7 SaaS Pricing Strategies to Demolish Your Growth Goals
This is part two of my three-part series, taking a deep-dive into SaaS pricing strategy. I’ll be covering key pricing models, strategies for hitting your growth goals, and psychological hacks for optimising revenue.
Your pricing model is at the heart of your SaaS business: it’s the foundation that allows you to build out repeatable sales processes and generate recurring revenue.
But, within the framework of your pricing model, there are all-manner of different goals you’ll need to hit on the way to your over-arching objective of “growth”.
That’s where SaaS pricing strategies come into play. Each of these strategies is suited to a different objective: whether that’s rapidly expanding into a new market, or attracting particularly high-value customers.
1) PENETRATION PRICING
Penetration pricing is the strategy of reducing prices to rapidly gain adoption in a target market, and secure the “first mover” advantage: claiming market share before your competitors can beat you to the punch.
In order to do so, companies often lower their prices to unsustainably low levels in the short- to medium-term, but aim to compensate in the longer-term, when they’ll be able to upsell and cross-sell their large customer base onto a more profitable package.
This “land and expand” strategy has been used to great effect by companies like Slack and New Relic, using penetration pricing to grab the lion’s share of the market before their competitors.
2) CAPTIVE PRICING
Captive pricing (also known as captive product pricing) is the practice of offering a “core” product for a lower-than-expected price, but charging extra for additional products that are required to get the most from the core product.
One classic example is the printer: most modern printers are sold for extremely low prices, but as soon as your ink runs out, you’re forced into shelling-out for expensive, own-brand ink cartridges (the captive product), which are usually far more expensive than the printer itself.
For equivalent examples in software, imagine offering graphic design software at a nominal price, but requiring users to download stock imagery from the company’s own stock photo service.
Or for a real-world example, the case of Adobe, offering older versions of their software for free, but gradually eliminating backwards-compatibility, forcing users to upgrade to an expensive paid version if they want to collaborate.
3) SKIMMING PRICING
Skimming pricing (also known as promotional pricing) is the strategy of setting a high initial price for a new product, before slowly lowering the price over time.
Skimming pricing is sometimes referred to as “riding down the demand curve”: as the product’s price is lowered over time, it appeals to different sub-sections of the marketplace, and customers with different price sensitivities.
The best examples of skimming pricing can be found in tech: Apple products are famous for heavy discounting just a few months after launch, and in video gaming, prices steadily decline from release.
In SaaS, this strategy works because of the Technology Adoption Lifecycle: early adopters gain utility from the bragging rights of first access to new technology, and they’ll often pay more for access to new products. As the product matures and prices are reduced, it begins to appeal to the later market.
4) PRESTIGE PRICING
Prestige pricing (also referred to as premium pricing) is the strategy of maintaining high prices, in order to convey a sense of quality, exclusivity or luxury. In doing so, companies can maintain a (relatively) small customer base of high-value customers; customers that would likely abandon the brand if prices were to decrease.
There are a few ways to leverage prestige pricing in SaaS. If you’re a well-known brand, or your product is used by high profile companies, you may be able to differentiate yourself by reputation, allowing you to charge a higher price in the process.
In other cases, it may be possible to offer a “premium” tier, containing best-of-everything features, rounded price points ($500 instead of $499) and additional recognition for being a “premium” customer.
5) FREE TRIAL PRICING
Free trials are a staple of SaaS pricing strategies, and with good reason: by offering the product for free, for a limited time, you provide a quick foot-in-the-door. Customers can start using your product without any financial expense, and as long as they’re able to benefit from the product during the trial, there’s a strong incentive to upgrade when the trial ends.
Free trials are typically time-limited (the most common length is 30 days), but it’s also possible to restrict it by usage (with the trial expiring after 5 invoices, 1 video file, etc.).
Crucially, half of all free trial signups occur after the trial has ended, so it’s important to have a well-defined follow-up sequence.
6) COST PLUS PRICING
Cost plus pricing (also referred to as cost based pricing) serves as a starting point for many SaaS companies. Developing, marketing and selling a product takes resources and, of course, money: cost plus pricing is the practice of adding a target profit margin to those costs (say, 20%), and setting that as the price for your product.
Cost plus pricing doesn’t take into account competitor pricing, the perceived value of the product, the price sensitivity of their customers, or any of the other inputs that should influence pricing. But pricing discussions have to start somewhere, often with limited information — and in these instances, cost plus pricing can be a useful framework for kick-starting your thought process.
7) VALUE BASED PRICING
Cost plus pricing is very company-centric: it’s an exercise in choosing the profit the company wants, with little regard for the customer that supplies that profit. Value based pricing works in stark contrast, using the perceived value of the product as the benchmark for price setting, instead of costs, competitors or target margins.
At its heart, value based pricing encourages SaaS companies to view their pricing strategy as a product of the value they provide. Instead of fixating on cost-cutting to improve profit, companies focus on improving the service and value they provide, using extensive research to understand how customers actually value a product.
Value based pricing isn’t a quick-win — it’s a long-term change to how prices are fundamentally viewed — but if you’re looking for a good starting point to transition to value based pricing, check out the 10x Rule. In simple terms, it’s the idea that the value your product provides should be ten times its price, providing a simple heuristic for framing your pricing decisions.
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