What Successful SaaS Pricing Strategies Look Like
One of the BIGGEST questions any SaaS company asks is, “What is stopping us from growing?” It may very well be your pricing.
Although winning new customers is critical, retaining the ones you’ve already got is just as essential to your growth and valuation－ a well-structured pricing model can do that for you and drive up the most important SaaS metric of them all — your net dollar retention (NDR).
No other metric is more important to the valuation multiple on your revenue as NDR.
So what are the best SaaS pricing strategies?
“The reality is that pricing for maximum revenue doesn’t have to be difficult — you just need the right pricing strategy. Each of the pricing strategies below has its place for different business types.” — Patrick Campbell in his blog post Saas Pricing Models, Strategies, and Examples of Success
So let’s look at some of Patrick’s contenders…what types of Pricing Strategies are there?
According to Profitwell, “cost-plus-pricing is what people automatically think of when they think of ‘pricing strategy’.” It is incredibly basic and is determined by looking at a product’s unit cost and adding a little extra when deciding your selling price to ensure you make a profit. For a SaaS startup, those costs might include things like product development, WebOps or DevOps and the cost of running a team.
The approach is popular because it is easy to calculate, and you can rest easy that you’ve covered your upfront costs and made a profit.
However, there is a massive shortcoming…. Patrick wisely points out that the costs for delivering a single account of a SaaS product can be very low meaning you won’t actually make the profit you deserve with this pricing strategy.
“Your pricing should be based on the value that your customers will get out of using your product, not how much you paid your developers,” says Patrick.
This approach also doesn’t take into account external factors, like competitors.
“Instead of using your business costs as a benchmark for your pricing, competitor-based pricing involves setting prices based on what your competitors are already charging” (Profitwell). Assuming your competitors have set their pricing sensibly, this strategy can help you get your pricing right.
This may be a tempting approach for SaaS startups who are still working out how to value and monetize their product.
In Patrick’s view, it’s good for benchmarking but you don’t want to be basing your pricing strategy solely on what your competitors are doing. Once you have consistent sales data, you should be able to know if your price reflects your products real value.
Patrick describes value based pricing as: “Instead of looking inwardly at your own company or laterally towards your competitors, with value-based pricing, you look outward. You look for pricing information from the people who are going to make a decision depending on your price: your customers”.
This pricing strategy has the customer at its core! It doesn’t just focus on market trends, competitors or costs to define pricing; it considers how a price will affect how a product is perceived by prospective customers.
However, this method takes a lot of work. You will need to work on your value proposition to ensure ‘value for money’ and that you are actually providing a service that solves a pain or meets the expectations of customers. You will need to dedicate time to research into your customers behaviours and motivations. Basically… you’ll need customer data to put this strategy in place.
…so which model is The Winner?
Value-based pricing is the only pricing strategy you should choose for your SaaS company because often the ‘value your products provide is greater than the costs to produce the products’ (Hubspot). That is why you should always lead with ‘What is my product worth to the customer?’ when thinking about pricing.
In fact, cost-plus pricing is often used by retail companies, not so much by SaaS businesses. In retail “there is variation in the items being sold, and different markup percentages can be applied to each product” (Hubspot). But, if you sell software as a service this pricing strategy may not cut it, especially if you’re subscription-based — it’s just too simplistic.
Competitor based pricing also misses the mark because it has the danger of setting you up with the wrong mindset. If you are basing your selling price on undercutting your competitors, then you are likely to miss out on innovative pricing strategies i.e. upgrades and premiums, and the fact that customers may be willing to pay more.
“Maintaining a lower price than your competitors isn’t always the best way to attract consumers, but competitor based pricing exacerbates that idea by simplifying price as a barrier that constantly must be lowered. Yet, the lowering of prices in most industries leads to doubts about the quality and lower revenue from tiny profit margins.” (ProfitWell)
Settling on a Value-based pricing strategy doesn’t mean you’re done making pricing decisions. You still have to choose how to package your SaaS pricing? Most companies tend to follow a handful of popular pricing models. Read about the five major SaaS pricing models in Patrick’s blog here.
Patrick says, “when it comes to pricing, no matter what type of business you are, you are creating some kind of value. Therefore the monetization of your pricing is essentially the exchange rate for the value you put into the world”.
Catch up with Patrick Campbell’s event with us, Value-Based Pricing Strategy Lessons from 20,479 SaaS Companies, on-demand. From seed startups to seasoned enterprise behemoths, there’s an alarming level of pricing the world is merely guessing on – and ProfitWell has the data to prove it. Catch up here.