In the world of SaaS, pricing strategy stands as a critical pillar of success. It’s far more than just a number on your landing page – your pricing strategy is a reflection of your product's value, your understanding of your target market, and your long-term business goals.
Choosing the right pricing strategy for your SaaS product is not just important – it's essential. It can mean the difference between a thriving, scalable business and one that struggles to gain traction. The right strategy can accelerate customer acquisition, boost retention rates, and maximize your revenue potential. Conversely, a poorly conceived pricing strategy can deter potential customers, increase churn, and leave money on the table.
But here's the catch: there's no one-size-fits-all solution in SaaS pricing. The landscape is complex, with a myriad of strategies and models to choose from. That's why it's crucial not just to pick a strategy, but to combine it with the right pricing models that align with your product's unique value proposition and your customers' needs.
In this guide, we're diving deep into the world of SaaS pricing strategies, appropriate pricing models to combine them with and real-world examples of how successful SaaS companies have leveraged them.
Let's begin this journey to pricing perfection!
What is a SaaS pricing strategy?
A SaaS pricing strategy is a comprehensive approach to determining how a company will charge customers for its cloud-based software products.
It encompasses not just the pricing models used, but also the overall philosophy, objectives, and tactics employed to maximize revenue, attract and retain customers, and achieve business goals.
A well-designed SaaS pricing strategy takes into account various factors, including:
- target market and customer segments
- competitive landscape
- value proposition of the product
- customer acquisition and retention costs
- long-term business objectives
- product development and maintenance costs
- market trends and industry standards
SaaS pricing strategies vs. non-SaaS pricing strategies
In comparison with non-SaaS pricing strategies, SaaS pricing is generally more flexible, value-focused, and aligned with a recurring revenue model. SaaS products require a more dynamic approach that considers ongoing customer relationships, scalability, and the unique cost structure of cloud-based software delivery.
More specifically, SaaS pricing strategies:
- Focus on recurring revenue through subscriptions, emphasizing customer retention and lifetime value, while non-SaaS pricing often relies on one-time purchases or perpetual licenses, with less emphasis on ongoing customer relationships.
- Need to accommodate rapid scaling, both in terms of users and features, while non-SaaS scaling often involves physical products or on-premises installations, which have different cost structures.
- Emphasizes value-based pricing, aligning costs with the ongoing value provided to customers, while non-SaaS pricing is often based more on production costs, with less flexibility to adjust pricing based on perceived value.
- Offers lower upfront costs for customers, but ongoing subscription fees, which with non-SaaS, upfront costs are usually higher, but the long-term costs for customers are usually lower.
- Often focus on upselling and cross-selling to existing customers to increase their subscription value while non-SaaS pricing strategies typically focus more on selling new products or versions rather than upgrading existing ones.
- Focus on recovering CAC over time through subscriptions, while CAC with non-SaaS products is often recovered more quickly through higher upfront prices.
- Capitalize on the opportunity to use real-time usage data to inform dynamic pricing strategies. With non-SaaS, access to ongoing usage data is limited, making dynamic pricing harder to implement.
SaaS pricing strategies vs. SaaS pricing models
SaaS pricing models are specific structures used to charge customers for the software, such as:
- Per-user pricing
- Tiered pricing
- Usage-based pricing
- Flat-rate pricing
- Freemium
- Feature-based pricing
On the other hand, SaaS pricing strategies are broader approaches that incorporate one or more pricing models along with other elements to create a cohesive pricing plan. Strategies focus on the overall goals and methods used to achieve them, while models are the specific mechanisms for charging customers.
Pricing strategies and models are typically used in combination rather than independently. A comprehensive SaaS pricing strategy will often incorporate multiple pricing models to cater to different customer segments or use cases. For example, a company might use a combination of tiered pricing and per-user pricing within its overall strategy to appeal to both small businesses and enterprise customers.
How to price a SaaS product?
Understanding how to price a SaaS product or service starts with a deep dive into your customers and the business. There is no one-size-fits-all solution; it's more like crafting a bespoke suit – you need to know the cost of materials, the measurements of the wearer, and the style they desire.
Here’s a breakdown of SaaS pricing best practices to follow along this process:
- Thoroughly calculate your costs: these will include development, hosting, marketing, customer support, and other operational expenses. Use these to determine your break-even point and desired profit margin. However, when figuring out how to price a SaaS product, don’t focus solely on the costs, but the value you deliver.
- Identify your ideal customer: research their needs, pain points, budget, and willingness to pay. Consider factors like company size, industry, and geographic location.
