SaaS Pricing Models Explained: How to Price Software Products
Pricing your SaaS product right helps build a loyal customer base and maximize revenues. Learn what models and strategies you can use to price your software.
Reasonable pricing for a SaaS business application is not a piece of cake. Think about competition and business model. Add the cost of product development and the quality of your software. Here you are, now you can better understand what price is reasonable. However, very few companies spend enough time considering these factors. It is not surprising given the huge number of available models. Another mistake is to think that the price can be set once and for all. It’s fluid and should be adjusted from time to time.
Setting the pricing right for your software may help achieve high customer satisfaction. You can also launch a more cost-effective software that withstands fierce competition. Don’t know where to start and what pricing model to choose? This article may help you. Read on to learn how much your software product should cost.
What Pricing Approaches Can I Choose?
A simple definition of the pricing model states that it is the cost of the software. Do not confuse this term with the pricing strategy. The latter describes why the software has a specific price. The pricing model, in turn, explains how you should calculate the pricing. When you choose the model, you should also think about the strategy. Understanding them will help you determine how to price your software product.
One of the main goals of setting a price is to achieve profit. But it’s not as simple as that. Some companies charge less to differentiate from competitors. It also helps them build a loyal customer base. There is no universal model that would work for all SaaS Internet software. You can choose from the most popular models that suit your specific needs and business goals. Let’s review some of them.
Let’s start with one of the simplest pricing strategies called flat-rate pricing. It is suitable for software with a single set of functions. Companies using it offer software at a single price. It’s easy to communicate and justify, so you can reach the audience faster. Customers understand what they are paying for. They are also not confused by different options.
But with flat-rate prices, you cannot enjoy flexibility. You can’t produce a SaaS business application that diverse users will enjoy. For instance, you can’t offer both pro accounts and basic accounts. The take-it-or-leave-it approach to pricing is not always winning. Some clients may need more advanced or basic features. This pricing model does not provide the required flexibility.
This model is the opposite of the previous one. With tiered pricing, you offer different service packages and set different prices. For example, you can allow new customers to buy a basic package. It will allow them to get acquainted with the product. They can buy an option with more advanced features once they learn your software’s value. The more flexibility you provide within this pricing model, the better. Tiered pricing and per-feature pricing are alike. The latter differentiates packages by features and functions.
Pricing Based on Usage
Why pay for something you’ll never use? Allow customers to pay based on how many services and functions they use. This pricing model is flexible and fair. It allows customers to choose services they need and pay for them.
Another way to gain a competitive advantage is to use penetration pricing. Set the price lower than competitors. This short-term strategy may help new software companies win their market share. It can also help gain a much-needed customer base. But you cannot use it for a long time because it does not maximize profits.
Consider other approaches to price-making, such as:
- Credit-based pricing
- User-based pricing
- Hybrid pricing
Are you new to the business software market? Experimenting with different models! This will allow you to test all pros and cons of each in practice. As a result, you will select the one that works for you and your customers.
Software Pricing Strategies
Do not confuse pricing models and pricing strategies. Now, it’s time to review the latter.
Some companies focus on their competitors when setting their SaaS prices. They study the market and choose the same, higher, or lower price compared to other companies. The main benefit of this approach is that your product can keep up with the market conditions. Yet, you cannot exercise flexibility with competitor-based pricing. Competitor-based prices give minimal control over your software’s price and specific features.
Measuring the value of your product is a more flexible strategy of SaaS price-making. Forget about your software’s features, costs, and competitors. Ask yourself, “What value does my software have for users?” Your product may have the following advantages:
- Save time
- Help customers earn extra revenue
- Reduce stress associated with using complex software, etc.
After identifying the value, you can decide what price better corresponds to it.
Finally, you can take the cost of your software and add the profit margin. It’s a simple strategy, but it may fail to consider the market conditions. Moreover, your software’s value for users may not correspond to its price. This often happens when you spend too much money on developing your product. For example, you use expensive SaaS design services.
Never settle on one model. Track your financial performance, market conditions, and customer-related data over time. It will allow you to make the needed price adjustments. For example, your major competitor added new features and increased the price. In this case, you may need to adjust your prices to remain competitive. Or you may want to increase the price as you add new features and upgrades.
Always ask yourself why you chose a specific pricing model. Analyze how it helps your business to grow. Making a well-informed choice is a key to winning the market with your unique software. With SaaS business applications, there are many pricing approaches to try. You can stand out from your competitors by mixing approaches and thinking differently.