Whether you are just starting a software as a service (SaaS) business, or have been in the game for years, it’s always beneficial to understand the primary pricing strategies for your products. In truth, it’s not uncommon for a business to realize they have been over or undercharging for their products. With this in mind, below we’re uncovering pricing strategies that are working in an effort to help you develop your own pricing model.
What is a Pricing Strategy?
Just like it sounds, a pricing strategy is an approach for how you will price your SaaS product. In other words, it’s your chosen policy for how much your customer will be charged to receive your product. The best plan of action in terms of pricing is to determine how much your customer is willing to pay, while also ensuring your business will turn a profit.
Many, if not most SaaS companies opt for a subscription pricing model that yields a constant stream of revenue for the business. It’s important to remember that when it comes to pricing strategies, you must keep in mind the value your product is offering, and find that perfect sweet spot that will yield a healthy profit margin while keeping your customer happy. After all, if they feel you are overcharging, they are likely to seek out a competitor.
Different Pricing Strategies Explained
Now that you have a brief overview of the goals for a good pricing strategy, let’s explore different pricing strategies to help you determine the best one for your SaaS business.
1. Penetration Pricing
The goal of penetration pricing is to enter the market with a low price in an effort to get the attention of customers, and convince them to leave the higher priced competition. The problem with pricing strategies like this however, is that over the long term they are not sustainable. Eventually, the business will have little to no choice but to raise their prices if they hope to be profitable.
2. Skimming Pricing
In stark contrast with penetration pricing, this strategy centers on entering the market at a high price, and then later tapers the pricing down as the product becomes less popular. This strategy is quite common with theme parks. When they are at the highest of their popularity, the price goes up, and suddenly, as crowds thin out, ticket prices go down to bring customers back.
While it’s a great way to hit the ground running in terms of profitability, pricing strategies like this work best when there is little to no competition. To make up for the high price, additional offers may be necessary if you’re in a crowded SaaS space.
3. Premium Pricing
The idea behind premium pricing is to position the SaaS product as a high-end or luxury product. The psychology behind it is that if it’s priced higher, it must have better features, or higher quality customer service. Like high fashion goods that accomplish the same goal of clothing oneself, the goal in technology is to make the product seem like it has an elite status that justifies its cost.
4. Bundle Pricing
Bundle pricing strategies are great for companies that have multiple SaaS products to offer to their customers. By bundling the items together, they can charge less than they would for the single items, while still turning a profit. Insurance companies do this frequently by bundling things like car, house, and boat insurance together. Another example is an internet service provider bundling cable and phone service with their internet pricing.
5. Loss Leading
While pricing strategies like this are most popular in grocery and big box stores, they also make perfect sense in some SaaS businesses. The idea is you sell something at a loss in hopes that you attract a plethora of customers, and upsell them on your higher-priced products.
6. Competition-Based Pricing
Just like it sounds, this pricing strategy is centered on setting your prices based on what your competitors are doing. This is a widely used practice with gas stations. If station X down the street is charging $3.50 a gallon, station Y will likely follow suit with other stations nearby charging the same as well. That is until station Z gets wise and charges just a little lower, and more customers go there to save a little money. It’s important to be careful using pricing strategies like this because sometimes “remaining competitive” can cost you big profits if you’re too focused on undercutting the competition.
7. Cost-Plus Pricing
While it’s not necessarily a good pricing strategy for a SaaS company, this pricing method focuses on how much you want to profit on each “unit” sold. For example, if it cost you $10,000 to produce the software, and you anticipate selling to 1,000 people and want to earn a profit of $10,000 you would need to sell each offer at a minimum of $20 to double your money.
8. Value-Based Pricing
With value-based pricing, you price your software based on what customers will pay for it. This will require market research to determine customer interest, and the base price they expect to pay considering the value they will receive in exchange for their purchase.
9. Freemium Pricing
This is one of the most popular pricing strategies for SaaS. The way that it works is users can obtain the software for free, but they will have to pay extra for certain features. A great example of this is DropBox. You can get free cloud storage up to a certain amount. Then, to get more you have to pay for it.
10. Promotional Pricing
This is also referred to as high-low pricing, or discount pricing. Website hosting companies are notorious for using promotional pricing. They will sometimes slash their hosting by as much as 50% to get you to sign up, and you can enjoy that price for a limited time before the full price kicks in at the end of your promotion period.
11. Free Trial
Just like it sounds, a free trial pricing strategy allows users to try a paid product for free for a specified period. A common example of this is Netflix. You can get a 7-day, 14-day, or even a 30-day trial of the streaming service for free (depending on their current offerings), and then you start being billed at the conclusion of your free trial.
12. Psychological Pricing
This is the most tricky of all pricing strategies because it’s based on common human psychology – which is not always guaranteed to work. The most common is called the 9-digit effect which works under the assumption more customers are willing to pay for a product that ends in the number 9 than in a zero or any other number. For example, instead of $20/month, the fee will be $19.99/month.
Another way psychological pricing works is to put two or three products next to each other with wildly different prices. The goal is to get the customer to purchase the cheaper of the products, but because you have placed it next to the higher priced ones, they feel like they are getting a good deal. Other means of psychological pricing include “buy one get one,” changing the font size, increasing the list of features, and changing the color of your price compared with the rest of the text.
Understanding Pricing Models
In determining your pricing strategies, you also want to think about which pricing model will work best for you. The five most popular are:
1. Flat-Rate: One product, one price, all-inclusive of features and tools
2. Per Usage: Only pay for what you use – stock photo websites are a great example. You can purchase a single image, or several images, and only pay for the images you want
3. Tiered: You can pay for one product and the amount you’re charged is based on the features you want. If a product has 20 features, each price point will add more features with the highest price offering the most features to a user.
4. Per User/Per Active User: This pricing model involves charging a customer based on how many users are on an account.
5. Per-Feature: Similar to tiered pricing, this pricing model involves charging customers based on the number of features they want from your product. For example, if they want all the bells and whistles they will be charged the highest price. However, as they remove features from their account, their fee goes down.
Would you like help growing and scaling your business with the addition of new offerings? SiteLock partners with variety of businesses to provide them with a suite of products to sell to their customers. We even assist them in bundling our products and develop pricing strategies that converts. Become a partner today. Click here to learn more about our channel partners program.