Pricing your SaaS product is a huge challenge, especially if you’re building something innovative and can’t make any direct comparisons. There are dozens of pricing models (we'll unpack most of them in this article) and a science to the process that is a mile deep.
The biggest challenge is the options at your disposal. There's more than one way to price your product, and it's tricky to know if you're picking the best one.
In this article, I'll cover the biggest factors to consider when deciding on your pricing model and then lay out a straightforward process to figure out which approach will be the best fit.
Pricing isn't rocket science, but getting it wrong can make everything else feel like a grind. So, let's get into it.
SaaS Pricing Factors
There's plenty of stuff to plug into your pricing equation, but these are the variables I suggest focusing on.
The value of your solution to your customer
The value of your solution is the most important factor to consider when figuring out SaaS pricing. If your product is solving a mission-critical problem for your customers and can save them a significant amount of time or money, you can charge a higher price for it.
Even better, if you can guarantee that your customers will make money from your service in a scaleable way (i.e. PPC advertising), then you can charge them an uncomfortable amount of money because they know they'll get it all back with interest.
On the other hand, if your product is solving a less important problem or is a nice-to-have for your customers, you may need to align with their expectations.
While it's not very scientific, you can estimate your product's value. If it saves your customers time that they would be spending otherwise, then it's:
hours of time saved * average hourly rate for that target customer
If your platform helps marketing or sales, then you need a case study of its effectiveness to see what kind of revenue increases it contributes. This is the same for cost savings; you're golden if you can pinpoint the number.
If your product doesn't relate to money, then you need to get creative and find an indirect correlation to attach a hard number.
Different types of customers have different needs and budgets, so you'll need to consider that when deciding how much to charge for your product. Keep in mind that everyone loves a bargain. Just because a product is $500/month doesn't mean it's a bargain. It just means it's only attractive to customers getting $10,000 of value from that $500 investment.
The big question is "How much does your customer spend on software?". Small businesses can vary wildly but typically err on the low end of the scale. Enterprise companies are happy to open their deep wallets but will demand results.
If you have a direct competitor doing something similar to you, then you have a template.
There's nothing to say you can't adjust your own pricing based on the value it's serving or your customer profile, but just be careful because pricing expectations have already been set.
Costs of doing business
You'll need to consider the costs of developing and maintaining your product, as well as the costs of marketing and selling it.
If your platform has clearly taken 5,000 development hours from highly trained specialists and requires half a server room to run, then it's easier to justify a higher price tag.
This bleeds into competitor pricing, because if you've put in an enormous amount of work to get your product off the ground, the chances are that you won't have many competitors, and you'll be closer to holding a monopoly solution that grants you the freedom to charge more.
On the other hand, if your costs are low and your service took a month to build, you can charge less and still make a profit.
Market dynamics is another factor to consider when figuring out SaaS pricing. You should research and analyze your market to understand the pricing of similar products and the willingness of your target customers to pay for your product.
This isn't necessarily a competition thing. It's more of a positioning tactic.
For instance, personalization suites like Bloomreach, Klevu and Dynamic Yield all charge thousands of dollars a month. Their target customer is typically mid-market to enterprise, get a lot of quantifiable value from their service, and are happy to pay these rates.
Customer Acquisition Strategy
If you plan to use a direct sales approach, you may want to choose a higher price point to accommodate the cost of hiring a sales team. If you plan to use a low-touch or self-serve approach, you may want to choose a lower price point to make it easier for customers to sign up and get started with your product.
This is one of those friction tradeoffs. When you're in the early stages, it's better to be easier to sell with less profit than harder to sell with more profit.
Get the sales machine turning first, then add this kind of friction.
There are several pricing models you should at least consider before making the final call. The most common models are:
A freemium model is a pricing model where you offer a basic version of your product for free, and then charge for additional features or functionality. This model is an excellent way to attract new customers and get them to try your product, but it can be challenging to monetize if you have high costs or a small customer base.
It's anecdotal, but this tactic seems to have died out over the past four or five years. The resource costs of free users can be a drain if you don't build in forceful gates that make them upgrade to a paid subscription.
Pay-as-you-go (aka Usage Pricing)
Pay-as-you-go model is where you charge customers based on their product usage. This model is a good option for products that have variable usage, such as cloud storage or web hosting, as it allows you to charge customers based on the value they are getting from your product. However, it can be difficult to predict revenue and plan for growth.
Tiered pricing model is where you offer different pricing tiers based on the features or functionality that the customer needs. This model is a good way to cater to different customer segments and their specific needs, as it allows you to offer a range of options. However, it can be difficult to design fair pricing tiers that make sense for your customers.
Tiered pricing is typically combined with other pricing approaches.
Flat-rate pricing model is just as it sounds. You charge users a fixed rate for your product, regardless of how much they use it. This model is a good option for products that have predictable usage, such as project management software or email marketing software, as it allows you to offer a simple and straightforward pricing structure. However, it can be difficult to scale revenue with this model, as there is no incentive for customers to use more of your product.
