Building and running a SaaS firm requires time and effort. Furthermore, diving deeper into SaaS pricing structures opens up a whole new universe of possibilities. Still, you need to understand your pricing alternatives in order to achieve the appropriate levels of the two most significant SaaS metrics: customer lifetime value (CLV) and customer acquisition cost (CAC).

The ultimate result should always be a satisfied customer who wants to move up the product ladder alongside you. However, this is only possible when your product pricing is spot on. If you overprice, you will have an unsatisfied customer who believes your company isn’t good enough—and if you underprice, the expense of doing business will kill you.

There is no one-size-fits-all solution when it comes to SaaS pricing. Of course, each SaaS product is unique and targets a certain clientele. However, there are some broad concepts that can help you devise a strategy that works for your company and expands its capabilities.

SaaS products are often priced depending on the number of users or licenses, therefore the first step is determining how many customers you want to support at your price point. If you’re just starting out, you’ll set a baseline amount of people, say 200 in the first quarter, and then optimize the pricing later.

From there, you can evaluate additional aspects like as features and customization options to determine a pricing that matches your requirements.

Keep in mind that SaaS pricing is typically adjustable, allowing you to adjust your prices as your firm develops and expands. The main thing is to begin with a price strategy that is appropriate for your target market and then make changes as needed. With some trial and error, you should be able to discover a SaaS pricing model that works for you and helps you build your business.

9 Popular SaaS Pricing Strategies

The word pricing strategy refers to the method a corporation will follow when pricing its items. Based on product differences, below are some of the most prevalent SaaS pricing models you can pick from:

1. Penetration Pricing

Penetration pricing is a SaaS pricing strategy where you charge a low price for your product or service in order to gain market share. The goal is to increase sales and market share while still maintaining a profit margin.

This strategy can be risky, as you may not be able to make enough money to cover your costs. In addition, if your product or service is not well-received, you may have to lower your prices even further in order to compete. But if done correctly, penetration pricing can help you build a successful SaaS business.

2. Captive Pricing

Captive pricing is a smart choice for SaaS products with multiple layers. The idea behind the captive pricing strategy is that you offer the core product at a market-competitive price, and you set different prices for the augmented product features.

For example, if you’re a SaaS startup with a project management app, your core product is a workflow management software. However, there are endless options with augmented products. You can offer integrated software programs tailored to your target business needs. 

Usually—but not always—the core product prices are basic, and they add up to your revenue stream through the captive (augmented) products.

3. Skimming Pricing

Skimming pricing is a strategy in which a company prices its products or services at a high level in order to maximize profits. This strategy is often used when there is a new product or service on the market, and the company wants to take advantage of the high demand. 

Skimming pricing can also be used as a way to discourage competition by making it difficult for new companies to enter the market. However, if you’re working in an already saturated SaaS space, this pricing strategy isn’t the best for your business.

4. Prestige Pricing

Prestige pricing is a high-end pricing strategy in which a company charges a premium price for its products or services in order to convey a sense of quality or exclusivity.

This pricing strategy can be effective in certain situations, such as when a SaaS company comes up with an entirely new idea. By charging a higher price, the company can communicate to consumers that the product is of superior quality.

Prestige pricing can also be used as a way to differentiate a company’s products from its competitors. If two SaaS products are very similar in terms of quality and features, the one with the higher price tag may be perceived as being better simply because it costs more.

Here, you may ask that what’s the difference between skimming and prestige pricing? Well, skimming isn’t permanent. It is sort of short-term, while prestige pricing maintains a high price for the entire product life cycle.

5. Free Trial Pricing

Free trial, as the name suggests, allows the customers to try the SaaS product for free. You can use the free trial strategy in a couple of ways: The first is as a way to let customers test out your product before they commit to buying it. This can be especially useful for new customers who may not be familiar with your SaaS product or how it works.

Read Also: How to Successfully Scale Your SaaS Startup

It also allows them to experience the value of your product first-hand and see if it meets their needs. Another way to think about free-trial pricing is as a way to generate leads. By offering a free trial, you can attract new customers and get them interested in your product. 

Once they’ve had a chance to try it out, you can then upsell them on a paid subscription.

6. Cost Plus Pricing

Cost plus pricing is a pricing method where the selling price of a product is set by adding a markup to the cost of the product. The markup is usually a percentage of the cost, but it can also be a fixed amount.

The cost-plus pricing strategy is popular in B2B settings, so a SaaS startup can use it without a second thought.

However, you need to ensure that the markup doesn’t affect the overall customer experience in the long run. It means that you cannot underdeliver by setting up too high markups on the cost unless you’re sure of maintaining a unique SaaS product for the decades to come.