- Analyze your competitors: research their pricing models, features, and target audience. Identify opportunities to differentiate yourself and justify a higher or lower price.
- Choose a pricing model(s): we offer a thorough overview of nine best SaaS pricing models in a dedicated article.
- Consider applying pricing tiers: each tier should offer a distinct set of features and benefits that justify the price difference. Also, encourage them to commit to a longer subscription by offering a discounted annual price.
- Test and iterate: Consider conducting A/B testing to experiment with different pricing strategies. This should help you understand what resonates best with your target audience. Ask customers about their perception of your pricing and use the customer feedback to identify areas for improvement.
- Implement metrics: monitoring key metrics like customer acquisition cost (CAC), customer lifetime value (CLV), and churn rate to assess the effectiveness of your pricing strategy.
- Offer excellent customer support: build strong relationships with your customers and address their concerns promptly.
- Clearly articulate the benefits of your product: highlight how your product solves customer pain points and delivers value. Avoid hidden fees or confusing pricing structures. Use case studies and testimonials to build trust and credibility.
- Offer a free trial or demo: allow potential customers to experience the value of your product firsthand.
Following these SaaS pricing best practices should help you develop a strategy that maximizes your revenue and drives sustainable growth for your SaaS business.
Now, let’s take a look at the most effective SaaS pricing strategies available for businesses and how these can work with different pricing models.
1. Penetration SaaS pricing strategy – for building a user base for new products
Penetration SaaS pricing strategy concentrates on attracting a large customer base and gaining a market share rapidly by offering a service at a significantly lower price than competitors or the perceived market value.
The primary goal of this strategy is to quickly penetrate the market, establish a strong user base, and potentially create barriers to entry for competitors. This strategy isn’t sustainable in the long run, so it’s something SaaS businesses should consider as part of their strategies in the early stages of SaaS product development.
How does Penetration SaaS pricing strategy work?
The company offers its SaaS product at a price point that is considerably lower than competitors or the perceived value of the product. The low price attracts many customers, leading to rapid adoption and market penetration. As more customers adopt the product, the company gains a significant market share quickly. The widespread adoption helps build brand awareness and recognition. As users become accustomed to the product, it becomes harder for them to switch to competitors. Once the company has established a strong market position, it may slowly increase prices to improve profitability.
To calculate the penetration price, companies must first determine the perceived value of the product in the market and analyze competitor pricing. Then, determine the minimum viable price that covers costs and allows for some profit. Finally, set the price lower than competitors and the perceived value, but above the minimum viable price.
When Penetration SaaS pricing strategy works best:
Penetration pricing in SaaS works best when introducing new services to the market. More specifically, use it when;
- there's a large addressable market to capture
- customers are highly responsive to price changes
- there’s a network effect, i.e. when the value of the product increases as more users adopt it
- it's easy for customers to switch from competitors' products
- your business can sustain potentially lower profits in the short term
Penetration pricing can be applied to SaaS products in several ways:
- with free trials with low-cost conversion, to offer extended free trials followed by a low-cost subscription
- with the Freemium pricing model, to provide a basic version for free and charge for premium features at a low price. Read more about the different SaaS pricing models here.
- with Tiered pricing models, to offer multiple tiers with the lowest tier priced significantly lower than competitors.
When combining penetration pricing with these models, companies should have a clear strategy for transitioning to more profitable pricing structures over time to ensure long-term sustainability. The key is to balance rapid market penetration with the need for profitability and growth.
Example:
Zoom, the video conferencing platform, used a penetration pricing strategy when it entered the market. They offered a free basic plan with generous features and priced their paid plans significantly lower than established competitors like WebEx and GoToMeeting. This strategy helped Zoom quickly gain market share and establish itself as a leading player in the video conferencing space.
2. Free trial SaaS pricing strategy – for removing any barriers to entry
With Free trial SaaS pricing strategy, companies allow potential customers to use their service for a limited time at no cost.
This strategy aims to demonstrate the value of the product while reducing barriers to entry, but is ultimately oriented at converting free users into paying customers.
How does Free trial SaaS pricing work?
A free trial typically offers full or limited access to a SaaS product for a specified period, usually ranging from 7 to 30 days. During this time, users can explore the features, functionality, and benefits of the software without any financial commitment.
The goal is to provide a hands-on experience that showcases the product's value proposition and encourages users to subscribe to a paid plan once the trial period ends.
