How To Keep Your SaaS Pricing Model Competitive In 2024
Establishing effective pricing options for your software as a service (SaaS) products can make or break your business. For example, a 1% change in your pricing plan can increase your bottom line by 12.5% and improve your customer retention.
With so much economic uncertainty today, your pricing strategy should be at the top of your list of priorities in 2024. However, determining the right competitive SaaS pricing model can be challenging.
My name is Mohammed and as a Revenue Operations leader, monetization models and pricing strategies are things I constantly think about. Like other RevOps leaders, I am on both forefronts as someone who supports my organization’s strategy and as someone who has evaluated and bought dozens of solutions.
This article aims to explore the primary considerations you need to make when setting your SaaS pricing strategy. I'll also dive head first into strategies and billing models so that you can begin to determine if one of these models best serves your needs.
What Is SaaS Pricing?
SaaS pricing is a pricing model where customers pay a subscription fee to use your product. For example, if you are a SaaS company that uses a CRM like Salesforce, your organization is paying for products and services which could be a monthly fee or some sort of annualized commitment.
A good pricing model is critical in influencing purchasing decision-making for your products and services. It can also help support your customer retention strategies and mitigate churn while garnering recurring revenue.
Some of our favorite software companies like HubSpot, Zoom, or Zendesk, rely on very well-designed pricing models. Along with their superior products, their pricing models have allowed them to dominate their categories.
Organizations like these spend billions of dollars analyzing and coming up with models that convert and retain more customers.
On one hand, creating a competitive advantage for your organization through pricing should be a primary goal. On the other hand, balancing your CAC, LTV, and, customer value is very complex.
Luckily for you, I'm going to lay out some of the best-in-class strategies that will help you get a better sense of what model suits your business best.
Top 5 Pricing Strategies
Before you even think about product pricing, you will first need to select a pricing strategy. This strategy will guide you in setting up your subscription plans, pricing tiers, and fees. Here are five of my favorite strategies you will want to consider.
Cost Based Pricing
Cost-based pricing is exactly as it sounds. It is also one of the easiest strategies to implement.
This strategy involves calculating all the costs associated with providing your product like development, sales, and marketing. You then add a specific target profit margin to those costs and set this as your price.
Although easy to implement, cost-based pricing has its shortfalls. For example, this strategy does not take into account your competitor’s pricing. If you and your competitor are equal in product value, your competitor may go with a lower price point and grab more market share.
This strategy also does not reflect the perceived value of your product. Establishing an effective pricing model must take into account a perceived benefit-to-cost ratio in order for you to remain competitive in your market.
Penetration Pricing
Penetration-based pricing allows your organization to lower the barrier of entry for customers. Most commonly, this type of pricing is used to generate quick demand. The strategy involves offering a low price in order to penetrate your target market.
Now there are two primary situations you may want to deploy a penetration-based strategy:
- You want to secure a first-mover advantage
- You want to promote specific products and services for a short period of time
Employing this pricing strategy can be extremely beneficial if you are solely after market share and you want to beat your competitors to market.
But just like any other strategy, penetration-based pricing also has its own drawbacks. For example, this strategy could negatively impact your profit margins as you lower your prices.
It's also important to note that if you have a brand that is not well established, this strategy may be harder to implement. After all, it doesn’t matter how low your prices are if no one knows who you are.
Using this strategy at the right time can provide your organization with lots of value. But be careful in trying to leverage this pricing over the long term as this strategy is generally viewed as not sustainable for long-term growth.
Competitor Based Pricing
This strategy uses your competitor’s pricing as a benchmark for price points. By pricing your product above or below your competitors, you can attract customers.
However, relying solely on this strategy may limit your ability to showcase the unique value your product holds. Understanding where your competitors are priced is important hands down. But focusing on your differentiators and product value is more important than just price.
Value-Based Pricing
This pricing strategy requires a deep understanding of your customer’s needs and their overall willingness to pay. A value-based strategy prices products based on the value your customer receives.
