Pricing is often the last thing that a SaaS developer will decide on. While focusing on making your product as good as it can be, price can feel like a secondary consideration.
But, of all the decisions you’ll make as a SaaS developer, the single most impactful might be finding the optimal price point – there’s HUGE money in SaaS pricing optimization.
Pricing will decide how much revenue you generate, how large your profit margins are, what types of customers you can reach, and more.
Research by the Harvard Business School suggests that small increases in pricing can have an outsized impact on profits.
In the face of such a big decision, some developers panic and set a price at an arbitrary point. Some just copy the competition. Others fail to do market research.
To make the right decision on pricing, you need to be armed with knowledge. You need to understand what questions to ask of your product, your team, and your users before setting a price.
To help you with this process, this blog post gathers together the insights and advice of some of the industry’s leading pricing experts.
Follow these steps and finding your optimal price will be a much less daunting task.
Pricing is a process and it can never be perfect
Let’s begin with adopting the correct mindset, courtesy Patrick Campbell. You aren’t looking for the perfect price, and you aren’t going to find the optimal one first time.
This is the one thing that nearly all pricing experts emphasise; you can’t and won’t find a single price to never waver from.
Instead, view pricing as a process. It is about making gradual adjustments, continually collecting data from your customers, and always being open to change.
Lincoln Murphy reassures his readers that, ‘I always say that you won’t get it perfect out of the gate, but you can get it as right as possible.’
And the team over at Price Intelligently end many of their posts with this same insight; pricing is a process.
Be willing to make changes and learn from your mistakes, and you’ll have taken a large step towards finding the right price for your product.
Avoid competition-based pricing
This is another piece of advice offered by many experts; don’t just copy your competition’s price points.
Looking to your competition for pricing is understandable; it seems like a quick and easy way to gauge how much a user is willing to pay for your product.
It also seems like it will preserve a competitive edge; a lot of start-up SaaS companies are afraid of being priced out of the market.
But, as Patrick Campbell argues, competition-based pricing is most likely to lead you to misunderstand your customers, and to not properly evaluate your own product.
People don’t want a cheap version of another product – they want your product because of what you can offer.
Moreover, if you are providing a high level of value, people might be willing to pay a lot more for your product than for other similar services.
Finally – don’t overrate your competition! There’s no guarantee that they’ve done the research necessary to find the right price for your market.
Trust yourself, and the results of your own pricing process.
Customers pay for value
Here’s a guiding principle for deciding on prices. A customer buys your product because of the value they see in it.
A good price, therefore, is one that corresponds to the value that the customer perceives in the service you offer.
This is a point that Patrick McKenzie emphasises in his writing. Reading his work can help to avoid some common mistakes in pricing.
For example, ‘SaaS entrepreneurs overestimate the benefit of low prices early.’
SaaS companies often assume that they have to undercut more established competitors.
But your customer is not choosing your product, ‘because it is bad but attractively priced’ compared to competition. They’re buying it because they see the value in what you can offer.
Don’t be afraid to charge for the value your customers see.
Know how to use freemium tiers
Offering a freemium tier to your pricing plan can be a great move for a start-up SaaS company.
You can offer an extended trial period, build your user base, and begin to create an identity and reputation as a company.
Each SaaS company thinking about offering a freemium tier needs to consider whether it suits their company’s needs and growth plan. Tom Tunguz offers a great road map for making this decision.
Does your company have the spare capacity and capital to support users who aren’t paying for your service? How much do you need to grow your brand?
And remember that free options are, ‘for products whose value proposition is simply conveyed and whose value increases with time.’
Is your product’s value easy enough to communicate that it suits a freemium plan? Or do you offer a more complex form of value?
Start charging early
It can be daunting to decide to start charging customers. Making this move requires confidence in your product, and a willingness to risk losing customers unwilling to make the leap to a paid service.
Because of these fears, SaaS start-ups often delay charging for a long time.
Steli Efti offers some clear advice for those wrestling with this decision; start charging your users!
The benefits of charging users go beyond getting some extra money. Charging users is the only way to really begin optimising prices.
As Efti makes clear, paying users are at the top of the ‘hierarchy of data value’ when setting prices.
Paying users will most closely resemble the people who will end up becoming your target market and core users in the future.
So to collect this high-value data, you need to set a price that users can pay!
And as Efti makes clear, it’s only by setting a price that you can learn what a customer is willing to pay for.
It’s the most important step in the process of price optimisation.
Evaluate price sensitivity
Once you set a price, you need to understand what impact changes to it will have on your revenue, retention rate, and subscriber numbers.
You need to understand, in other words, how many users you’d lose if you increased price, and if the increased revenue would be worth the change.
To make these decisions you need to find the price sensitivity of your product, and Eric Yu has a great post on how to do so.
Yu makes the benefits of assigning price sensitivity clear; with it you can measure the ‘amount of value you’re creating in your product by revealing your customer’s willingness to pay.’
It also ‘translates value from an ambiguous buzzword into a quantifiable metric that you can optimize for and improve’
There are various ways to gather the data you need to assign price sensitivity, and some are outlined in Yu’s post .
Pricing tiers matter
A one-size-fits-all price is a rarity in SaaS products, and with good reason. Having one price nearly always limits the revenue you can generate, and it also misunderstands the variety of user needs and demands.
Different personas of users will utilise different parts of your product and to different degrees. Having one price will ensure some users pay for parts of the product they don’t use, while others will pay far below the value they gain from the service.
This is why most SaaS companies use pricing tiers. There are some basic guidelines you can follow for getting these tiers set right.
Ayat Shakiry makes clear that each tier should correspond to a specific buyer persona. They shouldn’t be random, but rather a clear response to user needs and demands of particular types of users.
You can, however, give users too much choice. Patrick McKenzie points out that your users only have so much ‘mental bandwidth’ and that too busy a buying screen can really overwhelm and turn off potential customers.
Pricing pages are key
All of the above advice will help you optimise prices, but this process has a key bottleneck, the pricing page.
Pricing pages are, as Ayat Shakiry makes clear, vital to a success price strategy.
Once you have convinced a customer of your product’s value, you need a page that elegantly and intelligibly guides each user to the right plan for them.
UX design is key here; you need something that is easy to read while containing all the information your customers need to identify what plan suits their needs.
The names of your tiers should, as Patrick McKenzie says, clearly describe the appropriate user. When he is advising a cryptocurrency app on their naming, he points out that ‘Basic’ and ‘Advanced’ aren’t as useful names as, say, ‘hobbyist’ and professional’.
Get your names, design, and language right, and you will have gone a long way to getting the optimal page for your pricing strategy.
Start the process now, and reap the rewards
Pricing might be complex, but there’s a lot of help out there for a SaaS developer looking to start optimizing. So start researching now! Check out the authors in this blog and take advantage of their knowledge.
There is never a perfect moment to start optimizing your pricing, except for the present one. The more research you do, the more data you collect from your users, the more prices that you set; the more rewards you will see for your product and your company.
Stay confident, stay curious and start pricing!