Insight: SaaS (25) Raise your SaaS price

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We addressed common SaaS growth engines in the previous article ‘Insight: SaaS (24) Use one metric to boost sales and find your growth engine’. Let’s speak about the advantages of upping product prices today.

Recently, I’ve been considering a question. Who has the veto power in whether the product’s price is expensive or cheap? How we price our products is determined by the positioning. The supplier determines the pricing. However, whether a price is high or low is a subjective judgment made by the consumer, and it has nothing to do with the seller’s pricing strategy.

Can it be claimed that, as a commercial organization, our perception of the price will always differ from that of consumers, since everyone’s definition of pricey is different? Entrepreneurs may believe they have set a high price, but the clients may feel it as a low price. Even if you think you’ve set a very affordable price, some clients will claim you’ve placed it too high. Because this deviation is constantly present, the price we are currently selling may not be appropriate.

We should try to be flexible in altering our rates now that we have realized that there is no fixed price that will always be in the comfort bubble for all consumers.

One of the most common mistakes we make as SaaS or B2B businesses is not being bold enough with our pricing. You set up a $500 annual plan, and only a handful of customers make purchases. You still assume it is overpriced. But what if the price is increased to $5000 per year? You have no courage to attempt. Be aware that the majority of SaaS businesses charge inexpensive fees for their services. StatusPage, which Atlassian acquired, began at $49/month and then increased to $399/month, yet consumers didn’t churn significantly. As those customers who truly require it will continue to purchase it as the price rises, while those believing $49/month is too exorbitant will not purchase it even if the price is reduced.

So, if your product still isn’t publicly available, I recommend increasing the estimated price by 2–4 times. This could be the most accurate pricing method in terms of results.

So, how do you set the price for your products? Is it reasonable to price by cost? Do you want to compare prices with your competitors? What do you mean by value pricing? I’m going to write an article about how to price SaaS products. However, how long has your product’s price been unchanged? We all know that the market might alter at any time and that the product should be updated as well.

Why am I advocating for SaaS companies to raise their product prices? Because this strategy offers so many advantages, the risks aren’t as high as imagined.

1. Enterprise customers are frequently value-sensitive and price-insensitive when it comes to SaaS and other B2B solutions.

Corporate clients are unconcerned about price increases if there is an improvement effect at the same time. Corporate clients, we often say, make rational purchasing decisions. The rationality is goal-oriented. Enterprise clients are concerned with the product, which is considerably more important than the price. A company that purchases a SaaS product will generate more value than it costs. It will renew as long as the value is somewhat higher than the cost. Furthermore, enterprise consumers are highly sensitive to consequences. They will face friction in renewal as long as the effect is diminished, and they will quit as soon as the effect is less than the cost.

Products for value-sensitive customers always have room to increase the prices. The premise is to ensure that the product effect continues to expand.

2. A price rise may not necessarily lead to a loss of clients, but it may bring in more.

The following are excerpts from the 2019 OpenView SaaS benchmark report:

Among the companies that changed pricing, just 1% expected ARR to decrease as a result. By contrast, the median impact of a pricing change was a more than a 25% increase in ARR growth.

Since a product’s price has risen, the ARR will also skyrocket. At the same time, the higher price will be easier to attract large enterprises. According to the renewal and additional purchase rates of various sizes’ businesses, large companies have a greater renewal rate than SMBs and are more likely to upsell. The NDR will rise as a result of this.

3. Increasing the price is a very effective way to increase overall profit.

Assume a corporation with ten consumers, a $1000 price, a $2000 fixed cost, and a 35 percent variable cost of sales.

In the first case, we raise the price by 10%, but in the second, we lower the price by 10%:

It has been observed that the actual profit impact is greater than 10%. When you cut rates, you must gain extra clients if you want to keep your earnings.

So, when can we raise our prices? Many SaaS companies want to raise their prices but are hesitant. Some SaaS companies have raised rates several times, and we must judge the timing.

When is the best moment to act:

1. A lot of new features have been added.
2. Customers are quite happy with the current offerings.
3. Assuming that the benefits can be measured, the cost is less than 20% of the benefit.

What constitutes inopportune timing:

1. The majority of the consumers have just made a purchase within the last several months.
2. Without any updated version.
3. The pricing has altered within six months.

So, how can we put it into practice?

First and foremost, you must communicate with all paying customers, informing them that you will be increasing the price, as well as the reason for the price rise, such as an increase in cost or a significant upgrade in functionality, and be prepared to wait for the customer’s responses. Answer the customer’s confusion and inquiries honestly, and do our best to alleviate the customer’s discomfort. Increase the price in accordance with the schedule, with no time modifications. Wait quietly for the customer’s renewal decision. Consider returning to the initial price if there is a big area of churn.

Please send me an email (jasperhanlingyi@gmail.com) if you have any questions or suggestions.

The next article ‘Insight: SaaS (26) Four departments collaboration’ is published. Simply send me some claps and feedback if you enjoyed my article.