Figuring out how to price your product is one of the trickier aspects of running a SaaS business. And when your growth really takes off, which is common for B2B SaaS startups, you'll be asking when and how you should increase prices as your offerings develop and expand. In other words, the SaaS pricing model that's best for your startup right now might not be optimal in a year or two as your company matures.
Where do you start? Below, we guide you through SaaS pricing strategies and how to adjust as you grow.
SaaS Pricing Best Practices
First, you'll want to gather information that helps you choose the best SaaS pricing model out of the gate. Your goal is to identify a price (or prices) that isn't too high or too low. Don't expect to hit the magic number the first time—or maybe you will—that's not the point: just don't pull a dollar amount out of thin air!
Rule #1: Cover your costs but don't undersell your value.
The initial pricing strategy you choose will point you in the right direction for the future, which will make pricing adjustments easier as you learn from deeper relationships with your customer base. It's a winning recipe for gaining traction as you grow.
SaaS pricing should take into account a range of factors which might include:
Your product’s value to customers
Market conditions
Competitor landscape
Target customers and customer segments
Customer conversion targets
The type of SaaS pricing model you’ll be using
Billing cycles
Your sales process
The most important part of any strategy involves listening to your customers every step of the way.
Rule #2: Give careful consideration to the "freemium" strategy.
“Freemium,” a combination of “free” and “premium," is a popular offering for many SaaS businesses because it supports rapid user adoption and can make it easier to win big enterprise accounts.
With freemium pricing, the customer pays nothing to use basic product features, but needs to subscribe to unlock advanced features and to get the most value out of a product.
From a customer standpoint, this is a huge plus—you can see if a SaaS solution is going to work with little risk and low effort, without any budget. From a business perspective though, freemium is obviously not going to pay your bills if nobody moves up to a paid plan.
This strategy isn't right for every SaaS startup. Some questions to ask yourself before you decide to offer a free version of your product:
How much are you willing to give away for free?
Can you offer enough incentive for customers to upgrade?
Will you have enough paying customers using your product to cover at least some of the cost of the free offering?
Will your free users get enough value out of your product to start referring others?
Can your startup keep improving and offering new, innovative features that entice free users to upgrade?
Does your customer lifetime value make up for the sacrifices you'll make for free users?
Image source: hbr.org
Dropbox is a good example of a freemium model that works. Sign up and you get an awesome 2 GB of free storage space. This is perfect for keeping basic documents in the cloud, but once you start backing up photos and other media you’ll hit your storage limit fast. The need to upgrade to a paid plan becomes fairly obvious at that point. Dropbox have also expanded and introduced new features over time to increase conversions and encourage late adopters to sign up for paid plans.
Another downside to the freemuim model, aside from what it can cost you in revenue, is the impact of bad user experiences. If people don't understand how to use it, aren't successful using it, or just don't see the value, you'll never see them again. While it may be hard to believe that people won't immediately LOVE your software when they try it, it's a considerable risk for young, growing startup.
Rule #3: Test and optimize pricing.
Getting your prices as close to “right” as possible at the outset is what everyone aims for, but it’s by no means the end of your pricing journey.
As you acquire more customers and get a clearer idea of what they want, you should continue to test and optimize pricing strategy. Survey existing customers to get deeper insight into features or use cases you may have overlooked, and to get a read on the value your customers see in your product. It’s insights like these that will enable you to scale and grow most effectively.
3 Effective SaaS Pricing Strategies
One of the most common mistakes SaaS startups make is implementing pricing that fails to evolve with company growth and any increased value in product offerings. Pricing is never set it and forget it.
Being alert in the driver's seat when it comes to revenue growth is essential in the competitive tech industry. Fast-growing startups are often in a position to raise prices before they may realize they are or feel comfortable doing so.
So stay vigilant and consider these strategies to adjust pricing when you see an opportunity to raise the bar on the value your deliver.
1. Raise prices on existing customers
One way to adjust prices is to tell your existing customers that the product is getting more expensive. This is a controversial decision, with the potential for backlash from dissatisfied customers.
“Everyone has to ask themselves: When you decide to increase prices, do you increase prices on your existing customers or not?” says Lackland. “Raising prices on existing customers is always a difficult thing.”
However, many customers are likely to stay despite heightened costs if you provide a valuable service, especially in a very specific niche, and/or if your software has high switching costs.
2. Raise prices for new customers
An easier way to raise prices is to charge new customers more, particularly larger customers. While some companies may regret their early deals because they were locked into pricing that was clearly too low, they should be viewed as strong and valuable evidence for more sustainable pricing.
These deals are not mistakes—they’re an integral part of building a business. But they are best approached as launching pads for moving up. It's only a problem when you don't make a change.
Climbing steadily toward larger clients is a good strategy for increasing pricing. Large enterprises aren’t as price sensitive as small businesses, so pricing differences that seem crushing to a scrappy team of entrepreneurs may be hardly even discernible in larger corporate budgets.
Such companies may take months (or even years) to commit to purchasing a software, though. After spending so many resources on the decision-making process, they just want the right solution for their problem, regardless of the price tag.
3. Price new product features as add-ons
Many SaaS businesses neglect to consider another option for increasing prices: charging for new features as add-ons to the core offering. Startups often don’t do this is in part because the continual and incremental process of updating and improving the software obfuscates how much its value is increasing.
“Back when you sold packaged software, you’d plan out your release for months and then you’d go release it, but now you can push updates and changes weekly,” says Lackland. “Frequently you don’t think you’ve added a whole lot more value with all these new features for your customers.“
Accurately assessing the value you’ve created by improving your software over time will help you see that your offering is worth charging more for. Analyzing how your features may be grouped—or picked apart—in order to create modular pricing can reveal interesting new ways to get more revenue from your product.
“Don’t be afraid to call something a different offering and try to up-sell it,” Lackland advises.
The add-on pricing strategy recognizes that not all customers have the exact same needs and allows customers to build the most effective solution with the greatest value based on their specific requirements. Nobody likes to pay for features they don’t use and add-ons allow a level of customization most customers will recognize and appreciate.
What’s the Best Pricing Strategy for Your Startup?
The most effective SaaS pricing strategy for your startup depends on a variety of factors only you can answer. Your initial pricing model, increased value in product offerings, overall company growth, and how your ideal target customer may have evolved since inception are just a few things you’ll want to consider.
What is crucial is that you are actively considering different strategies that make the most sense for you and your company right now, as well as down the road as you continue to experience growth.
The best SaaS pricing strategies aren’t necessarily making one decision over another, either. Smart companies might consider implementing a custom combination of different pricing models if they believe it will result in high customer retention, high customer acquisition, and greater overall revenue.
Whether you are planning to raise prices, seek bigger-ticket clients, or reconfigure your offerings, the important thing is that you’re looking critically at how you can get more revenue out of the valuable product you’ve created.
