Different flavors of SaaS billing & what works in different scenarios
SaaS businesses are in it for the big bucks. It would be tragic to see you put your sweat and blood into building a great company that doesn’t take off, just because you made a wrong choice about pricing your product.
According to 99firms, the SaaS market is expected to touch $157 billion in 2020. Why shouldn’t your business have a piece of this pie? Getbeamer states that only about 400 companies contribute to bringing in the major part of the industry revenue. Even if you’re witnessing a 20% growth each year, you have a 92% chance of going out of business in a few years.
It’s imperative to decide on a pricing strategy that works for you as well as your users.
Factors To Consider Before Deciding a Pricing Strategy
But before you decide how you want to charge your customers, it’s important to consider a few factors.
1. The Value You Bring To Your Customer
Your pricing strategy depends to a large extent on the perceived value of your product. You need not lose out on revenue by pricing too low, when, in fact, users highly value your product offerings, and are willing to pay a premium.
At the same time, if you price too high, you may end up losing customers who don’t find your product worth the money. Knowing your value in the market helps you determine the upper and the lower limit of your pricing strategy.
2. How Much Is It Going To Cost You?
Every business involves certain fixed costs and certain variable costs. If you aren’t able to turn a profit, or even break even from your sales, there’s really no point in keeping the business going.
In the SaaS business model, customer acquisition costs are fairly high. You also need to allocate a significant budget for marketing and advertising, in addition to your operating costs. Make sure to choose a pricing strategy that at least covers your costs, if profits are not your primary focus during the initial stages of establishment.
Different customers prefer different pricing models. It’s important to cater to their requirements, and have multiple pricing points, although too many could actually hurt your business.
Keep it simple, keep it flexible. Don’t confuse your customers with too many options. But don’t confine them to a single option either. And always build flexibility into your system to incorporate the evolving needs of your ever so demanding users.
4. On Par With The Industry
Sometimes, even if your product is perceived to be invaluable, you may lose out to competitors on the basis of their pricing strategies. You must be aware of what the industry as a whole is doing and be on par.
Commonly Used Pricing Strategies
It’s important to formulate a strategy around your pricing. Different businesses adopt different strategies, during various different phases of their business. You need to evaluate your game plan and decide accordingly.
1. Cost-Plus Pricing Strategy
Isn’t this the first thing that comes to mind when thinking of pricing? Evaluating all your costs- fixed and variable, and then adding a profit margin to it? While this strategy is widely popular, it isn’t always the best.
If your product development costs are not too high, and you add a certain profit margin before quoting customers, you’re likely leaving money on the table. Your product may be worth far more to your customer, than what you’re offering it for.
2. Value-Based Pricing Strategy
This is the best strategy to choose for your SaaS business. This way, you are putting the onus upon your customer. They decide for you, by telling you how valuable your product is to them. But this cannot happen overnight. You need to put in the required research to know where you stand and how much money you can convince your users to shell out.
Make sure to cover all your costs while using this strategy, and not be too off from your competitors. Else, you may end up making losses, or even worse, lose sales to significantly cheaper competitor products.
3. Competitor-Based Pricing Strategy
This model is an easier one for newer businesses to adapt to, as their competitors have already done the research involved before pricing a similar product. So, if you are following suit and setting your prices based on your competitor’s offerings, you could be at an advantage.
But if your product turns out to be better and your customers value it higher than that of your competitor, you could be losing out on the additional revenue that your users are willing to pay. This strategy could turn out to be a boon or a bane. It depends on how well your business is perceived in the market.
Pricing Models Adopted By SaaS Companies
While there are certain pricing strategies in play, the actual method that you end up using to charge your customers is the pricing model.
1. Usage-Based Pricing
As the name suggests, this model charges customers as and when they use a product. It’s commonly referred to as a “Pay as you go” model. Not as common in SaaS companies, it’s mostly used to service API requests, and by bulk, text messaging services like Twilio.
There are certain pros of using this model. You are paid appropriately by heavy users, who would otherwise pay a small upfront cost and hog the majority of your resources. It’s also attractive to price-sensitive users, as they must pay only for what they have used, and not for your entire product offering.
The advantages are manifold, but so are the disadvantages. With dynamic demand each month, you can’t really predict your revenue and cash flows. And you can’t make decisions based on your users’ ever-changing usage patterns. And you must always be prepared for a surge in demand, whether or not it actually happens, leading to additional costs.
2. Flat-Rate Pricing
This is a pricing plan, wherein companies sell a fixed set of features for a fixed price. It’s easier to explain such plans to customers, as well as focus all your marketing efforts on selling set bundles, as opposed to customizing for each customer.
The biggest con of using the flat-rate pricing model is that you end up under-pricing the larger customers, and not getting enough for the value your product provides. Also, your offering might be too expensive for some users, who may not require all the features in your bundle. You can’t really tweak your plans to accommodate them, resulting in lost sales.
3. Tiered Pricing Model
Most SaaS companies flock to the Tiered Pricing Model when it comes to charging their customers. The advantages are especially realized while servicing larger corporates, where you can offer various different packages, with different subsets of features, and varying price points.
With this pricing model, you can attract customers with lower-priced plans, and upsell to them eventually. Netflix uses the tiered pricing model, enticing users with its basic plan, who more often than not, upgrade because of the seamless browsing experience and varied content offerings.
But it is important to be mindful of the fact that you don’t overcomplicate with too many tiers. When presented with a plethora of options, your users may end up confused, and switch to a competitor where it’s easier for them to choose.
4. Per Feature Model
As the name suggests, the per feature model is dependent on the number of features you’re offering your users. Naturally, the cost goes up with each additional feature. This model helps fetch more revenue for companies, as users pay a premium for every new feature that they require. Also, you can charge according to the resources you need to allocate, helping you recover your costs.
At the same time, it’s difficult to predict which features will perform well and generate demand. You may end up overpricing or underpricing. Customers may also be resentful of not being able to access various features despite paying a subscription fee. This is not the best model out there and must be avoided.
5. Freemium Model
This is probably the most commonly used pricing model by SaaS companies. They provide certain features for free and charge for additional ones. Some of the popular companies employing this model are Spotify, Dropbox, Grammarly, and Evernote.
You can use the products offered in the freemium model for free unless you want to upgrade and unlock additional features. It bodes well for companies as once users have had a taste of their product, most of them want more, and they end up subscribing.
But you can also lose customers fast, as the switching cost for free users is low, and they may flock to your competitors if they find a better offering.
6. Per-User Pricing
This model is also commonly used in the SaaS world, where the cost goes up with the number of users using your product or service. A popular example, in this case, is the Salesforce CRM, which provides packages based on the numbers using it.
This model is seamless and simple, allowing you to predict your cash flows. But it also deters companies from promoting the use of your product as they will have to incur additional costs for additional users. And this leaves them knocking at your competitor’s doorstep.
Before you decide your pricing strategy and pick a model, it’s important to know your customers and their preferences. It’s important to analyze what category your business fits into, and what will bring home the maximum revenue while providing significant value to your users.
A pricing strategy can be a make or break attribute for a company. It can bring you as many paid users as possible, or drive them away. In either case, it’s imperative that you back yourself up with a robust product or service offering, and then alter your pricing model as per your position in the market.