This strategy requires some significant investment and time but is worth every dollar. By conducting the right research, this strategy allows you to apply a higher price on your products if your customers receive significant value from them.
Freemium Pricing
The freemium model has caught a lot of attention over the past few years. And although many companies are just starting to make use of this model, companies like Dropbox and Salesforce have been using this strategy for a long time.
Whether you are an established brand or a tech start-up, a freemium pricing model and product-led growth are business strategies you should be considering.
This pricing strategy allows companies to offer a free version of their solution with a limited set of features and functionality. This entices free users to upgrade to a paid version of the solution in order to access the more advanced, new features and integrations.
Freemium pricing allows organizations to cast a wide net and expand their customer base. Once you have captured new customers you can track their progress by monitoring metrics and usage. If done correctly, you can unlock the power of product-led growth and begin to watch your business grow
SaaS Billing Models
Now that I've covered some of the most widely used pricing strategies, it's time for you to consider how you want to bill your users. Some of the most popular SaaS pricing models today include billing strategies like usage pricing, tiered pricing, flat rate pricing, user count pricing, and per-feature pricing. Let's jump into some of these models.
Usage Pricing
This model charges customers based on their usage of the platform regardless of how many team members or active users you may have. Some notable companies that have nailed this pricing model include MongoDB and Snowflake.
For example, MongoDB Atlas is a fully managed database service that charges customers based on resources used. As your customers use your platform more and gain more value from your solution, they end up paying more.
One drawback of usage-based pricing is that it can become costly very quickly. If your customers use your services extensively they can expect a big bill for their usage. But this won’t matter so much for larger enterprises as it will for small businesses, and so long as the value your customer receives is greater than the usage cost, you’re good.
User Based Pricing
Also known as per-seat pricing or per-active user pricing, this model charges customers based on the number of users they have purchased licenses for. Most SaaS businesses use this very model as it’s easy to implement a simple price per user. It’s also one of the easiest models for your buyers to try and understand.
While this model offers predictability in cost and perceived fairness, it also has its shortcomings.
For example, some organizations may be turned off by the administrative overhead associated with maintaining licenses.
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Feature-Based Pricing
Per-feature pricing helps customers customize their subscriptions based on their specific needs. This model allows customers to add on features that they require and drop the ones that they don’t.
This pricing model provides a level of flexibility that some of the other models simply do not. Potential customers love this level of flexibility and your organization will too as you upsell customers on different features.
HubSpot is a great example of how this is done well.
HubSpot allows its customers to have the freedom to choose features that best align with their business goals. This ability allows them to effectively serve a wide audience of customers big and small.
Choosing The Right Pricing Strategy For Your SaaS Products
Choosing the right pricing strategy and billing model for your SaaS business is critical for acquiring customers, maximizing your revenue and conversion rates, and creating a competitive advantage.
As you can see, each pricing strategy has its own unique advantages and disadvantages to consider. When trying to determine what will work best for your business model, make sure you review your business goals, the type of customers you wish to acquire, and the unique value proposition your product provides.
Here are five helpful considerations to keep in mind when determining the right strategy for your business:
- Business Objectives: Understand your revenue goals and how your pricing strategy will contribute to achieving them
- Target Market: Analyze the pricing expectations of your customers and understand the spending capacity of your target audience. It can help to create buyer personas.
- Product Value: Assess the value proposition of your solution. Determine how your customer perceives its value.
- Competitor Pricing: Understand how your competitors are pricing their solutions. Leverage a pricing structure that gives you a competitive advantage over them
- Cost Structure: Make sure you understand the cost associated with developing and supporting your products. Ensure you build a healthy profit margin into your pricing model
Optimize Your Strategy
It's important to regularly evaluate the effectiveness of your pricing strategy. Make sure to account for market conditions, customer feedback, and the ever-evolving needs of your different customers so that they find lifetime value. Pricing is not a one-time exercise and requires an intentional approach that involves monitoring and adapting.
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