In this blog, we are going to explore the key features needed to achieve a seamless SaaS pricing strategy. This means considering the wisest options to ensure the optimal success of your SaaS startup and ultimately boosting your all-important revenue.
Before we explore the key options, it is essential to consider that Software as Service (SaaS) businesses, as their name suggests, are drastically different from “traditional” businesses due to their online and app-orientated nature. Bearing this in mind, it should come as no surprise that the right pricing strategy can make or break your SaaS startup in all stages since pricing is a process that needs to be re-evaluated constantly.
Understand which pricing model is best for your startup
When setting out on a new business endeavour in the SaaS environment, most entrepreneurs become immersed in the day-to-day running of their new projects. This can quickly lead to a situation where finance, and more specifically pricing, is not given the attention it deserves. We’ll now walk through some of the key pricing options for a new SaaS business and highlight the pros and cons of each of them.
The Flat Rate Pricing model is possibly one of the easiest ways to approach the launch of your SaaS services. As the term flat rate suggests, it involves offering a single product and set of customer service features or products at a fixed price. An easy way to think of this would be an app offered for a single monthly price of 50€ or for a yearly plan that offers users a significant discount on the monthly fee. This is clearly much easier to sell to customers and brings in longer term customer commitment. However, this method means that the business only has one chance to capture customers, depending on whether they are interested in the product.
On the other hand, Usage Based Pricing, quite simply charges potential customers using a “Pay as you go” model. While we might associate this model with IT services like Google Fi or Mailchimp, the model is now popular with a range of SaaS providers, including invoicing apps and social media platforms.
When analysing the feasibility of this model for your business, keep in mind that a core advantage is the reduction of barriers to entry for new users.
This means that a typical app user is probably much more likely to pay for a €30 package than a huge lump-sum yearly fee. In terms of cons, this model can make it considerably harder to predict revenue and customer costs, as each month is likely to have different user figures.
Finally, Per-User and Per-Feature Pricing is one of the models that perhaps seems the best fit for SaaS environments and you’ll certainly see a lot of companies using this approach. It consists of charging users a fixed monthly fee or in the case of Per-Feature Pricing, a fee depending on the type of service level, package, or privilege level the user chooses. In the latter case, this could take the form of either a Basic, Plus or Premium membership plan.
The clear advantage of these strategies is the easy nature of calculating revenue and forecasting, as well as making plans that work easily for customers and allow them to “upgrade” the service level, thus earning the company more money.
The downside to this approach is mostly customer retention, considering that customers can purchase a month and simply decide to stop paying for the app, a phenomenon that is increasingly common during times of inflation. After all, how many people have cancelled their Netflix subscription in recent months?
Pricing strategy requires an in-depth study
Once you’ve decided on your pricing model, strategy is the next step which requires in-depth exploration. You could choose to launch your business with Penetration Pricing which aims to offer short-term low prices to customers in a bid to gain market share before its competitors catch ups and also, before subsequently upselling or cross-selling to recover revenue. This could mean a chance to join the service for just €3 a month for the first three months, before returning to a much higher standard fee.
On the other hand, Skimming Pricing does the complete opposite. It involves offering an initially high price for services to a core base of loyal customers, for example, fans of a new PlayStation video game or Apple’s latest iPhone. After core customers have bought the product, during subsequent months the company gradually reduces its pricing, opening the product to a wider audience. Hence, once the product matures and prices are reduced, it starts to become attractive to the downstream market.
The power of psychology to make the sales process effective
Once the pricing strategy and the pricing model have been established, there is still a margin to optimize your pricing. One of the most known pricing tactics is Charm pricing, which refers to those prices where the ending number is nine.
Our brain processes numbers extremely fast, without deliberate attention, that is the reason why we pay attention to the first number, the left digit.
For example, if the price is €299, the brain will create an erroneous perception of the price, thinking it is €200, instead of almost €300. A clear example of this tactic is Spotify, which pricing is €9,99 per month.
Another common pricing psychology tactic is the concept of a Price Bundle. This involves selling a group of products for one fixed price and ensuring that each individual product is cheaper than if the customer were to purchase it individually. A good example would be G Suite, where products are limited to a monthly subscription service, and there is no possibility to pay for certain products and not for others.
Seek expert advice to help fine-tune your pricing strategies
Considering all this, pricing is the most important lever in our business. Indeed, Startups with the greatest pricing power are constantly re-evaluating their pricing strategy. We know that the amount of work entrepreneurs have on their shoulders while growing an early-stage startup simply cannot be underestimated.
At The Startup CFO, we draw on the vast experience of helping countless SaaS startups to grow their businesses, both in Spain and on the international stage. As well as our core CFO services and funding support, we also offer expert business consulting services which are tailored personally to each startup and its unique needs.
Our services include working in synergy with entrepreneurs to conduct a thorough analysis of the local market, target audiences, competitors, suppliers, and pricing strategies. Get in touch and speak to our professional team.