How to price a software product for a SaaS development company
How To Price A SaaS Product?
Many aspiring entrepreneurs have doubts about their pricing strategy. Is the price affordable for customers to pay? Will it cover all development expenses? They worry for a reason. Companies lose some profit when SaaS product price is calculated without taking into account all factors in a business plan. When a solution is priced accurately, it ensures profitability in the long run. Often SaaS entrepreneurs look the other way and rework the product or marketing strategy, while it’s the pricing policy that requires revision.
SaaS pricing covers many pitfalls. One of the reasons is that providers sell SaaS products regularly based on subscription in comparison with traditional on-premise solutions. For that reason, SaaS companies should think about their pricing strategy in the long term.
To make sure that you have optimized your pricing, let’s discuss the overall process in detail.
To set a price for a SaaS product, companies consider the following factors:
Product development costs
To evaluate development costs, you need to estimate the adjacent essential factors such as available resources, design complexity, and timeline. Product development costs also include project management costs and separate testing costs. Also, take into account that the more comprehensive your product is, the more expensive it will be.
Development companies incur infrastructure costs that include hosting servers, databases and other technology which maintains their application. In other cases, it involves payment for using Infrastructure-as-a-Service (IaaS) platforms like AWS or Microsoft Azure.
Revenue goals are usually based on two key metrics:
- Total number of clients
- Revenue per client
After estimating these figures, evaluate the rate of growth for the last few years. It will give you an overview of what you are most likely to achieve.
Competitive pricing analysis
To assess competitive pricing, a company examines historical data on customers’ behavior and responses to polls. It enables a business to craft an optimal offering. In the analysis, providers also pay attention to competitors’ prices.
Nevertheless, to attain maximum value per sale it is not enough to define rigor numbers. A team needs to look outwardly at their company. It’s critical to think about what impact the product creates for customers. Here is where you get another criterion to pay attention to.
The value of a product
Do you remember that highly-priced products are frequently perceived as better than lower-priced solutions? Customers still assume that high fees indicate superior quality.
On the other hand, the perceived value differs from customer to customer. This fact makes value-based pricing especially challenging because it encourages providers to analyze plenty of customer data. But most experts found this pricing approach to be the most effective.
If you know what features your customer values, it will be easier for you to align new prices to the product update. The value-based pricing strategy entails several steps:
Identify buyer personas
While using a solution, customers expect that their needs will be met. That is why identifying buyer personas is the first step.
Asking your customers about the features they value will help you to price your product more equitably.
Build tiers and packages
After specifying the behavior of each buyer persona, you can create appropriate priced tiers.
Test your pricing
Before you finally implement pricing, it’s better to test it out. In doing so, you will be more certain about how it will work out in the long run.
At the same time, there are other approaches to price products.
SaaS providers have several options to estimate their product’s real price on par with value-based pricing. At some point, they seem to be easier to calculate, but not everything is as simple as it might look. So, let’s get into these variations to define the most suitable pricing strategy for you.
Using this strategy, a company applies competitor prices as a benchmark to define its product prices. The downside of this method is that you become dependent on your competitor’s strategy.
You may find this model useful if you are a newcomer to the market, especially when you do not want to scare away your potential customers with your pricing page. With that, you can use price discrepancy to highlight your product as a more valuable alternative and simply raise the price.
However, huge SaaS corporations also use competitor-based pricing. For instance, the streaming platform Netflix dedicated to B2C audiences applies this method.
This is the common pricing approach that implies a simple formula:
Costs + Profit = Price
Cost x Desired Profit Margin = Price
The method just requires knowing what your costs are. However, it might be difficult to predict all SaaS costs upfront. They fluctuate over time. When expenses increase unexpectedly, you may lose revenue.
An additional advantage of cost-plus pricing is that you are always aware of your profit percentage.
As we’ve discussed above, when a company decides to price a product taking into account customers’ opinions, it means they use value-based pricing. According to this strategy, a business undertakes marketing research to adjust product prices to potential customers’ expectations.
This is the most independent method of pricing. With it, you can set a high price point from the beginning if there is a demand for such services. Even though the approach is highly recommended it takes time to get it right.
Generally, the pricing policy needs to be reviewed regularly as externalities change over time. Businesses should assess possible pricing problems in advance. For that, we put together the metrics you should consider to set a price effectively:
To measure user loyalty and retention, you must look at several fundamental metrics: customer churn rate, MRR Churn, Customer Lifetime Value (LTV), and Customer Acquisition Cost (CAC). They would help you understand why customers churn.
If you’ve admitted the drop in conversions, the cause might be rooted in your pricing strategy. Try to find the answer by studying the price sensitivity of your buyer personas. Too high or too low a price can put off potential clients.
Using these metrics will help you find appropriate price points that suit customers’ needs.
Ultimately, it is crucial for a SaaS business to correctly evaluate a product because the price predetermines its profitability. Knowing your customer behavior, competitors’ pricing, and key metrics will help your business be successful in the long run.
Keep in mind that the SaaS market evolves rapidly and the number of tech-savvy providers grows at a fast clip. As a result, customers become more critical and informed while choosing a SaaS solution. So, to survive in a crowded market, you should adjust your product pricing plan with all internal and external factors discussed in the article.
Alex Kulitski is the Founder and CEO of Smart IT and is the co-founder and executive CTO at MEDvidi. Being a serial entrepreneur, he is a keen investor in technology startups and runs several successful side projects besides Smart IT and MEDvidi.
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