Pricing is one of the most important yet challenging aspects of launching a SaaS business. Get it right, and you’ll be rewarded with revenue that fuels growth. Get it wrong, and you could stagnate—or worse.

In this post, we’ll explore the nuances of SaaS pricing to help you maximize value for your customers while achieving your revenue goals.

Why Pricing Matters So Much for SaaS Companies

SaaS pricing sits at the intersection of product, marketing, and finance. It directly impacts all three, making it a high-leverage activity with cascading effects on the success of your business.

On the product side, pricing influences who buys your product and how they use it. Price it too low, and you attract bargain hunters who churn quickly. Price it too high, and even qualified leads pass you over.

On the marketing side, pricing determines the customer acquisition tactics available to you. With higher pricing, you can afford to pay more to acquire customers. This opens up channels like paid ads.

Financially, pricing has an outsized impact on your revenue. A 10% increase in price leads to more than a 10% increase in revenue, all else being equal. Optimizing pricing is often the fastest way to grow.

For these reasons, pricing should be among the top priorities of any early-stage SaaS founder. Get clarity on pricing, and many downstream activities become clearer too.

How to Think About Pricing Your SaaS Product

Put simply, your SaaS pricing should be directly tied to the value your customers receive. The more value you provide, the more you can charge.

This is easier said than done, however. How do you know exactly how much value you provide customers? And how willing are customers to pay for that value anyway?

There are three lenses that can bring your SaaS pricing into focus:

1. Benchmark against comparable products: Study how competitors and similar products are priced. This gives you a baseline for where to start.

2. Understand your costs: Know your costs to acquire customers and deliver your product. This helps you establish a viable floor price.

3. Test customer willingness to pay: Experiment with different price points while talking to customers. Watch how unit economics change.

Let’s look at each of these in more detail.

Benchmark Against Comparable Products

One of the best ways to think about pricing is to study how comparable products or competitors price their offerings.

These might include:

• Direct competitors: Products addressing the exact same customer needs as you.
• Adjacent competitors: Products or services customers might substitute for yours.
• Complementary products: Products commonly used alongside yours.
• Vertical equivalents: Similar products tailored to other industries or verticals.

Surveying a range of analogous products gives you helpful guardrails for your own pricing. You’ll get visibility into the:

• The price range for your type of product
• Typical pricing models used
• Standard list of features for each tier

Of course, don’t just copy the competition. But use them as guideposts to inform your own pricing strategy.

Understand Your Costs

Next, have clarity around your costs. At a minimum, you need to price high enough to cover your:

• Customer acquisition costs (CAC)
• Cost to deliver the product (COGS)
• Other fixed and variable operating expenses

Add these together, and you have a rough floor for pricing. Price below this threshold, and you won’t have a sustainable business.

Understanding your costs also helps when setting pricing tiers. Make sure higher tiers deliver enough extra margin to justify the sales and support costs to serve those customers.

Test Customer Willingness to Pay

Finally, test different price points directly with customers. Talk to them about their budgets, perceived value, and willingness to pay.

The best way to do this is to offer a price on your website, then gauge reactions in sales conversations. How does conversion change at different prices? How much do you need to discount before prospects bite?

Don’t be afraid to charge more than feels comfortable at first. You can always lower prices, but it’s hard to raise them later without upsetting customers.

Pay attention to the aggregate economics, not one-off anecdotes. An individual complaint about pricing rarely means your price is wrong. Stay focused on overall conversion and churn.

Setting Your Initial Pricing and Models

Armed with benchmarks, costs, and customer input, it’s time to set your initial pricing.

First, let’s discuss two major pricing models:

Value metric pricing: Price scales up based on usage or value received. Common metrics are number of users, messages sent, storage used, etc.

Tiered feature pricing: Higher tiers unlock more advanced features. Scales are based on needs, not usage.

Value metric pricing tends to work better for most early-stage SaaS companies. It’s simpler and intrinsically ties price to customer outcomes. But tiered plans make sense for some products. Choose what aligns best to how customers realize value.

Within your pricing model, you’ll need to set the:

• Price points for each tier
• Value metrics for scaling usage tiers

To find the right initial numbers, use these rules of thumb:

• Anchor on value, not costs. Start with what customers should pay, not your costs.
• Don’t be afraid to start high. You can always reduce prices later.
• Have 3-4 clear tiers. Good, better, best works well.
• Double+ the price with each tier. Price to incentivize upgrading.
• Have a 10-20X premium for enterprise deals. Account for costly sales process.

