You have built your product, found some customers, and now it’s time to make a sale. Product pricing is often something overlooked in SaaS, but pricing can have the biggest impact on your overall business.
The state of SaaS pricing – Some Quick Facts
Before we dive in, lets take a quick look at the state of SaaS pricing in general:
- 39% of SaaS companies spend 10 hours or less on their pricing strategy per year.
- 80% of companies change their pricing at least once a year, with most changing it multiple times.
- 98% of Saas companies earned positive results from making core changes to their pricing strategy.
Let the first and last point really sink in – almost 100% of SaaS companies do better by making core changes to their pricing – but less than 39% spend more than 10 hours per year on their pricing strategy!
If you want to get the most out of your pricing strategy, it’s important to a) spend more time on it, and b) review it frequently. Reviewing your pricing strategy at least twice a year is a good start. It’s important to ensure you are optimizing your pricing, but also not annoying customers with constant changes.
Different Types of pricing models
There are 5 different pricing models common among Saas startups: Flat rate, Usage based, Prepaid, Hybrid and Event-based. Let’s take a look at each one:
Flat Rate Pricing
The Flat Rate model is the most common. It’s easy to set up, since you only need to define the recurring price and billing frequency.
Usage Based Pricing
Usage-based pricing aligns monetization with how customers actually consume your products and services. You’re probably familiar with how cloud service providers charge, or even how your monthly utility providers bill you – all based on how much of the service you consume.
Nearly 39% of SaaS startups bill based on usage – and that number is growing.
The Prepaid Model
The Prepaid pricing model gives the you revenue upfront, whether the customer uses the service or not. This provides more security for the merchant, since the consumer has already paid for the service, and it’s easier to use.
The prepaid model allows you to have a predictable revenue stream going forward and is about the closest thing you will get to billing customers for exactly what they use.
The Hybrid Pricing Model
The Hybrid model combines multiple billing models to create hybrid pricing to maximize revenue growth. For example, you can have a base rate plus a per transaction fee.
We are all farimlar with the 2.9% + $0.30 that payment providers charge us – this is a perfect example of two-part tariff pricing hybrid pricing.
Last but not least, event-based billing is thought to be the next generation of billing for SaaS companies; and is all about linking value to price. In this model, a company only charges customers for specific actions taken, for example the number of videos watched, miles driven, messages sent, etc. This requires more work on the seller’s side, including advanced metered usage and billing.
Building blocks for your pricing model
There are several different building blocks that will determine which pricing model works best for your business. For example:
- Business model
- Your value proposition
- The total cost of your product
- Revenue optimization
- The competitive landscape
SaaS companies can have different business models; some are more low-touch (self-service purchases, and a low learning curve), while others are more high-touch (direct sales approach, usually B2B SaaS. These different models will affect your pricing model. Low-touch businesses usually offer a free trial and a lower price point, while high-touch businesses can start at a higher price point.
Customers care more about the value they receive as opposed to the price they pay, so your overall value proposition is central to how you determine the actual product price.
Another building block for your pricing model is the total cost of your product. This includes any fixed costs, variable costs and your profit margin.
You can use optimization to seek your ultimate revenue and profit goals for different pricing segments and distributed levels of granularity. The goal is to have certain revenue and margin targets, which will influence your pricing strategy.
When deciding on a pricing model, it’s important to keep an eye on your competition. That doesn’t mean you should use competition-based pricing, which can be dangerous in the long run. Instead, differentiate yourself with value-based pricing.
Executing your pricing strategy through your billing ecosystem
It’s important to understand the difference between pricing and billing, and how the two can work together. Pricing is the monetization of your products, the market and customers’ perception for value. Billing is how you’re going to collect revenue. The engine of barter from your customers to your product.
Once you’ve decided on your preferred pricing strategy it’s time to find a billing ecosystem that lets you execute it. Make sure the billing system to choose has all capabilities that you might need for your pricing system, for example freemiums and trials, ease of setup and maintenance, billing frequencies, targeted promotions, integrations and efficient invoices.
Your billing suite should act as your Revenue Operations Generator
Your billing ecosystem should guide you and your customers through the funnel from beginning to end, starting at Customer Sign up and Consumption of product catalog, to Billing Dates, Line items generated, Invoice generated, Payments, and Dunning. All of these functions should support your ideal pricing strategy.
Don’t be like the 60% of SaaS companies that leave money on the table; take a value-based approach to your pricing strategy. Making your pricing and billing customer-centric will provide you a competitive edge in the bloated SaaS market. Fine tuning your pricing model and implementing a strong billing ecosystem is key to hyper-growth SaaS companies.
Remember to start with your pricing model – which makes the most sense for your business? And more importantly, which pricing model makes the most sense for your customers?
Thinking about the building blocks for your pricing strategy ensures that you don’t lose sight of the bigger picture.
The tools that make up your billing ecosystem are critical to successfully monetizing your product. Make sure your tools are aligned with 1) Your pricing strategy, and 2) Your overall goals for monetization.
Watch the full webinar presented by Chargify below for more details and Q&A