what can we do to get them to convert at, say, $75/mo instead of $50/mo?
Well, we could take the next tier up – $100/mo – and give them that tier for ONLY $75/mo. We could do that forever (until they upgrade/downgrade/cancel – a good reason to not cancel, especially if the price has gone up even more later) or for a limited time, like 6-months.
Either way, that could be a mighty enticing offer, especially if triggered based on their actual usage during the trial (i.e. once they complete the CCAs, make them the offer… I like to use One Time Offers that will never be available again).
We ran our own analysis of over 100 SaaS companies in order to find out the math behind the discounts, and analyze the different strategies they use to showcase their discounts. Here are some of the things we learned:
41 out of the 100 companies offer monthly subscriptions only and 9 offer yearly subscriptions only. Discounts for packages with smaller prices range between 7.4% and 44%. More than half of all the companies that offer a discount offer it between 15% and 20%.
Discounts for packages with higher prices range between 3.5% and 34%. Most discounts are also between 15 and 20%.
All the companies that offer yearly plans offer discounts on them
This is a strategy often used by companies who offer cloud storage services. Think of Google Drive and Dropbox for a moment. This model is a mix between freemium and a usage based pricing strategy. Their pricing packages are based around how much storage space their users need:
Cloud storage companies often use tiered pricing based on the amount of storage people need. For example, Google allows you 15GB of storage across your account, then you have to pay for anything extra. And companies like Dropbox let you have a certain amount of storage free, then you have to pay. This allows people to get to know a service, which may encourage them to upgrade when they hit the limit.
It might be a bold move, but think about the bigger picture for a bit. How much value is your product actually providing for your customers? How many problems does it solve?
Even if they only use a tiny feature in your product, it could be a case where it’s saving them from having to spend money on increasing their dev team, or marketing team for that matter.
Jason Lemkin has a beautiful way of putting this:
$1,000 a month is a lot of money for a widget, even if everyone on my team uses it. But $12,000 a year is dirt cheap for anything that solves a true problem. That solves me having to hire an engineer, or 3, to do something. That fixes something broken in my 500+ person org.
Even if it could sound a bit far-fetched at first, asking new customers more for the service you’re providing isn’t unheard of. It sure is something you could try experimenting with. Jason Lemkin mentions big numbers and names like Facebook or Google, but if you’re a SMB SaaS or a startup charging $20/mo for your service, asking new customers to pay $40/mo might not be the end of the world for them:
You may have to build them an extra feature. Provide better on-boarding. Improve customer success. Upgrade your sales team, or at least, add reps with more experience selling larger deals. Build a new integration. Who knows.
You may have to change a bunch of things to get twice what you did on your largest previous deal. Or possibly — nothing. Either way, you’ll learn. It’s a journey.
Now it’s your turn. Which of these strategies are you going to use to drive up revenues for your SaaS? Let us know in the comments.
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