SaaS Pricing Strategies
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Your SaaS pricing model is the foundation of your SaaS business. However, in order to achieve repeat sales and generate recurring revenue, you need a strategy.
Ask yourself, are you driving customers always because of a poorly framed pricing structure or missing key opportunities to exponentially grow with a higher ROI?
If you don’t define your SaaS pricing strategy, you won’t understand your customers nor what motivates them to purchase your service.
Tap Into Pricing to Leverage Growth
What is the first thing that comes to mind for growing and scaling your SaaS business?
You might think that customer acquisition is the much-needed element that will drive your business skyward. However, research from Price Intelligently suggests that there is too much information about customer acquisition and not enough info dedicated to pricing strategies:
“People in SaaS are writing and thinking about customer acquisition seven times as often as pricing.”
The chart above reveals the effectiveness of different methods for driving growth. Monetization has the biggest impact followed by retention and acquisition. When you concentrate on pricing, you can maximize your profits by targeting your ideal customers and retaining those that have the best fit with your business.
SaaS Pricing Strategies (Examples)
Let’s look at some practical SaaS pricing strategies you can use. Each will depend on your situation and objectives. For example, if your goal is to rapidly expand into a new market or attract high-value customers, these each require a different strategic approach.
- Penetration Pricing
Penetration pricing is a strategy that uses a low product price to infiltrate and dominate a new market. Use this strategy to take the first-move advantage by claiming as much of the market before competitors fight for their place.
Companies that adopt this strategy lower their prices substantially for a short to medium duration. Their focus is to gain higher profits in the long term by upselling and cross-selling to their large customer base.
Another term for this SaaS pricing strategy is called: Land and Expand. This pricing strategy has been used by Slack, Netsuite and New Relic To minimize adoption friction, grow quickly, and then move-up market after acquiring a broad user base.
- Skimming Pricing
Skimming pricing starts with a higher price and systematically broadens product offerings to address customers at the lower levels. A real-world example of this would be Apple who sells the later products at the highest price points while repackaging their old models at lower prices. They do this to address the needs of different customer segments.
While this is a pricing strategy commonly used in consumer hardware, it’s not a common pricing strategy for SaaS businesses.
This strategy works if early adopters are receiving access to new technology and are willing to pay a higher price to get it first. Later, as your product matures and prices are lowered, it can appeal to a larger population of the market.
Taniun offers a great example of this pricing strategy being used by an SaaS business. Tanium targeted “elite customers” and quickly acquired a $10 per year deal with the U.S. Air Force for their product launch. It was later on, after they secured the captial needed to fund their initial release, did they begin to open up their services to a broader group.
- Captive Pricing
Captive pricing is a strategy that offers a “core” product at lower-than-expected pricing. However, to fully utilize the core product, additional products are needed to upgrade and get the most out of it.
This is a challenging pricing strategy to use because after a customer makes the initial purchase, they are constrained to making purchases from the same business. While it may appear low-cost to begin with, the customer relationship is quickly affected by the ongoing required purchases to maintain the core product.
Let’s use a printer as an example. It’s relatively cheap to buy a printer. However, as the ink runs out, the customers must hand over more and more money for branded ink cartridges. Over time, this becomes for most costly than the initial printer.
Captive pricing is a way of forcing short-term loyalty by locking in the customer. If prices are too high for the additional services, customers may quickly abandon that business in search of a cheaper, more reasonable alternative.
- Free Trial Pricing
In the SaaS world, free trials are a popular strategy used to attract new users with little to no resistance. The key here is that new users are offered a product for a limited time to get the full experience before they are reduced to a lower level or completely restricted access. This leads to a strong incentive to upgrade to a paid plan to continue using the services they became familiar with.
Free trials are always time limited with 14-day and 30-day trials being the most common. Depending on the SaaS business you have, you can also restrict access based on usage (i.e. trial expires after 5 video downloads or 10 invoices sent).
Customers will always convert at different rates based on who they are, what they do, and what you offer. However, if you have an effective follow-up sequence, half of all trial signups typically occur after the trial has ended.
- Value Based Pricing
Value-based pricing taps into the perceived value of your SaaS business. Instead of focusing on desired profits, competition, or target margins, prices are set specifically to meet the expectations of your potential customers.
With value-based pricing, you can increase the price of your product as you increase the value of your product. This may require extensive research into your target customers to understand what they value and which features of your product they need the most.
Remember, your customers care about value and nothing else. If your pricing can reflect the value they’ll receive, value based pricing is a long-term strategy to grow and sustain your business.
SaaS pricing strategies must decide what you are going to pursue, how you are going to achieve it, and align with your sales, marketing, products, and engineering teams. Some of the variables you may want to prioritize are revenue growth, volume growth, profit generation, market penetration, and market share. Use this to come up with a pricing strategy that is consistent with your short- and long-term business goals.
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