The 2022 Guide to Pricing Your SaaS Product - 5 Models
June 1, 2022
I used to hear that some extremely capable people could sell snow to an Eskimo, but then I realized that no matter how good of a salesperson you are, there are some cases that you cannot avoid failing.
Most of the time, these cases do not derive from the way you present the product at hand but the issues regarding the product itself—such as bad pricing adjustments, insufficient value proposition, and poor user onboarding.
In today's highly competitive SaaS industry, one of the issues above makes your business take a turn for the worse: product pricing.
Your software product lacking a profitable yet decent pricing structure could result in either your potential customers' early departure or earning less revenue than you could have if you had a pricing model worthy of your product or service's real value.
Therefore, pulling the strings when it comes to the pricing process to increase revenue potential is a must, AND this article will fully guide you to make healthy pricing decisions for the future of your business.
Why It Is Absolutely Crucial to Nail Your Software Product's Pricing
SaaS pricing is what keeps your company on its toes.
Thus, it has the power to make or break by being the applied device that proves the value of your product or service and gives your company a head start in the target market.
Let's check what items supply this amount of power:
1- You get a competitive market advance.
First things first, everybody has to admit that it gets harder to be the number one in the market every year due to your old competitors' tactics or new competitors' arrival. As if those two reasons are not enough, you also have to deal with internal issues in the company. Within this process, many companies tend to lose their customers.
Break out of this cycle by optimizing your pricing—unlike your competitors who do not change their pricing options. This action would only push you to dig deeper into buyer personas and help you align your pricing plan with your customer base accordingly.
AND if you manage to perform this action successfully, you will end up getting ahead of your competitors.
2- You can use pricing to improve retention and growth.
Many categories symbolize the customer journey, which are called growth levers. One of them, which is all about sales, is the main focus of this section: monetization.
You can improve retention without any problems by offering reasonable pricing packages according to the types of customers you have. What is more, not only your current customers would be interested in the proposals you hold out but also the prospective customers.
Therefore, you would make more revenue by profiting from the retention coming from your active users, whose number is growing day by day, thanks to the price sensitivity.
3- You can increase your CLTV while lowering your CAC.
That is why they make up the foundation for your SaaS business to succeed—only if you can handle them properly throughout the sales cycle.
You must seek to have your CLTV quite higher than your CAC to remain as a business that grows stably. If not, the amount of money your customers spend on your product or service will seem small next to the amount you spend to acquire them—which will turn out badly for your business.
There are two effects pricing has on these metrics:
It lowers the CAC by using customer discovery, better categorization, and packing.
It increases the CLTV by demanding more deserved pricing and ensuring even more retention.
Thus, your business gets to grow more and becomes financially healthy more than ever.
4- You can prove your real worth.
When pricing, you should always keep your product or service's real value in mind instead of grounding your pricing on other factors, such as business costs. Because your customers do not wish to remain between the competitors and base their decisions only on the pricing.
You must display your features and put on a show to justify your customers' decisions on continuing to work with your company regardless of the ideal price in the market.
5 Pricing Models for SaaS Products
As I have said before, having an innovative product or fully capable service does not mean that everyone interested will be paying for that. There are many factors that affect the decisions during the purchase process, but I will be focusing on product pricing today.
Here are the top five pricing models that will help you find the correct path to charge for your services.
1- Flat Rate Pricing Model
As you can deduct from its name, the flat rate pricing model offers a single plan for everyone for a single price—every customer purchases the same plan with the same features for the same amount of money.
Therefore, the customers will not be paying for additional features, and there will not be any unexpected monthly costs on their bills. You will be able to calculate your revenue priorly, and your customers will know what to expect at the end of the month. Also, observing revenue growth will be easier.
However, one downside of using the flat rate model is that some of your features will go unused as not every customer will be using your product or service for the same reasons. Thus, not being able to charge your customers according to their needs will affect the business no matter what.
Zoho is one of the companies that applies this model for its product CRM Plus—unlimited use for all the available features of the product.
