How to Price Your SaaS Product? Guess Less, Ask More
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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.
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.
SaaS Business Model: Learn How It Works and How to Measure If It Does
With more than 15,529 SaaS companies registered on Crunchbase and 12 times growth rate since 2010, it's okay to say that SaaS is a business model of the 21st century. As a SaaS design company, Eleken works with SaaS businesses every day. Over the past couple of years, we've seen an increasing number of entrepreneurs looking to adopt this business model. Why does everyone want to be a SaaS company?
We decided to cover the most important aspects of the SaaS business model so you could better understand how it works and whether you need to be looking into it for your next project.
What is SaaS?
SaaS (Software as a Service) is software hosted on the cloud. It can be accessed via an internet browser, mobile application, or desktop app. SaaS is provided to users on a subscription basis, which means they have to pay a recurring fee monthly or annually.
You know Zoom, right? It's a go-to app for group video chats today. You may hold an unlimited number of one-to-one and group meetings on Zoom as well as record these meetings, share screens, use boards, and have productive discussions without any annoying issues (hello Skype!). Zoom offers access to its video conferencing app using a subscription model.
SaaS revenue streams
SaaS companies typically have a few revenue streams in addition to subscription. Let's look at all of them.
Recurring payments are the main revenue-generating stream of SaaS businesses. This stream is fluctuating and varies from month to month (depending on your pricing model and customer satisfaction). People continue to use the app as long as it delivers value.
You can upsell to existing customers offering them more storage, more data, additional features, or more accounts. Going back to Zoom again (we do not promote it, but we do like it, especially in times of remote work), they have a couple of available add-ons: Audio plan and Additional Cloud Recording Storage. With the Audio plan, you can call out your participants (like in Skype) instead of just waiting for them to join in. If you need more storage to keep your conference recordings in the Zoom account, you can pay for additional space.
You may charge for software setup. This revenue stream not only adds to the profit of your SaaS but also enables a customer validation process. You need to approach setup fees carefully. It works better for enterprises (big clients) with a lot of data.
For example, a well-known customer relationship management platform, Salesforce, provides different integration and installation services from their in-house architects on request. They get pretty good financial returns from this offer. Salesforce has hundreds of apps and features which are useful for any business, but customers struggle to integrate them. Because the value dominates over the price, people pay for architects’ services.
You may apply additional charges for creating data-driven reports based on what service you provide to your customers. It may be a feature in one of your plans or just an additional service. Make sure that these reports add value to your customers and have ROI (return on investment). One more successful SaaS player, Hubspot, a platform for sales management, marketing automation, and customer service offers their customers to get Reporting Add-on and create Custom Reports to track various metrics.
You can develop different levels of customer support and charge for this service. Customer service is an important and expensive part of any business. And, we consider it to be part of the SaaS value proposition so it might also be included in the pricing model.
A prominent email-marketing automation SaaS, Mailchimp, offers different levels of support depending on the pricing plan. If you are signed up to the Free plan, you will only be able to use published tutorials, and email-support during the first 30 days. Standard and Essential plans will let you communicate with support representatives via live chat. And Premium Mailchimp plan users, in addition to the mentioned before support features, can get phone support and priority response.
Key metrics of SaaS Businesses
SaaS is a “metrics-based” model. If you want your business to succeed in the competitive SaaS environment and scale up, you have to keep an eye on the key metrics for your business.
One metric that matters (OMTM)
It is also called the Northstar metric. It helps you figure out whether your product is succeeding or not. Northstar metric is unique for every SaaS business and defines the goal for your entire product team. For example, Slack aims to 2K messages per user. Airbnb has bookings per night as OMTM.
Monthly Recurring Revenue (MRR)
MRR is the most important financial metric. As SaaS is a subscription-based business, you need to count how much money you get every month. This metric doesn’t include upsells or profit from additional revenue streams. You should only take into account the number of subscriptions.
Lifetime Value (LTV)
LTV is the amount of money you receive from your customer during the whole period of using your software. This number helps you predict profit and allocate resources wisely. Companies that have a good LTV focus on improving the user experience of their existing customers. It's cheaper to keep an old client that attracts a new one.
Customer Acquisition Cost (CAC)
CAC is a marketing metric that indicates how much money you spend to acquire new clients. Watching LTV and CAC of your SaaS will help you keep a healthy balance and growth.
Net Promoter Score (NPS)
NPS helps you identify how satisfied your users are with your product. NPS is based on a simple question: How likely are you to recommend our product to your colleague or friend from one to ten? This metric is related to the quality of product features, customer services, and user interface.
