As a product manager being involved in building SaaS products for the last 5+ years as well as a finance guy in my previous career, I thought of sharing my POV on SaaS pricing. Pricing is a vast subject, and determining the price for your product is an art, that involves several factors. I am not going to explain all these, but focus my post only on SaaS Software Product pricing.
So here are the 7 SaaStras for SaaS pricing:
Revenue Recognition and Hockey Stick
If you come from services background, you will get it easier. While you are pricing a product, SaaS’s inherent behavior is that of offering services. So wear a service mindset to determine the price. What do we mean by that? The revenue comes in installments and is steady over the contract period. From a buyer’s point of view, they take this as OpEx vs CapEx, as they are not committing to a big upfront license. Important terms that you should be familiar is ARR (Annual Recurring Revenue), TCV (Total contract value across the contract).
If you manage your customer attrition very well, the revenue is predictable. Also it’s a hockey stick as you keep building upon your initial momentum, as customers keep paying you as long as they are happy with your products. So bottom line, SaaS pricing should be designed based on a longer-term view and keeping renewals in mind.
Metrics
What metrics you want to price your SaaS products is an important one. Obviously it depends on the product you have. Here are some popular metrics
Monthly/ Annual Flat Rate
This is a classic SaaS metric that you use for products that don’t have much variability. The big advantage of this is its simplicity.
User per month
This is another popular method, this is adapted when you see the value of charging more or less based on the number of users using your product. Most use this as it helps them upsell more users as the adoption increases.
% of Revenue
This is sometimes used for solutions that provide a straight ROI on the revenue generated. Also it’s helpful for products that have very low user count but do a lot in terms of being giving great insights. Some of the AI/ML products could make use of this.
Storage
A very popular method for cloud infrastructure and computing power. The variability is very high, so customers are happy to go by the storage they buy.
Domain-specific metric
This method is based on some key metrics that are used based on specific objects a particular solution is used. For Master Data Management it could be a number of records, for a marketing execution it could be based on the number of emails or other campaigns, for a Business Intelligence system it could be based on the number of reports, and for HR software, it could be the number of employees.
B2B vs B2C
When determining the prices, there is an apparent difference when you price B2B products vs B2C products. In B2B, usually the person using is going to be different the person paying or approving. In B2C, most likely the user pays for what he uses. So for B2B, the focus on the right pricing should be geared towards the IT departments or the IT budget owner, rather than making it something attractive for the actual user, while the actual user may be a good influencer in the buying decision. Also be aware that in B2B, procurement teams, committees, and finance are often involved in the negotiations, so be prepared for heavy discounting. On the other hand in B2C, really you should show a huge value or an attractive offer to lure the user who may be tempted to buy at a certain price. Also the concept of Freemium works better for B2C, as in B2B it may not be even encouraged by the businesses. Many times, your revenue monetization strategy could be not through a price in B2C, while for B2B it’s often through the price will be charging the business. Bottom line, pricing strategies have to vary based on the product being sold to a B2B or B2C, if it appeals to both e.g. MS Office, it should have different pricing strategies for the same product.
Low Touch, High Touch
Pricing is market-driven but at the end of the day the pricing at some point should result in profits. Aside from the R&D costs, support costs etc., one of the significant variable costs is the cost of acquisition of a customer. What is your sales effort? Is the product compelling enough to sell on its own? Can it sell by hearsay? How much marketing spends or promotions are required to sell the product? Is the product a pain killer (known problem), vitamin (concept selling), or vaccine (removes a problem completely)? So essentially, low touch products allow you to sell at a very lower cost of acquisition for a known problem but a high touch usually involves costly salespeople, intensive marketing, and more.
10-5-20 Rule
This is a very popular rule that we apply in designing saas pricing.
10 x Value
The perceived value that a customer gets out of paying for your product. Basically the ROI. This is especially good when you are looking to price your product initially
5 % more
Another rule that you can apply is to keep increasing the price by 5% every year or periodically to test the water. Your product should be able to do that if you have sustained buying form customers
20% rejection
This is a test of whether you have priced at a reasonable level or not giving away at a low price. If 20% of customers reject buying your product because the price is high, that is a good sign, as you probably don’t want to give your product away at a very low price
Global vs Local price
If your product is perceived to be a global product, especially saas products that are sold internationally through the internet, it’s foolish to have one global price. I have seen many enterprise software companies do this and it makes no sense, and it often gets discounted heavily really making the price itself a futile number. This common global price goes against the basic economics of purchase power parity. Any other product does not sell at the same price across different places. At the minimum the price should be different for developed and emerging markets.
Pricing Tiers
Often saas pricing very much follows the famous car tiering structure. We all see the car pricing that goes from basic variant to fully loaded version, adding some premium features into the higher priced ones. This is very much useful when you are pricing saas products. One of the good options to be made available would be to allow for an easy upgrade path when the customer wants it. Also the premium features should be some key ones to encourage customers to move there, but the standard ones should still be self-contained and useful as otherwise it may look a false pricing tier.
I hope the above saastras are useful as you are thinking about your saas pricing strategies.