To evaluate the effectiveness of a free trial strategy, companies typically track the following metrics:
- trial-to-paid conversion rate: the percentage of free trial users who become paying customers
- time-to-conversion: how long it takes for a trial user to convert to a paid subscription
- Customer Acquisition Cost (CAC): the cost of acquiring a new customer through the free trial
- Customer Lifetime Value (CLV): the total revenue expected from a customer over their lifetime
- churn rate: the rate at which customers cancel their subscriptions after converting from a free trial
When Free trial SaaS pricing works best:
Free trials are most effective when introduced as a limited time-offer and:
- the product has a clear and immediate value proposition
- the onboarding process is smooth and user-friendly
- the trial period is long enough for users to experience the full benefits
- there's a strategy in place to nurture and engage trial users
- the product has a relatively short sales cycle
- the target audience is tech-savvy and comfortable with self-service models
Example:
Salesforce Starter Suite - this free trial is designed to give potential customers a comprehensive experience of Salesforce's Starter Suite, allowing them to explore its features and benefits without any initial financial commitment.
It's aimed at helping businesses understand how Salesforce can accelerate their growth and improve efficiency across various operations in 30 days. There's no credit card required to start the trial, and no software installation is necessary. Also, the trial offers simplified sign-up and easy-to-follow onboarding to help users get started quickly.
3. SaaS price skimming strategy - to target early adopters
Price skimming in SaaS is a pricing strategy where a company initially sets a high price for service to target early adopters and customers who are willing to pay a premium for innovative or exclusive features.
As time passes and competition increases, the company gradually lowers the price to attract more price-sensitive customers and maintain market share.
How does SaaS Price skimming strategy work?
The company introduces its SaaS product at a premium price point. The high price attracts customers who value innovation and exclusivity. At this point, the company capitalizes on the high willingness to pay of early adopters.
As the market matures and competitors enter, the company reduces prices to attract more price-sensitive customers. Lower prices help maintain or increase market share as the product becomes more mainstream. The company may introduce new pricing tiers or adjust existing ones to cater to different customer segments.
When the SaaS Price skimming strategy works best:
Price skimming in SaaS works best under the following conditions:
- when the SaaS offering has features or capabilities not available elsewhere
- when the company has a reputation for quality and innovation
- when there are few or no direct competitors in the market
- when early adopters are less sensitive to high prices
- when the company needs to recoup significant R&D investments quickly
- when the company can justify high initial prices with continuous feature improvements.
Price skimming works well when applied to SaaS products with:
- tiered pricing model: maintain premium tiers while introducing lower-priced options over time, catering to different market segments as the product matures.
- feature-based pricing model: introduce new, innovative features at high prices and gradually make them available in lower-priced tiers or packages.
- per-user pricing: allows for easy price adjustments across the entire customer base as the market evolves.
Example:
Salesforce, the CRM giant, has used price skimming strategies throughout its history. When it introduced new products or significant features, it often priced them at a premium. For instance, when Salesforce launched its AI-powered Einstein analytics platform, it was initially offered as a high-priced add-on to enterprise customers. Over time, Salesforce has integrated some Einstein features into its core products and introduced more affordable AI options for smaller businesses.
4. Segmented SaaS pricing strategy – for maximizing customer satisfaction across different segments
A Segmented SaaS pricing strategy is a sophisticated approach that involves dividing the target market into distinct segments and offering tailored pricing plans for each segment.
This strategy aims to maximize revenue and customer satisfaction by providing pricing options that align with the specific needs, preferences, and willingness to pay of different customer groups.
How does Segmented SaaS pricing strategy work?
The starting point is the identification of different customer segments. This can be based on various factors such as company size, industry, usage patterns, or specific feature requirements. Supporting this strategy with robust data analytics can give companies invaluable insights and help them further segment their customers with data-driven accuracy.
For each segment, the company determines the unique value proposition and key features that are most important to that group. Based on the value proposition and customer needs, the company creates pricing tiers or plans that cater to each segment.
Different features or usage limits are assigned to each pricing tier to justify the price differences and appeal to specific segments. With this pricing strategy, the SaaS business should regularly analyze customer data and feedback to refine the pricing strategy for optimal results.
Segmented pricing is commonly applied to SaaS products through:
- tiered pricing plans (e.g., Basic, Pro, Enterprise)
- usage-based pricing models with different thresholds for each segment
- feature-based pricing, where certain features are only available in higher-tier plans
- industry-specific pricing plans
- company size-based pricing (e.g., SMB vs. Enterprise plans)
When Segmented SaaS pricing strategy works best:
Segmented SaaS pricing works best when:
- there is significant variation in customer needs and willingness to pay across different market segments
- the service has a wide range of features that can be bundled differently for various segments
- the business has a good understanding of its target market and can accurately identify distinct segments
- the product can scale easily to accommodate different usage levels or feature sets
- the market is mature enough to support multiple pricing tiers
Example:
Salesforce, a leading CRM platform, employs a segmented SaaS pricing strategy:
- Essentials ($25/user/month): For small businesses, limited features
- Professional ($75/user/month): For growing businesses, more advanced features
- Enterprise ($150/user/month): For larger companies, advanced customization and automation
- Unlimited ($300/user/month): For enterprises, unlimited customization and support
5. Geographic SaaS pricing strategy – tailored to economic conditions
Geographic SaaS pricing, also known as regional or location-based pricing, is about adjusting prices to the geographic location of customers.
