It shouldn’t be overlooked and formulated with wishful thinking or weak statistical data. Pricing plays an integral role in helping you monetize your customers and keep your business in good health. These are some of the most crucial questions that SaaS businesses should answer with complete clarity before deciding on a pricing model.Ī great product coupled with a great pricing plan is a force to be reckoned with. Which pricing model complements your target market? Many SaaS companies spend all their blood and sweat building a great product and then throw it in the market, hoping to hear the sweet sound of “ka-ching” almost immediately.īut the secret sauce to building a successful product boils down to an essential factor - Pricing. Building your product is just the first step. And when it comes to SaaS, what many fail to understand is that your work doesn’t get over after building a great product. Why is choosing the right pricing strategy important?Īccording to Gartner, SaaS businesses are the largest segment of the cloud market and are slated to grow exponentially in the coming years. Provided you have deep insight into your consumer behavior, it is also possible to change and experiment with your pricing to suit different segments of your customer base. This tiered pricing approach allows different customer segments to get value out of Crazyegg’s offerings depending on their needs and budgets and allows Crazyegg to upsell customers to a higher plan. If you truly understand your customers and their needs, value-based pricing can help you package your products to meet those needs, even if your competitors are charging a higher price.įor example, check out how Crazyegg segments their pricing depending on the features available with each tier. This strategy considers customers and how they perceive the value of the product or service. That brings us to the most suitable pricing strategy for SaaS businesses, the value-based pricing strategy. However, this strategy can prove highly inefficient in the long run as it does not consider the end consumer. The cost-based pricing strategy is often applied when businesses have limited knowledge of the customer’s willingness to pay for your product. COGS in SaaS is typically cloud infrastructure, engineering, and support.įor example, your customer acquisition cost is $100, and COGS per customer is $50, and the desired margin is 20%, your price comes to 150 + 30 = $180. This method is not research-heavy because it just involves adding your desired profit margin over your expenses.Ĭost plus pricing = Customer Acquisition Cost (CAC) + COGS + MarginĬustomer acquisition cost is the money spent to acquire each customer. It works on the basic principle: to make profits, one must sell for more than you spent. Penetration pricing allowed Netflix to establish a solid subscriber base, to begin with.Ĭost-based or cost-plus pricing is one of the most straightforward pricing strategies. That’s less than $1 per DVD, whereas Blockbuster was charging $4.99 for a single DVD for a three-day rental period. In 1999, Netflix started offering a subscription of 4 DVD rentals for $15.95. Netflix entered a market where DVD rentals were the norm. Netflix is an excellent example of how a business can use the penetration pricing strategy. A word of caution: low prices can cause losses, so this is not a long-term strategy. This strategy can help gain a stronghold in a new and competitive market. It involves pricing your product lowest as compared to competitors. Penetration pricing strategy is usually used by new entrants in the market. This in turn can lead to missed revenue opportunities. While this pricing strategy is fairly simple and may keep you afloat in a competitive market, it also means that you have minimal control over deciding and experimenting with pricing. You can price your product higher, lower, or at par with the competition. This strategy only considers the publicly available information about your competitors’ pricing and does not consider factors like market demand or production costs. Just as the name suggests, the competitor-based pricing strategy depends on that of your competitors. Let’s look at some of the popular pricing strategies. Various moving parts contribute to pricing strategies, including competitors’ pricing, costs, and expenses. Pricing strategies are methods used to determine the pricing of the product or service. In this guide, we will talk about various SaaS pricing strategies, different types of SaaS pricing models, and the metrics to track the performance of your pricing model. “#1 tip for pricing strategy is to treat it as an experiment.,” says Yoav Shapira, Director Of Engineering at Facebook. As a growing SaaS business, if you’re not giving your pricing strategy a serious thought and often, you’re leaving money on the table.
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