Under a cost-based pricing strategy, you set your prices based on the costs of producing and delivering your product, plus a markup for profit. This strategy is a good option if you have a good understanding of your costs and you want to ensure that you are covering your costs and making a profit.
It's pretty uncommon for SaaS though, since profit margins tend to be upwards of 60%.
A value-based pricing strategy takes the dollar value of savings or revenue growth that you can offer the customer as the foundation for the subscription. This strategy is a good option if you have a good understanding of the value that your product is creating for your customers and you want to ensure that you are capturing a fair share of that value.
Competitive-based pricing strategy is where you set your prices based on the prices that your competitors are charging for similar products. This strategy is a good option if you are in a competitive market and you want to ensure that you are charging a price that is comparable to your competitors.
Price skimming strategy is a pricing strategy where you set your prices high initially, and then lower them over time. This strategy is a good option if you have a unique product with a lot of demand and you want to maximize your revenue in the early stages of your product's life cycle.
Penetration pricing strategy is a pricing strategy where you set your prices low initially, and then raise them over time. This strategy is a good option if you want to quickly gain market share and attract new customers to your product.
Pricing experiments are a great way to test different pricing strategies and models to figure out what works best for your product and customers. Some common pricing experiments include:
A/B testing is a method where you test two or more different pricing strategies or models and see which one performs better in terms of revenue, customer acquisition, or other metrics.
Freemium to premium
Freemium to premium is a pricing experiment where you start with a free version of your product and then introduce a paid version with additional features or functionality. This experiment can help you test whether customers are willing to pay for your product and what price they are willing to pay.
How to figure out SaaS pricing
Here is a step-by-step process to figure out SaaS pricing:
Step 1: Start with your costs and revenue goals
Before you can figure out SaaS pricing, you need to understand your costs and revenue goals well. This will help you determine how much you need to charge for your product in order to cover your costs and make a profit.
To do this, you should create a detailed budget that includes all of your costs, such as development and maintenance costs, marketing and sales costs, and overhead costs.
The piece that most businesses leave out during this exercise is your own time. You sure as hell aren't working for free! Figure out what salary you need to pay yourself and add that to your expenses.
You should also set revenue goals for your product, such as the amount of money you want to make in the first year, and the amount of money you want to make in the long term.
Be realistic but generous here. No point underselling your hard work :).
Step 2: Understand your customer profile
You need to have a good understanding of your customer profile. This will help you determine how much your customers are willing to pay for your product, and what pricing model and strategy will work best for them.
To do this, you should create a detailed customer profile that includes information about their needs, wants, and budgets. You should also conduct surveys and interviews with your target customers to gather additional data and insights.
Step 3: Figure out your value
I touched on this earlier, but you need to figure out your product's value. This can be very difficult and even if you get a number, it can feel like a bit of guesswork. That's okay; just get to a number that makes sense.
Step 4: Understand your market and competitors
Once you have a good understanding of your costs, revenue goals and how much value your product is bringing to the table, your next step is researching the market to understand the pricing of similar products.
My best advice here is to do this from both a product perspective and target market perspective.
What I mean by that is dig around and look for products serving a similar function to your SaaS. But also look at the other tools your customer is purchasing. If your target market is enterprise, then there's no point comparing your pricing with other B2C products because they'll be undervalued.
While you're on this mission, take into account the willingness of your target customers to pay for your product.
Step 5: Choose your pricing model and strategy
It's time to choose your pricing strategy. As a reminder, these are the options we covered above:
- Freemium model
- Pay-as-you-go model
- Tiered pricing model
- Cost based
- Competitive based
- Penetration pricing
- Price skimming
Step 6: Test and iterate
Finally, once you have figured out your SaaS pricing, you should test and iterate to see what works best for your product and customers. You should run experiments and gather data to see how your pricing is performing in terms of revenue, customer acquisition, and other metrics, and then make changes as needed. You should also stay up-to-date on market trends and competitor pricing to ensure that your pricing remains competitive and relevant over time.
Easier said than done, but there are so many options you can build into your pricing;
- Yearly vs monthly
- One single price vs three tiers vs 5 tiers
- Pay-per feature
- Hidden pricing where customers need to reach out for a quote
Frequently asked questions
Q: How do you price a SaaS product?
A: Pricing a SaaS product involves understanding your costs and revenue goals, understanding your market and competitors, understanding your customer profile, choosing your pricing model and strategy, and testing and iterating.
Q: what is the best pricing model for a SaaS product?
A: There are several good pricing models for SaaS products, including the freemium model, the pay-as-you-go model, the tiered pricing model, the flat-rate pricing model, and the usage-based pricing model. The best pricing model for your product will depend on factors such as your costs, revenue goals, market, competitors, and customer profile.
Figuring out SaaS pricing can be a complex and challenging process, but with the right approach and a good understanding of your costs, revenue goals, market, competitors, and customer profile, you can find a pricing model and strategy that works best for your product and customers. Remember to test and iterate over time to ensure that your pricing remains competitive and relevant and that it helps you achieve your revenue goals in the long term.
Tim is the face of the company. When you want to kick off a new project, or an update on your existing project, Tim is your man!