This strategy takes into account factors like economic conditions and purchasing power when determining the price that will drive sales within a specific market.
How does geographic SaaS pricing work?
Companies segment their market based on geographic regions. They research and analyze economic factors, competition, and market demand in each region. Prices are set differently for each geographic segment, reflecting the local market conditions. Customers are charged based on their location, typically determined by IP address or billing address.
There's no one-size-fits-all formula for geographic pricing, but some factors to consider when calculating prices include:
- local GDP and purchasing power parity (PPP)
- market demand and competition in the region
- operating costs in the specific location
- exchange rates and currency fluctuations
- local regulations and taxes
When the Geographic SaaS pricing strategy works best:
Geographic pricing is most effective when:
- the service has global appeal but faces different market conditions in various locations
- the service is distributed globally to individual consumers, when there are significant economic disparities between target markets
- competition varies greatly across regions
- local regulations or taxes significantly impact pricing decisions
Example of Geographic SaaS pricing:
Spotify, the popular music streaming service, is a well-known example of a company that employs geographic pricing for its subscription plans.
Spotify Premium (Individual Plan) pricing in different countries:
- United States: $11.99/month
- United Kingdom: £11.99/month (approximately $15.40)
- India: ₹119/month (approximately $1.45)
- Brazil: R$21.90/month (approximately $4)
- Germany: €10.99/month (approximately $11.80)
- Philippines: ₱149/month (approximately $2.50)
In countries with lower average incomes, like India and the Philippines, Spotify offers significantly lower prices to make the service more accessible. At the same time, in the US, where there are many competing music streaming services, Spotify also maintains a competitive price point. In countries like the UK and Germany, where consumers generally have higher disposable incomes, Spotify charges slightly more. Lower prices in emerging markets like India and Brazil help Spotify rapidly gain market share and compete with local services.
6. Promotional SaaS pricing strategy – for a temporary sales boost
Businesses can use Promotional SaaS pricing strategy to temporarily attract new customers, retain existing ones, or boost sales during specific periods.
It involves offering discounts, special deals, or limited-time offers on SaaS products.
How does the Promotional SaaS pricing strategy work?
Discounts are made available for a specific period of time. These can be applied as:
- free trials with promotional pricing upon conversion (like in the Shopify example mentioned above)
- discounted annual subscriptions
- limited-time access to premium features at a lower cost
- promotional codes for specific user segments
- referral programs with discounts for both referrer and referee
When the Promotional SaaS pricing strategy works best:
For promotional pricing to work, it must be made available for a specified time-period only. They can be applied:
- when launching new products or features
- when entering new markets or targeting new customer segments
- when countering competitive pressures
- during slow seasons to boost sales
- for customer retention and reducing churn
Example:
Adobe’s current promotional pricing package is clearly aimed at encouraging users to subscribe to the All Apps plan by offering a substantial discount for the first year. This strategy can help Adobe attract new customers or encourage existing customers of individual apps to upgrade to the full suite.
Craft the perfect pricing strategy for your SaaS product
As we've explored, selecting pricing strategies for SaaS products is a complex but crucial task. The six strategies we've discussed offer unique advantages and can be tailored to suit your specific business needs and market position.
Remember, your pricing strategy is not set in stone. It should evolve with your product, your market, and your business goals. Regularly reviewing and adjusting your approach is key to maintaining a competitive edge and maximizing your revenue potential.
At RST Data Cloud, we specialize in helping SaaS businesses like yours develop and implement effective pricing strategies. Our team of experts can analyze your product, market position, and business goals to recommend the perfect pricing approach for your unique situation.
Don't leave money on the table with a suboptimal pricing strategy. Schedule your free 30-minute pricing strategy consultation today via this contact form. During this session, we'll:
- review your current pricing model
- discuss your business goals and challenges
- provide initial recommendations for improvement
Remember, the right pricing strategy can be the difference between struggle and success in the competitive SaaS landscape. Don't wait – take action now to ensure your pricing is working for you, not against you.