7. Value-Based Pricing

Value-based pricing for SaaS involves setting your price based on the value you deliver to your customers. This means that instead of charging a flat rate, you charge based on the results you achieve for your customers.

This type of pricing can be very effective, as it ensures that you are always delivering value to your customers. It also aligns your interests with those of your customers, as you are both working towards the same goal.

The key to success with value-based pricing is to make sure that you accurately assess the value you are delivering to your customers. This means understanding their needs and what they are willing to pay for. Once you have a good understanding of this, you can then set your prices accordingly.

8. Price Anchoring

Price anchoring is a technique that can be used to influence the perceived value of a product or service. By presenting a customer with a reference price (an “anchor”), businesses can guide them towards perceiving a higher or lower value for what they are selling. In the context of software as a service (SaaS), this technique can be used to help close deals and boost revenue.

There are two main ways that price anchoring can be used in SaaS:

1. By providing customers with a list of features and benefits, along with a corresponding price for each one, businesses can encourage them to see the value in what they are selling. This is known as feature-based pricing.

2. By presenting customers with a lower-priced option (known as a “loss leader”), businesses can encourage them to see the value in what they are selling. This is known as price anchoring.

It is important to note that price anchoring should not be used to mislead or deceive customers. Doing so could damage your business’s reputation and result in legal action.

9. Competitor-Based Pricing 

Competitor-based pricing is a type of SaaS pricing in which the price of a product or service is set based on the pricing plans their competitors use. This type of pricing can be used to:

• Gain market share
• Improve customer loyalty
• Simply stay competitive. 

In order to successfully use competitor-based pricing, it is important to have a good understanding of the competitive landscape and the prices that competitors are charging for similar products or services. Additionally, it is important to make sure that your own product or service is priced accordingly in order to attract and retain customers.

4 Steps That Make up a Great SaaS Pricing Process

Pricing is an ongoing process, a series of processes organizations should keep repeating until they establish a sustainable (and lucrative) pricing strategy. The approach we follow involves four basic parts: Problem, Cause, Solution, and Implementation.

Problem: find the main obstacles your company is facing

The #1 question any SaaS company asks is, “What is stopping us from growing?”

It might seem like a straightforward question on the surface, but the problems range far and wide—it could be product, people, customers, or any one of a dozen other areas. The only way to find the answer is to chip away at this question, drill down into your biggest problem areas, and gaps in understanding.

SaaS companies tend to face five major problem areas when it comes to growth:

• Poor unit economics
• Poor user retention
• Poor MRR retention
• Poor acquisition volume
• Poor conversion

Almost all of these (with the exception of acquisition volume) can be solved by improving your pricing strategy. You need to explore these areas deeper, focusing on one at a time, and collect the necessary data to define the problem. These are the things that are stopping you from succeeding and stopping your customers from succeeding with you.

Cause: use data to discover the root cause of these issues

To find out what that underlying disease truly is, you have to go to the source: your customers.

Customers are the only people who can tell you why they don’t value your product as it stands. Unfortunately, the vast majority of SaaS companies usually avoid this step for three main reasons:

• It takes time.
• They’re scared of what they’ll find out.
• They think they already have the answers.

By asking the right questions of your customers and adding the right data to your buyer personas, you can find out more about where your company is succeeding and where it is failing than you ever would looking at an analytics dashboard.

To be sincere—it takes hard work. You’ll no doubt hear things you don’t like, and you’ll need to face the harsh reality of your current pricing strategy. But all of this is data that makes your company better and moves you up and to the right.

Solution: use data-driven experiments to test viable solutions

This is the fun (and also the scary) part. Running tests and gathering data to validate or invalidate your hypotheses are vital for identifying the best long-term pricing strategy that you can.

By testing small changes often, you can quickly get reliable data on each of your individual hypothesis. You can see what works and what doesn’t, and only take the time and effort to permanently implement the changes that maximize growth and revenue.

Implementation: put into action the best solutions

This is where you take the results from your experimentation and embed them into your pricing.

This is the entire point of your pricing process, though also the part that companies rarely follow up on. Going live with major pricing changes is terrifying for any SaaS company. Will customers recoil at the new prices? Will acquisition drop off a cliff?

With quantified buyer personas, though, you can make these changes confidently, safe in the knowledge that the value you provide aligns with what the customers want and what they are willing to pay.

Finally

Most SaaS companies today may consider valuation and funding to be the most important financial terms; yet, any business must finally comply to economic realities such as demand and supply, revenue generating, and profit-making.

Demand-supply curves are central to every business transaction in the world today, including those involving multi-billion dollar valuations for firms making millions of dollars in losses, because investors want profits. Even traditional sectors are modernizing and going digital.