Pricing is one of the most crucial decisions when launching a Software-as-a-Service (SaaS) business. Get it wrong, and you could be leaving money on the table—or worse, driving customers away. So, how do you determine your SaaS pricing strategy? What’s the best way to design a pricing strategy that works for your product and target audience? And what pricing models should you consider?
Today, we’ll explore some considerations you should make prior to choosing a pricing strategy, then we’ll dive into several pricing strategy options and the pros and cons of each of them.
How to Determine Your SaaS Pricing Strategy
Determining your SaaS pricing strategy isn’t just about slapping a number on your product. It’s about finding the right balance between what you want to charge, what your customers are willing to pay, and what your competitors are doing. Here are some key steps to help guide the process:
- Understand Your Costs and Margins
First and foremost, identify your costs—this includes development, hosting, customer support, and marketing. Your pricing needs to cover these costs and leave you with a sustainable profit margin and be affordable enough to customers that they will continue to renew.
A strong pricing strategy will cover your costs and reflect the value of your product. If those two numbers aren’t lining up, it may be time to figure out how to include more value adds to your product, or how to cut development costs.
- Research the Market
Look at what similar products are charging. This can help you understand what customers expect and where you stand in comparison. Are you offering premium features? Is your product easier to use? Your pricing should reflect that.
A strong product-market fit is a crucial foundational step as you work to build a pricing strategy.
- Know Your Customer
Pricing will vary depending on your customer base. Are you targeting startups or large enterprises? Each segment will have a different willingness and ability to pay. Consider factors like customer lifetime value (CLV) and acquisition cost (CAC) to inform your pricing. - Consider Value-Based Pricing
Rather than basing your price on costs alone, consider how much value your platform offers. If your product can save users significant time or money, you might be able to charge more. Value-based pricing aligns the price with the benefits your customers gain.
How to Build Your SaaS Pricing Model
Once you've determined your pricing strategy, it’s time to build your SaaS pricing model. A pricing model lays out how you will charge your customers and how you structure your tiers, discounts, and payment options.
Here are some steps to help you build your pricing model:
- Choose Between Flat-Rate, Tiered, or Usage-Based Pricing
Decide whether you'll have a single price for all customers or multiple pricing tiers. You may also want to consider usage-based pricing, where customers pay based on how much they use the software. This is common in products like cloud storage or APIs. - Offer a Free Trial or Freemium Model
Free trials or freemium models can help you acquire new users. A free trial lets potential customers experience your product, while a freemium model offers basic functionality for free with the option to upgrade for premium features. Just be sure your paid offerings have enough value to convert users. - Factor in Discounts and Promotions
Consider offering discounts for long-term commitments or volume purchases. This can help incentivize users to commit to higher-priced plans or longer subscription terms. The current average SaaS discount is 17%, which can have a major impact across many key metrics. Consider using tools that can help you close without relying on discounts. - Test and Iterate
Pricing is rarely a set-it-and-forget-it decision. Test different price points and models with your audience, gather feedback, and refine your pricing accordingly.
What SaaS Pricing Models Are Out There?
Choosing the right pricing model for your SaaS product is key. Here are some of the most common SaaS pricing models you can consider:
- Flat-Rate Pricing
This is the simplest model where you charge a single price for access to your entire product. It’s easy for customers to understand, but it might not work for products with a wide range of use cases. - Tiered Pricing
With tiered pricing, vendors offer multiple pricing plans based on different feature sets or usage levels. For example, a basic plan might include core features, while a premium plan might unlock advanced analytics or integrations. This allows you to cater to a wide range of customers. - Usage-Based Pricing
This model charges customers based on how much they use your product. Think of how cloud storage services charge based on the amount of data stored. Usage-based pricing is great for businesses with a broad user base and varying usage patterns. - Freemium Pricing
Freemium gives users free access to a limited version of your product, with the option to upgrade to premium features. This model is excellent for attracting new users but requires you to offer compelling paid features to convert them. - Per-User Pricing
With this model, customers pay based on how many users access the product. This is a common approach for SaaS tools like project management software or CRM systems. It’s scalable and can be easy to understand for both you and your customers. - Per-Feature Pricing
If your product offers a variety of features, you might consider charging based on which features the customer needs. This approach allows you to monetize advanced functionalities and create tailored pricing for different types of users.
What Is the Best Way to Design a Pricing Strategy for SaaS?
When it comes to designing a pricing strategy for SaaS, there isn’t one-size-fits-all advice. However, here are a few best practices that can guide you:
- Align with Customer Value
Your pricing strategy should reflect the value your customers receive from your product. If your SaaS product saves users a lot of time or improves their business operations significantly, it’s okay to charge a premium. Always be clear on the ROI your product offers. - Keep It Simple and Transparent
Complicated pricing structures can confuse potential customers and hurt conversions. Keep your pricing clear and easy to understand. If you’re offering multiple plans, ensure the differences between them are easily digestible. - Iterate Based on Feedback
Don’t be afraid to adjust your pricing based on customer feedback. Some customers might feel that your product is overpriced, while others might see it as underpriced. Be open to testing and adjusting your strategy based on the data you collect. - Consider Global Pricing
If you’re targeting customers across different regions, make sure your pricing is competitive in each market. This might involve adjusting prices based on local economics or offering different plans for international customers. - Monitor Competitors
While it’s important to define your own value proposition, keep an eye on your competitors’ pricing strategies. This will give you insight into how you stack up in the market and help you stay competitive.
Making your Pricing Model Successful with Capchase
A pricing model only works if your customers are willing and able to pay the bills that come with it. In today’s market environment, financial constraints are more common than ever, making it harder for buyers to commit to pricey annual contracts. Often, the upfront payment is a barrier that many companies simply can’t overcome or justify.
Capchase Pay helps B2B SaaS vendors close faster and at higher ACV by empowering sellers to offer flexible payment terms to customers. Seamlessly integrating into your checkout flow, Capchase lets buyers choose a payment schedule that works for them, allowing them to pay in manageable installments over time.
At the same time, Capchase pays you full ACV upfront, allowing you to power growth with cash in hand. Then Capchase manages billing and collections on your behalf, allowing your Finance team to turn their attention to more important tasks. Capchase underwrites, administers, and manages the details while you invest in future growth and development.
With more companies than ever aiming to stay liquid in order to meet unexpected challenges, Capchase Pay offers a solution that suits both buyers and sellers, allowing cash to remain available for both parties throughout the contract period, improving the customer experience, and empowering vendors to close without an undue reliance on discounts.
Ready to see how Capchase could help your company? Book a meeting here.
