An effective pricing strategy model is a must for every business.
The ability to offer different pricing levels is one of the advantages of running a SaaS businesses. You can offer your product at a variety of access levels, to a varied customer base, dependent on their financial circumstances.
By having these different pricing levels you can, therefore, appeal to a much broader group of clients and develop a strong but satisfied customer base.
However, deciding how many pricing levels your SaaS business should have can be difficult.
There are numerous theories and considerations about the most successful number of pricing levels but there is no definitive rule.
So what should you be considering when choosing the pricing strategy for your SaaS business?
1. Confusing Customers
One of the biggest advantages of using different pricing points is that it adds flexibility for your customers.
They get to choose the right package that is suitable for their needs. However, like with anything where there are multiple options, too many can negatively affect your customer’s opinions.
If you present visitors with four or five pricing levels they may get confused.
They may not realise the difference between each pricing level and what they stand to gain from each. A confused visitor to your site is not likely to be a customer and you can therefore lose out on significant revenue.
2. What Do Your Customers Want?
Another important consideration when choosing a pricing strategy is customer demand.
What is it they want from your software?
So many SaaS businesses will build pricing points that they believe customers want or at levels they can supply. This can create products that are completely unmarketable if the customer doesn't actually want the levels you have set.
Research what your customers actually want and carefully create pricing levels and points based around these – not what you supply.
3. Costs To Deliver
As with everything there are certain costs to deliver your products to your customers.
The most important costs to recognise are the fixed costs to your business. You need to ensure that your lowest price point is higher than the combination of the fixed and variable costs of your business to deliver the product.
This is not very easy to calculate if you don’t know how many users your business will have, but once you’ve become established you can determine this more successfully.
An Executive SaaS METRICS Cheat Sheet.
Calculate your customer acquisition cost (CAC), customer churn rate (CCR), customer lifetime value (LTV) and other valuable SaaS metrics to accurately measure the financial health of your company.
4. The Industry Average
In addition, you need to consider how many pricing points your competitors are offering.
This can be indicative of what the customer wants but also what the market is ideally suited for. If they are offering several different pricing points, then your target customers might be more appreciative of a flexible product.
5. The Changing Needs Of Your Customers
Is it likely that the needs of your customers are going to change regularly?
When you have many pricing points, your customers can switch between pricing levels dependent on their needs at the time.
When there are relatively few pricing points, customers may feel that there is no point changing and could look elsewhere for a more suitable product.
If the demand from your customers is likely to be different on a regular basis, then having numerous pricing points can be highly valuable but if they are likely to remain static, fewer pricing points will be better for your customers.
There are numerous reasons why you should have different pricing points for your SaaS business but using too many could affect your revenue. Anything from pay as you go, freemium, bundling or segmentation model. Therefore, you need to carefully consider whether having more pricing points is valuable for your business or whether your customers would be more appreciative of a simpler pricing model.