It is a percentage of clients you have lost during a defined period of time (week, month, quarter). SaaS businesses are based on a subscription model which means you have to keep track of current clients and make sure they continue to use your service from month to month. Trying to find the reasons of why they churn may help you improve your product.
Will every business evolve into a subscription business model?
According to a 2020 survey, the average growth rate for startups with less than $1M ARR is 144%. For companies with more than $5M ARR, the number decreases to 60%, which is still rather significant growth. The business model is lucrative and thus luring entrepreneurs to build new products. Still, there are dozens of other industries that generate the same or even bigger revenue. What do so many entrepreneurs want to build a SaaS?
We have been living in the “subscription economy” long time before SaaS became popular. We used to rent and lease housing, cars, offices, even outfits, and pay a monthly fee for using them. SaaS is another service that offers stuff "for rent," the only difference is that the stuff is digital.
Software as a Service business model is a win/win for customers and businesses. For businesses, SaaS scales fast, generates recurring revenue, and gets managed easily. For customers, it offers convenience and reduced investments.
Customer demand is changing. They are more willing to pay for access to the product or service in smaller amounts rather than paying lump sums up-front. Customers enjoy not only lower costs but also constant upgrades of the software and easy access to new features and cutting-edge technologies.
There is a luring opportunity for every business to evolve into a subscription business model. If you want to keep your product viable and generate constant profit, regardless of where you are, you should start considering this option.
The transition may be expensive at first, but you can reap benefits very fast as soon as you choose the right pricing model and set up your metrics.
Tien Tzuo, in his book “Subscribed: Why the Subscription Model Will Be Your Company’s Future—and What to Do About It” makes a point that the subscription business model is about freedom, easy access, cutting edge technologies, and easy financial management.
Types of SaaS Software: Categories and Examples
With more and more software companies slowly but inevitably shifting to the SaaS model during the past decade, more types of SaaS products appear. All SaaS businesses can be grouped based on their similarities and functions. Currently, there are not so many categories, but the range of these solutions already demonstrates that SaaS technologies can be applied and become successful in any industry.
Before creating a SaaS project, it is important to learn more about the types of SaaS software and how they work. In such a way, you will find out the nuances and challenges of each category, as well as their market particularities and even a little bit about end-users’ needs.
In Eleken, we work with various SaaS products, beginning from CRM and ending up with web hosting projects. Each SaaS solution requires a special approach to its development and expansion. Just like for any profitable product, you should first outline your niche and industry to move forward with your idea or plan. That is why there exists the typology of SaaS products.
SaaS basics and advantages
As a cloud-based software service, SaaS products have plenty of advantages for users compared to conventional software. We have enlisted their major benefits below:
- Available per subscription per user
- No need to download or update the software on your laptop or computer
- Can be reached from any device in any part of the world through the Internet
- Lowers costs for subscription in comparison to the price of traditional software
- Reduced time to launch the software and start using it
All of these characteristics can be found in all types of SaaS software but have slight variations depending on the preferences of targeted clients and the functionality of the very product. Furthermore, in each of the following groups, SaaS solutions slowly force out traditional software.
Let’s check the main categories of SaaS solutions and see how they differ from each other.
The types of SaaS solutions
There are many types of SaaS software. The central aspect of division into groups is the sphere or industry that the SaaS product improves, such as online banking or communication.
Probably, the most essential thing about the division of SaaS applications is the fact that in the future, new groups of SaaS products will appear. It seems that cloud-based software service can be applied in almost any sphere of human activity. As more and more people are looking for ways to work from home after the Covid-19 pandemic, the popularity of SaaS applications will be rising as you can use them anywhere in the world. If you want proofs with revenue data, see our SaaS market overview.
So, while we are awaiting the new upcoming types of software as a service, the current ones go as following:
Customer Relationship Management (CRM) software
For every business, customer data is valuable information, which is used to promote the product and increase sales. CRM software is a tool for effective management. It stores all customer data and helps improve customer relationships.
Some CRM systems help their users forecast sales, but the majority simply automate repetitive sales tasks such as emails. Modern SaaS CRMs bring to the table loads of functions. Freshworks, a CRM owned by Girish Mathrubootham, offers more than 10 other products that can be integrated into each other depending on your business needs.
Enterprise Resource Planning (ERP) software
These SaaS are used by large companies and enterprises to manage a wide range of business processes. Among them accounting, risk management, compliance, and budgeting. Such a SaaS allows combining and tracking all these processes in one place due to the big number of its services.
