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How To Price Your SaaS Product?

How To Price Your SaaS Product?

22 January 2024
SaaS

The price of your Software as a Service product is a major deciding factor in your future revenue. It can literally make or break your profit health. However, it is quite a difficult nut to crack especially for newbie SaaS businesses. 

Most SaaS companies do not spend enough time working out a suitable pricing structure for their products. The majority of SaaS businesses only spend around 6 hours on the pricing aspect of their SaaS product.

Keep in mind that this isn’t 6 hours a week or month we’re talking about – 6 hours in total, which is not nearly enough considering how important pricing really is.  

Pricing your SaaS product can indeed be tricky, especially when you’re only in the Startup stage of your business. Not to worry, because in this blog post, we have compiled helpful tips that will assist you in shaping your SaaS product pricing strategy. 

Let’s dive straight into it!

How to Price Your SaaS Product?

When studying how to price your SaaS product, you need to look at different SaaS product pricing strategies. Let’s go through these individually. 

Main SaaS Product Pricing Strategies 

Cost-Based Pricing 

In cost-based pricing, SaaS organizations estimate the total of what’s costing them to provide a service and raise that figure up a specific percentage to generate a profit. 

  • Pros: The benefit of this pricing strategy is that it’s simple and doesn’t require a lot of time. 
  • Cons: The downside of the cost-based pricing model is that costs can’t always be predicted at the start. Suppose that as a SaaS company, you set a fixed price initially, but then you end up facing unexpected expenses. Your initially fixed price will fail to make you a decent profit.  

Competition-Based Pricing 

In competition-based pricing, you study your competitors and how they are pricing their SaaS products. Then, you price your own SaaS product in reference to your competitors’ pricing. 

  • Pros: This strategy is straightforward and easy.
  • Cons: If you are basing your price off your competitors, you are utilizing their strategy instead of developing your own. You are not taking your own Unique Selling Points into account during price estimation, which isn’t good for revenue generation.

Penetration Pricing 

Penetration pricing strategy is a kind of promotional strategy where a business reduces its prices temporarily (usually for a pre-determined time period) to generate quick demand. 

  • Pros: The limited time frame associated with this pricing strategy can work out in your favor, as potential buyers may feel like they will miss out on a great offer and, as a result, they will end up subscribing. 
  • Cons: If your pre-determined time period is too long, potential buyers may feel as if you are not acquiring enough customers and reducing your pricing for such a long time for that reason. This may make them hesitant to pay for your service. 

Value-Based Pricing 

This strategy focuses on pricing the SaaS product according to the value it promises to bring to the paying customer. There’s no consideration of competitor’s pricing here. 

  • Pros: This strategy can help your SaaS business get paid what it deserves according to the value it is providing. 
  • Cons: Since there’s no reference to competitor’s pricing here, customers may hesitate to subscribe to your business model as they may feel inclined to go with another SaaS product that is priced more market-competitively. 

Freemium Pricing

This pricing strategy offers users a free version of the SaaS product as well as a paid/premium version. The paid version, obviously, offers a higher number of benefits and advanced features.

In the start, both these versions are offered for free to users to generate maximum sign-ups. After some time, companies typically continue offering the free version for $0 while limiting the premium version to only those who pay. 

  • Pros: This is a commonly used pricing strategy and is helpful in giving your customers a taste of your advanced version for a price they can’t resist – $0! 
  • Cons: Users may get annoyed if you lock your product’s best features behind a paid wall. It is important to find the right balance so your users are satisfied with the free version while also being tempted to buy the premium version.  

Conclusion 

How you decide to price your SaaS product will depend on your availability of time and funds. 
We recommend sitting down with your team and going through all the pricing strategies one by one to pick the most suitable one for your SaaS business.

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