Determining your SaaS pricing strategy can be tricky, especially when there are so many different pricing models to choose from.
You also need to factor in what the market is willing to pay based on what your competitors charge. Will your prices be palatable or laughable?
To help you decide on a pricing strategy that works for your business, here’s our definitive guide to SaaS pricing. Read on to price right.
First, make sure you don't price too low
This might sound obvious, but you'd be amazed how many SaaS companies price their products too low.
If you advertise rock-bottom prices that hardly anyone would say no to, where are they going to see the value in your product?
You want to draw your customers' attention to the value your service provides, rather than the price they’re paying. This will attract higher-quality customers
Diversify your customer base with tiered pricing
With a tiered pricing model, you attract customers who are on different stages of their buying journey. For example, consider the theoretical example of a company that provides video-editing software.
- The 'basic' service might appeal to a company that needs simple videography features for simple videos.
- An 'intermediate' service might appeal to an organization that has outgrown the 'basic' model and needs some extra features.
- A 'professional' service might appeal to a professional videographer or student who demands nothing less than the best software to perfect their craft.
By diversifying your pricing, you can diversify your customer base.
Optimize your revenue for different types of customers
For example, while 1,000 customers may be willing to pay $500 a year for the premium model, 10,000 might only be willing to pay $100 a year if they know they won't need to use the full suite of your services. Without a tiered model, you could lose out on a lot of revenue if the latter group doesn’t buy your product.
It’s a bit like a gym that has a swimming pool.
- People in group 1 only want to use the gym
- People in group 2 only want to use the swimming pool.
- People in group 3 want to use both.
If the gym is inflexible and insists that you must pay for both the gym and the swimming pool, people in groups 1 and 2 might look elsewhere for a more flexible gym. That could translate to a big loss of revenue for the company.
Should you have lots of pricing tiers?
Ideally, different customer segments will appeal to different pricing tiers, but it may not always be that simple in practice.
A prospective customer may abandon a purchase if they can’t decide which tier to choose. For example, the difference between ‘semi pro’ and ‘pro’ may be confusing and subjective.
However, a tiered model can make it easier to upsell to customers who want to upgrade as they develop their skills.
With the tiered model, don’t be too generous if you offer a freemium service
This isn’t to say that’s you should be mean, but if your freemium model includes too many features, your customers may have less incentive to upgrade to your premium service.
Plus, many freemium models don’t offer much support to customers, which means they won’t experience the full breadth of support your premium products offer.
Should you offer a free trial?
Giving your customers a free trial is like a bakery offering some free samples of its latest cakes - bite-sized versions of the real thing.
Should you do it? Free trial to paid conversion rates hovers somewhere between 10-25% for SaaS businesses. However, if your pricing strategy is right, you could realistically achieve higher figures. It all depends on quality and value.
Most SaaS businesses want people to get a 'taste’ of their products so they can decide whether they like them enough to want more.
But you don't want customers standing around for hours trying more of your free samples and taking up so much of your time that you can't serve your other (paying!) customers. So, limit the free trial and offer a simple upgrade path.
Free trials can be effective for customer acquisition
Anyone curious about your product can try it. Typically, people need more than just curiosity to pay for a product.
In the long run, offering a free trial can be an effective way to acquire paying customers who, after using your product, realize they might benefit from the premium model, but probably wouldn’t have used your product if they had to pay for it upfront.
Should you employ the pay per user model’?
With a simple pay-per-user model, your customers know exactly what they're getting and how much it costs, so there’s little risk of confusion.
This makes it easier to monitor sales and predicts future revenue. But with this approach, you could end up with the following conundrums:
- You undercharge customers and restrict the amount of revenue you earn
- You overcharge customers, creating a refund and value proposition problem
Price Intelligently says that a per-use model can kill SaaS sales because it doesn’t take advantage of daily active users.
On the upside, there is a low barrier to customer adoption. Another unspoken benefit is you learning about your customer’s buying habits.
Last, but not least, what are your refund policies?
Like in any sector, SaaS businesses need refund policies that strike the right balance between respecting the needs of their customers with the interests of the organization.
In the UK, a customer is legally entitled to a refund if the product is faulty, does not match the description advertised, or does not function as it should.
However, many SaaS companies may benefit from offering more generous refund policies to improve their customer retention rates.
Try to resolve a problem before giving a refund
Remember that if a customer isn’t satisfied with a product, they won’t be legally entitled to a refund if the service just didn’t meet their expectations.
As mentioned, there would have to be a problem with the product, a mismatch between the product features and the description, or a defect.
But when the legal entitlement isn’t met, you should still try to find out why the customer was dissatisfied and find an amicable solution.
Perhaps they simply misunderstood your product or realized that they needed something different. Maybe you could offer a different service that might meet their expectations?
If a resolution cannot be established, it may be better to just offer the refund, even if you’re not legally obliged to. Being too firm could land you a negative review and bad social media coverage, which could expose your brand to reputational risk.
However, there may be occasions where you’ll need to stand firm if a customer makes an unreasonable demand, such as demanding a large refund for a problem that was out of your control or a refund for a product they didn’t use correctly.