In today's article, I will share with you 10 hands-on tips for your SaaS pricing.
Why does the right pricing strategy matter?
The right pricing strategy directly affects conversion rates, revenue, churn rate, and NPS scores and has a massive impact on your companies success. You want to find the right balance between value and revenue - as both undercharging and overcharging can harm your growth.
But the average SaaS company only spends 6 hours on their pricing strategy - ever (not per week).
Common SaaS pricing models
Let's start with a quick overview of the most common SaaS pricing models before we dive into the 10 hands-on tips for your SaaS pricing.
Flate-rate pricing is a pretty simple pricing model (not saying that it's not a great pricing model). You just offer one fixed fee for your product. This fee can be paid monthly or yearly in advance.
Easier to communicate
Therefore easier to understand and easier to sell
Harder to sell to different target customers
Missing out on potential revenue
The cost of the SaaS product is based on the usage of the customer - the more they use the product the higher the fee. This model is also known as the Pay As You Go model. Common usage-based metrics are #bookings #api requests #minutes #emails sent.
Revenue increases with usage
The aligned interest between you and the customer ('grow together')
Low entry barrier
Prevents users from unprofitable heavy usage
Harder to predict (future) revenue and customer costs
With tiered pricing, you offer different pre-defined packages to your customers. Mostly seen tiers are around included features or included transactions (see usage-based pricing). Tiered pricing can be seen as a combination of fixed-fee and usage-based pricing.
Appealing to many different target personas
Therefore huge revenue potential
Upselling potential and churn prevention
Prevents users from unprofitable heavy usage
Hard to define the right packages
Harder to communicate and to understand the different packages
Fear of going too broad
Per Seat Pricing
This model is quite easy to understand and therefore used a lot. The customer pays for every seat (or also known as user). So your SaaS is limited to #seats per customer (e.g. 5€/month per user). When the customer grows (needs more user accounts), your revenue increases with the number of seats.
Easy to understand
Revenue scales with adoption
Customers tend to cheat (e.g. share user accounts)
No direct relation to the value of the software
Per Feature Pricing
Feature pricing can be seen as a sub-category to tiered pricing models. This means you define the packages of the tiers based on the metric 'features included'.
Easy to market your product to different target personas (& budgets)
Built-in upgrade incentive
Hard to decide on the right packages (what features to include/exclude)
Customers don't like limited access
And now let's have a deeper look into 10 hands-on pricing tips for your SaaS product.
10 hands-on pricing tips
#1 Keep it simple to understand
Don't make it too complicated. Your potential customers need to understand pricing when they are on your pricing page. If they don't get it, they won't sign up for your product. Most of the time the easier the pricing the better.
Tip: Ask 10 random people to go on your pricing page and let them pitch your pricing to you. If they can't easily pitch it to you, it's a clear sign that your pricing is too complicated.
#2 Limit the number of options (and only change one variable)
To keep it simple and easy to understand for your potential customer, limit the number of options they can choose from. It's called the paradox of choice - the more options they have to choose from the harder it's for them to make a decision.
#3 Keep the differences between the plans simple
If you offer different pricing plans, let them only differ on one metric (e.g. seats included, features included, #bookings, etc.). If you change more than one metric, it will get way harder for them to compare between the plans.
#4 Charge price based on the value
First, identify what defines the value of your product. Secondly, think about how you can charge for your SaaS, based on the value it drives for your customer (value-based pricing). Ideally, you can scale your revenue with increased value for the customer (e.g. charge based on #bookings or #emails send or #revenue generated...).
#5 Go with 3 pricing tiers
If you decide on tiered pricing, offer preferably 3 tiers. Or in case you keep it simple (fixed fee pricing) just offer one standard pricing (e.g. 1% of revenue or 1€ per lead, email sent, booking...). If you offer 3 pricing tiers, make sure you highlight the plan which you want most customers to sign up for (see #6 Isolation Effect).
#6 Highlight one pricing tier (Isolation effect)
The conversion rate is the highest if you highlight one of your tiers. Consumers tend to decide for products that are highlighted or in some way 'isolated' from the rest of the options. A great way to do this is to highlight one tier with a badge (e.g. most popular), different color, or a frame.
#7 Use odd prices
Pricing with odd numbers converts better. This is most probably because of the Left-Digit Effect. So when deciding on the exact pricing, keep odd numbers in mind.
Check out: Pipedrive.com
#8 Nudge your customers (price anchoring)
Price anchoring is a concept, where you leverage the fact, that humans use reference points to assess the price and value of something. Use smart pricing (nudging) to nudge customers for your preferred tier. One powerful way is to make your more expensive tier 'relatively' cheap compared to the cheaper options, so your customers get the feeling that this is a 'great deal'.
#9 Offer free trials
Especially if you target consumers, prosumers and SMBs, make sure you offer free trials of your product (if you offer enterprise software, I wouldn't recommend a free trial). Make sure you have a great product onboarding in place (e.g. step-by-step guide, product tours, product videos, email onboarding automation...) and that your customers experience the value of your product as fast as possible.
#10 Offer yearly billing option
Offering yearly billing options is great for your cash flow and can help you to reduce the churn rate. Make sure your customers pay the yearly (discounted) fee upfront. I would recommend making the yearly plan 10% to 20% cheaper compared to monthly billing.
Some highly relevant resources
SaaS Pricing Page Design Tips: Check out Pascal Barry 14 Design Tips for SaaS pricing page
Tips for Seed Stage SaaS Companies: Point Nine Capital on DOs and DONTs