Don’t get pricing perfect right out of the gate. The goal is finding a sensible starting point you can refine from.

And don’t neglect your messaging! Craft pricing page copy explaining the increasing value each tier provides. Help customers pick the right plan for their needs.

Should You Offer a Free Plan?

One of the biggest pricing questions SaaS companies wrestle with is whether to offer a free tier.

The upside is you lower barriers to entry and get more signups. But supporting free users has costs. You also risk conditioning customers to not pay at all.

Here are a few guidelines on when free plans work best:

Products with intrinsic virality – Free users help spread awareness, driving up conversion. File sharing and communication tools do this well.

Low incremental costs – Serving additional free users has minimal COGS impact. Watch out for expensive data or API costs.

Self-serve onboarding – Little hand-holding is needed to get started. Otherwise, support costs eat up your margins.

Clear upgrade paths – There are obvious triggers for free users to convert to paid plans.

For products lacking these traits, focus on offering free trials instead of forever-free plans. Trials better qualify users and still reduce barriers.

If you’re on the fence, start without a free tier. You can always add one later based on user feedback. Tread carefully though. Free plans are hard to undo.

When and How to Raise Your Prices

Over time, you’ll need to revisit your SaaS pricing and make changes.

Price increases help account for rising costs over time. More importantly, they allow you to capture more value as your product matures.

Aim to reevaluate pricing every 6 to 12 months. If no one complains or pushes back on prices, you’re likely priced too low.

When raising prices:

• Announce increases 2 to 4 months in advance
• Grandfather existing users (optional)
• Frame it as delivering more value, not just costing more
• Monitor impact on conversion rates carefully
• Rollback if churn rises excessively

You can also:

• Eliminate your lowest pricing tier
• Shorten your free trial period
• Tweak value metric thresholds (e.g. Lower storage allotments per tier)

For big increases, you may lose some customers. But this churn can be healthy if new customers have a higher willingness to pay. Stay focused on revenue metrics, not retention alone.

And don’t forget to update your pricing page messaging. Position the extra value delivered at the new pricing tiers.

Things to Avoid When Pricing Your SaaS

In closing, watch out for these common SaaS pricing mistakes:

Being too reluctant to increase prices – Leave money on the table out of fear. Remember, you can always roll back or grandfather.

Making pricing too complex – Confusing matrices, multiple value metrics, excessive tiers. Keep things simple.

Giving away too much for free – Generous free plans or trials result in low conversion and revenue.

Not having premium enterprise pricing – Underpriced enterprise plans kill margins on your most valuable customers.

Listening too much to outlier feedback – That one angry customer doesn’t necessarily mean your pricing is wrong.

Forgetting to explain the value – Make sure your pricing page clearly conveys the benefits of each tier.

SaaS pricing is nuanced but doable. Leverage comparable products, understand your costs, test customer willingness to pay, and continually refine. Getting pricing right will propel your growth and unlock all kinds of opportunities.

Related Posts

• Crafting a Winning SaaS Blog Content Strategy That Converts and Ranks
• How to Continuously Improve Your SaaS Product to Drive Retention?
• How to Identify and Leverage Influencers to Grow Your SaaS Product
• Unlocking Sales-led Growth: The Ultimate Guide for Explosive Revenue Growth
• Why SaaS is the Best Business Model?

In Summary

• Pricing has a huge impact on product experience, marketing, and profitability. Optimize pricing to fuel growth.
• Set pricing based on customer value, costs, and willingness to pay. Don’t just mimic competitors.
• Typical pricing models are value metric tiers or feature-gated tiers. Pick what fits your product best.
• Monitor pricing impact continuously. Tweak pricing frequently as you learn. Don’t be afraid to increase prices.
• Free plans work for some models but aren’t required. Focus on providing value and clearly communicating pricing tiers.

How did you approach pricing for your SaaS product? What lessons did you learn in optimizing your pricing strategy? I’d love to hear your experiences in the comments below!

The post SaaS Pricing: How to Price Your SaaS for Success? appeared first on Tactyqal.