The quick answer to the question “how to price your SaaS?” is “price based on its value.” Now, what is a value-based pricing strategy?
Let’s unpack the concept of value a bit. How much would you pay for a hammock to kick back, relax, and enjoy some blissful moments of life? I’d pay no more than $50.
Now, what if I tell you a few facts about our hangout gear?
- It’s a space-age hammock that embodies 20 years of research and design;
- It was handcrafted by Swedish artisans who painstakingly molded each piece;
- It won an award of innovation at the prestigious design show;
- Its canopy blocks up to 86% of UV rays yet allows you to gaze at the sky;
- Kanye West has one such hammock in his backyard.
How much would you pay for it now? If you’re still under $50, you’re just not the hammock’s target audience. The one I’ve described is called The Petiole Hammock and it retails for $35,000.
The points listed above aim to increase value in the eyes of the audience. For those who buy it, the value of the hammock should go beyond $35,000, otherwise, they’d never pay that price.
The elite hammock is a completely different beast when compared to its regular brother. What matters for it is not the distance between the cost and the price, but the gap between price and the user’s perceived value. As soon as the value is greater than the price, the user has an incentive to buy.
Cheap hammock has chosen a cost-plus pricing strategy, and you don’t want to price your SaaS like the cheap hammock. At least because hammocks can upgrade their pricing every time their manufacturing cost grows, when your subscription-based pricing model requires you to be more or less consistent.
You’d better price your SaaS based on its value, as the expensive hammock does. Yes, you can’t drive off that joker with Kanye West, but you definitely have something valuable to offer. Let’s find your SaaS value proposition.
How is the value of a product determined
You can’t say “if I were our Sales Sally target, I’d pay $35,000 for our new app.” That’s called guesswork. Leave the room and ask some Sales Sallys what they really think. In this case, guesswork will be called a hypothesis to be checked.
Van Westendorp price sensitivity meter
You can check your hypothesis via the Van Westendorp price sensitivity meter. First, you ask respondents to answer four questions about a product:
- At what price this product is a good deal?
- At what price is it getting expensive?
- At what price is the product so cheap you doubt its quality?
- What price is too expensive for you to consider a purchase?
Having a stack of replies, you collect the values for each question and plot them as histograms. An intersection, created by four histograms, shows an acceptable price range.
Lincoln Murphy’s raise-until-it-hurts method
Lincoln Murphy from SixteenVentures offers another way to measure a product's value that requires no surveys, statistical sampling, histograms, or other excuses not to do it.
Testing requires talking to a cohort of prospects pitching them your product followed by the price you came up with. If they convert, it’s a sign for you to scale new heights. You set a price, say, 5% higher, and try to sell your product one more time, to a new cohort. Until you get to 20% pushing back on pricing, your prices are too low.
The school of life method
If you want to learn to swim, jump into the water. On dry land, no survey is ever going to discover your perfect pricing. The best insight on pricing you can ever get belongs to your paying customers. The sooner you start charging and testing different options, the better you tune your pricing page.
SaaS customer segmentation
Customers are different. Some of them want less awesomeness yet lower prices. Some others are ready to pay a little bit more for a little bit more. There’s even a cohort that wants to pay $35,000 for a hammock.
You probably have more than one customer segment (if you feel you have only one, check out our article on developing SaaS buyer personas). You can treat them all in the same way, but with a risk to end up with a one-size-fits-none product.
Try speaking to each segment of the audience, like beginner users or enterprises, articulating their specific demands and price points, you’ll get rewarded with higher conversion rates. The only question is what are their demands and price points?
How to create tiered pricing
One piece of advice about splitting your product into different packages is to start with a simple model and minimum tiers (like free and pro, or free and call us). You can always add more packages but it is difficult to remove them without disturbing existing users.
Once you start collecting statistics on paying customers, some patterns pop up. You’ll see that even with access to all the features, 80% of customers will only use 20% of them, and that’s just fine.
Try breaking down the customers on different axes — geography, size of a company, age, or any other relevant characteristics to see how the usage varies for different segments. For more info on how to employ a tiered pricing strategy, check out our SaaS pricing models article.
How to measure what matters to customers among your features
PriceIntelligently in their SaaS pricing strategy guide recommends running a relative preference analysis to boost your understanding of what people value in your product. It’s a simple question that asks respondents to pick the most and the least preferred option from the list.
Once you’ve asked enough people, you calculate a score for each feature, as shown in the formula below.
Plot the scores to figure out what features your customers can’t live without and what went unnoticed.
If you break the results down by different personas, you’ll see what you should do to equip each buyer persona with what it values most.
SaaS pricing page design principles
Once you have everything ready, it’s time to think about your SaaS pricing page design. And we as a SaaS design studio have much to say on the topic.
What page is the most important on your website? Is it your main page, or a service page, or maybe a case studies page? They all exist for one reason — to lead prospects to a pricing section as soon as they are ready to become customers. So, the pricing page is the most important one. All the magic of conversion happens there. Or doesn't happen.
Conversion may not happen if your pricing section wasn’t perfectly made to convert potential customers. If so, all your other pages, all marketing and sales efforts are for naught. To see what separates a good pricing page from a bad one, check out the saddest pricing page award by Profitwell.
Candidates for the saddest pricing page title
What makes a bad pricing page? It's either of the two. Overcomplicating what was supposed to be easy or lacking useful information needed for a confident decision.
Anyway, poor pages make it difficult for users to understand the value in each plan and choose the most suitable one. Feature distinctions are endlessly long, the difference between plans is elusive, and choosing a plan becomes a chore.
What makes a good pricing page?
- information that is complete, clear and consistent so that potential customers can make an informed decision;
- tiers that speak to specific buyer personas;
- a value metric is put upfront to show what specific buyer personas really want.
In the picture below, you see an example of a pricing page done right by Clientjoy, one of Eleken’s clients.
Don’t forget the SaaS price optimization
So here’s the answer to the question of how to price your SaaS product. First, determine the value your product offers, then pack it into bundles sized for your buyer personas and present them all clearly on a well-designed pricing page.
But that's not the end of the story. Pricing (like pretty much everything in startups) is never a set-it-and-forget-it task. Some startups will update their product every single day. Yet, they might not have optimized their pricing in years. Since people are changing, your product is changing, and your market is changing, pricing should be optimized too. Regular pricing optimization is essential for creating a stellar pricing page.
Need some stellar pages for inspiration? If you liked our article on how to price SaaS products, then you’d probably want to see what we consider to be the best saas pricing pages.