There isn’t anything that has a bigger effect on your software-as-a-service product revenue than pricing models. Choosing the proper monetization strategy, however, is a difficult task for many companies.
To help shed some light on the subject, we’ve put up a comprehensive guide to the most popular SaaS pricing strategies. In this article, you will find out the basic B2B SaaS pricing models and learn how to adopt them properly from popular SaaS companies.
What Are SaaS Pricing Models?
In simple words, a SaaS pricing model is a method that companies use to determine the optimum price for their cloud product or service.
Your main goal is to strike the right balance between value and profit. On one hand, you want to assist consumers in using your product. On the other hand, you expect to be fairly compensated for your help. You’ll be able to build a steady and successful SaaS business if you strike the right balance.
Consider the following criteria while deciding on the best SaaS pricing model:
- Internal: revenue targets, brand positioning, and target markets;
- External: consumer demand, competition pricing, and market trends.
Why Are SaaS Pricing Best Practices Important?
As we all know, the right revenue model is critical for the SaaS business. What are the reasons for its critical importance? Why do you need to optimize your pricing when you could just set them on instinct?
Other companies are likely to find SaaS pricing models difficult as well. For the same reasons as you, they may be reluctant to improve their SaaS business models. Even yet, the right price will help you stand out from the crowd of competitors selling similar products.
You Can Provide Genuine Value to Your Consumers.
Consumers want products that are simple to justify. They prefer to think of their purchases as sound financial investments. Make the actual value of your product your priority by establishing a SaaS pricing that customers are willing to pay.
It Contributes to the Improvement of Unit Economics.
Essentially, the success of your SaaS company is determined by the proper balance of two important criteria. Customer lifetime value (CLV) and customer acquisition cost (CAC) are two of them. The first measure should be much more important than the second. Otherwise, there will be no progress.
You can kill two birds with one stone by using the best SaaS pricing model. Better positioning may help you save money on customer acquisition. You may also increase customer lifetime value by improving retention.
Three Basic SaaS Pricing Models
We’ll look at three categories of pricing in this section: cost-based, market-based, and value-based pricing.
1. Cost-Based SaaS Pricing
The simplest to start with, explain, and calculate is cost-based pricing, which is based on the cost of developing your products or professional services.
To decide what you’ll charge for your SaaS business, just assess how much it costs to create and maintain a product, then add a tiny percentage mark-up. For example, if your software costs $100 to develop, you can sell it for $130 and make a 30% profit.
The cost-based pricing model for SaaS is often the starting point. You’ll see that you’re wasting money over time. That’s because the value you produce isn’t related to how much it costs you to do it.
Even after they’ve developed into highly complex categories, industries, and solutions, many professional services still sell under a cost + markup pricing model. Cost-based pricers should regularly question themselves, “How can I move up the value chain?”
2. Market-Based SaaS Pricing
Market-based pricing is tough to avoid middle ground between cost-based and value-based pricing.
Look at what’s already available in the market, what your competitors are charging, and how you fit into your customers’ existing budgets to discover market-based pricing.
This may be an important step in gathering data and learning about the industry. It’s also simpler for your customers to comprehend than a value-based SaaS pricing strategy since it’s clear and allows them to directly compare you to your competitors.
However, the disadvantage of this model is that you may not perform well compared to your competitors, putting you at risk of being demoted to the position of “vendor” rather than “business partner.”
With market-based pricing, you have no influence over how your prospective prospects and consumers compare you to the other options they have. You must adhere to the definition that your category has determined to be the most valuable and at what price range. If you offer a service with different features or differentiators, this may be a real challenge. Even if your product is unique, the price you pay will be set by the category you compete.
3. Value-Based SaaS Pricing
The easiest way to explain value-based pricing is that it is based on the results of your customers’ experiences (the value you deliver). Value-based pricing is extremely customer-friendly since it allows you to become a partner and provides additional profit opportunities.
Since this SaaS pricing strategy isn’t concerned with your prices (or those of your competitors), you can concentrate on what your target market expects from your product. You may increase your SaaS pricing and generate more revenue if consumers are willing to pay more because they see greater value in your products.
It’s a pretty binary outcome: if you utilize value-based pricing, your profitability should increase; if it doesn’t, you’ve simply proved to yourself that you’re not in the proper market if you can’t turn the value you’re providing into your price model. To put it another way, what you’re doing in the particular use case may not be worthwhile.
Finally, with value-based pricing, you have complete control over the narrative and how consumers perceive what you do compared to the competitors. You choose the positioning vectors used to establish what value is and how much people are ready to pay for it.
Controlling your messaging and positioning is beneficial since it prevents you from being a price fighter or standardized in your interactions with prospects.
We’ve covered a variety of SaaS pricing strategies in the hopes that you’ll be able to choose the best one for you. Don’t forget to revise your price regularly. Thus, you’ll be able to stay competitive and grow your SaaS business.
Sunvera Software develops next-level software applications from start-to-finish. Schedule a free 30-minute call with us to discuss your business, or you can give us a call at (949) 284-6300.