As an example, NetSuite, a popular ERP SaaS with more than 22 000 customers, includes e-commerce and retail solutions for your business. What is more, it even has a function of PSA (Professional Services Automation) for planning and executing projects.
Accounting software simplifies managing your financial operations and costs by automating them. This comes in handy when you are doing lots of financial operations per day.
All SaaS in this category differ greatly in features, so you should choose the ones that will fit your needs and expectations when it comes to handling your finance. Currently, the most used ones are Xero and QuickBooks, which have lots of effective integrations.
In Xero, for instance, you can create invoices and bills, and even see reports on your spendings. On the dashboard, you can prioritize your tasks, which makes it easier to track everything going on with your finances. Finally, you can even see your account balance and transactions in Xero due to its integrations with banks and online financial services as Stripe or PayPal.
Project management software
PM SaaS solutions enhance cooperation and progress tracking in teams. They are much faster and easier to use compared to shared spreadsheets or documents as synchronization happens in real-time.
Confluence by Atlassian is one of PM SaaS with the largest number of additional tools and functions. With only $10/user/month (1–100 users) with its Premium plan, you can make use of such features as task tracking, real-time notifications, adjustable page permissions, and even blog posting.
CMS and e-commerce platforms
E-commerce SaaS solutions are a great option for new businesses, as they allow you to start selling your products immediately, saving money on website development and UX/UI design services (if you are planning to make a website).
Shopify, the most famous e-commerce platform, has lots of cool features to help entrepreneurs sell goods and products online. First of all, it has many different themes to make your online shop unique. Secondly, it has various integrations such as POS and PayPal to simplify payment processing.
You can also create financial reports and even make blogs, which is a great solution for any business. What’s more, purchasing things online should be an easy and fun process for your clients. In Shopify, you can add your discounts, coupons, and gift cards as small gestures to attract customers and, at the same time, to reward them for choosing your service.
CMS is the Content Management System, which allows publishing and editing content, such as articles and blog posts. The most known platform of this type is WordPress, which was started as a tool for blogging but eventually evolved into a CMS and website-building tool. In WordPress, which is free, you can use templates for your website and work not only with the text itself but also with pictures, audio, and video files.
These are widely used SaaS products. Their main benefit of communication platforms is instant messaging and file sharing from any part of the world. These apps are often used by businesses for communication between their employees. For instance, Slack is a favorite communication tool of more than 12 million active daily users in both large and small companies.
Very often such communication platforms also have mobile applications available, that let users reach the network of their friends/colleagues and get all the necessary information at any time.
These SaaS solutions are developed to manage human resources. Such products have features such as recruiting, interview scheduling, performance tracking and analysis, and employee reviews. They come in handy for organizations that are constantly growing and hiring new people, as they allow storing all information on candidates in one place.
Some of such SaaS applications also allow managing employee productivity and attendance.
Lattice is a widely known SaaS application with more than 2000 organizations using it daily. With this product, managers can make use of templates for employee reviews or create new ones. Employees, in their turn, are requested to submit feedback right in the software for effective communication and cooperation within the company.
In Lattice, you can also set up your goals as discussed with the manager, and, later on, share the results with other workers or even on a special Slack channel (if integrated). Undoubtedly, such a clear and understandable approach makes it much easier to track achievements from the sides of both management and employees.
Finally, you can measure people analytics on dashboards and, for instance, filter data by skills, age, sex, and many other metrics.
Payment gateways and billing solutions
Payment gateways enable businesses to accept payments in a fast and easy way handling hundreds of transactions each day.
Paypal is a safe and secure service to store all sensitive customer data such as numbers of bank cards. For any business, this is a convenient way to receive payments by sharing protected customer information between banks and merchants and eliminate the risks of data leakage.
One more advantage of a payment gateway is that processing transactions online is much faster than doing it manually. Furthermore, with an extended customer base of Paypal as one of the most popular payment methods, you have more chances to reach out to new clients.
One more advantage of such software is payment reporting, which allows you to mark or flag any kind of suspicious activity or payments. A fun feature in some of the payment gateways is publishing reward coupons, which is a small thing to both entertain and attract users.
Different types of SaaS for different goals
SaaS solutions resolve numerous issues in different spheres and make the lives of millions of people much easier. Each type of SaaS software has its special approach to fix the particular problem of the users, whether it is receiving a card payment, sending a file to your manager, or creating a board with tasks for your team.
If you want to find out more about SaaS business or are simply curious about different SaaS products, you can find more details in our next blog-post What makes a good SaaS product.