Blog 88: How to price SaaS products?
- Idea2Product2Business Team
- Aug 12, 2024
- 3 min read
Updated: May 9
Proper pricing can generate interest, boost sales, and attract new customers, making it a powerful marketing strategy.
A. How to arrive at a price?
Cost-plus pricing is common, but less so for SaaS products. In cost-plus pricing we add all contributing costs and add a fixed percentage over and above it. For SaaS products, companies often price products based on their value (i.e. value-based pricing), rather than their cost. Additionally, potential customers often prefer to experience the product prior to making a purchase decision.
Value-based pricing: In this approach, we determine the pricing of our product based on the perceived value to the customer. Five steps to execute this pricing strategy i) find the price of comparable products ii) identify how our product is different from them iii) place a financial value on these differences iv) ensure customer value exceeds costs v) justify the price to customers, which might include reaching out to them.
Other pricing strategies include:
Price skimming: Companies use price skimming when they are introducing innovative products that have no competition. They charge a high price at first, then lower it over time. The high price helps the business recover some of its development costs. As market saturates, companies lower the price.
Penetration pricing: This approach is opposite of price skimming. In this case, the market is saturated with similar products. Therefore, companies set a low price to enter. And raise it later. Initial low price makes the product stand out.
Competitive analysis: A comprehensive competitive analysis can provide insights into how competitors are pricing their digital products. We price the product either below or above the competition (closely linked to value-based pricing).
Test various price points and iterate: In this approach, we test different price points and adopt creative ways to showcase product features. Calls to action (CTA), bonus offers etc. can convert potential customers.
Note: For all the above strategies, we can incorporate an element of psychology. Psychological pricing refers to a method of pricing items to make them appear like a bargain. Consider pricing them at $29, $59, and $89 instead of $30, $60, and $90.
B. Pricing models:
Refer blog 87 for different recurring revenue streams (i.e., subscription, usage, seat-sharing). For each recurring revenue stream, we can adopt the following pricing models:
Tier pricing: Offer tier-based pricing based on varying levels of service, features etc. Demonstrate the differences between tiers by using a comparison chart.
Trial period: Most companies offer a 7-day, 21-day, or 30-day free trial. Automate the process to notify customers about the expiration of their free trials and remind them to renew. Also consider adding a special offer to those who do renew before the trial ends. (refer blog 89 for more).
Freemium: A method of offering a basic version of a product for free and charging for additional premium features. By offering a free version, customers can experience the product. If a product is new to the market, this is a great way to make inroads (refer blog 89 for more).
Offer a bonus: Several digital products offer a bonus such as eBooks, worksheets etc. with original purchases. This can be coupled with a growth hack strategy (Blog 45: Growth marketing and growth hacking two sides of the same coin?). Bundling strategy (selling multiple products at a package price) is another model deployed by companies.
Money-back guarantee: Guarantees reduce the risks for prospective customers. If the product adds value, we will see very few returns.
As we create a pricing strategy, it is key to keep the needs of customers in mind. This will help us develop a pricing model that keeps customers attracted.
Jump to blog 100 to refer to the overall product management mind map.
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I wish you the best for your journey. 😊