2- Tiered Pricing Model
Tier-based pricing is almost the opposite of flat rate pricing.
Tier-based pricing offers a few packages with different features; therefore, it's up to your customers to choose one that suits their needs and expectations better.
It is safe to say that tier-based pricing prioritizes the concept of customer segment(s) by offering good deals that vary in features and pricing instead of making the same deal to every single user.
For example, Chargebee uses this model to display many options in pricing to be selected as a better fit, from startups to enterprises.
3- Usage-based Pricing Model
In the usage-based pricing model, aka Pay As You Go model, the more your customers use your product or service, the more they pay. This might come in handy for startups who cannot utilize the services you offer as much as an enterprise does due to the difference in the number of employees; however, the same reason might put off the enterprises as it is likely for heavy users to pay a high amount of money every month.
Stripe is one example that applies this model in its pricing since it charges its customers per successful card charge.
4- User-based Pricing Model
User-based pricing model, aka the per-user pricing model, offers a fixed rate for each user that will utilize the product or service. This is a bargain for the customers who will only benefit from the product as a small unit. Yet, for the big companies that will hold many seats, this model cannot even be discussed—unlessper active user pricing is possible— which helps companies add every employee into the system yet pay according to the number of active ones.
One example of this model can be seen on the Pricing page of Notion , where there is an option called Team, which charges per user.
5- Feature-based Pricing Model
The feature pricing model is closer to the tiered pricing model, but what feature pricing does differs when it comes to additional features: make packages according to needs but divide features in accord with the pricing. So, the pricing of the package rises as the features within the package increase. Thus, the feature pricing model ensures that customers access more functions if they are willing to pay more.
Bigin by Zoho CRM is an example of feature-based pricing as the prices rise in accordance with the features.
Perfectly Pricing Your SaaS Product in 6 Steps
Before using the models presented above, you might need to do some thinking. Here are six steps that will help you along the way and decide which pricing option would be a better fit for your product or service in the long run:
Through customer discovery, divide your audience into groups. At this stage, you should try to leave your product manager identity behind and put yourself into the customers' shoes to grasp their needs and expectations better. Provided that you can separate your audience properly, you will also be able to present them with more convenient packages that would catch their attention.
Take a deep dive into the features you will display within each package to show your real value to every target customer of yours. Make good decisions regarding the functions to deliver your value in each package fully. Do not forget that attracting customers is a part of the plan, but drawing them in does the real job.
See what causes problems over your side due to pricing. Planning everything from the customers' point of view would end up in a defeat for the business; therefore, you should seek to observe the issues that arise within the company, such as low MRR, poor conversion rates, and mediocre user retention rate—which are nothing a good pricing strategy couldn't fix.
Do not be afraid of customer guidance. Implementing strategies or models might work adequately for some time, but the moment things start going wrong on the reports, do not be discouraged from asking the CUSTOMERS about their decisions. Preparecustomer satisfaction surveys and get regular feedback if you can. Learn what your customers think about your current pricing before they churn.
Try to come up with a plan that would work for both you and your customers. After getting yourself familiar with your customers' thoughts, get together with your team and discuss. You might need to follow a new direction regarding pricing or change the pricing altogether—brainstorm on what is needed to be done to keep the business alive and make it stronger than ever while ensuring that both parties are happy with their decisions.
Get to work and monitor if the changes you made are going according to the plan. At this stage, you can still get feedback from your current customers or do market research to see where your business lands on the pricing tier. Observe how your buyer personas are reacting to these changes and track whether these changes are affecting growth and retention in a good sense or not.
As the SaaS industry is more competitive than ever, every little detail of the business you own is important.
And pricing is anything but a small matter as it plays a big role in the conversion process.
It attracts customers, but it also makes them stay by offering really valuable assets that would help them grow more and more.
Therefore, you should not play by ear when it comes to pricing. You must do your research well and present a well-thought plan to overcome any obstacle you may face on your road to success against competitor pricing.
I have provided you with a clear guide to getting your business to the next level by using pricing as a supporting tool in 2022. Enjoy!