How to Develop a Premium Pricing Strategy for Your SaaS or Subscription-based Business

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Online shopping cart abandonment significantly eats into sales.

In essence, when a cart is considered ‘abandoned,’ it means a potential shopper had likely decided to purchase a product, but then never followed the buying process through to completion.

In 2015, CartHook was launched to mitigate the reasons why customers abandon carts—reasons which have been somewhat of a black hole of unknowns. The software as a service (SaaS) business’s customers can tap into its EmailMagnet product to automatically reach out to their customers who fail to complete their purchases. And the SaaS offering has clearly been a success.

According to Baremetrics—a SaaS analytics, forecasting, and engagement tools provider—CartHook used its success as an opportunity to increase its pricing significantly.

As Corey Haines pointed out, the subscription rate jumped from a $100 to $300, and the outcome was a pleasant surprise for CartHook’s founder and CEO, Jordan Gal.

Pricing started at $100/month because that’s where the incumbent was and we figured it was a good starting point,” wrote Gal. “We got overwhelmed with demand so we moved to $300/month to slow things down. Demand stayed exactly the same!”

SaaS pricing strategies: Debunking the ‘low price’ myth

Is CartHook’s experience with raising prices an anomaly, or is a higher price less of a deterrent than some might believe?

Pricing products correctly is a significant concern for SaaS businesses, and with good reason. If a business prices its offerings too high, the price point might act as a prohibitive factor. On the other hand, if it prices too low, it can actually act as a deterrent.

One of the most common mistakes a business can make is to price its product too low. The perception is that if there are two like-products in the marketplace, a customer is going to lean toward the lower-priced product.

Setting aside SaaS products for a minute, let’s look at another popular product: beer.

In his book Priceless: The Myth of Fair Value, author William Poundstone illustrates a study where consumers were asked to purchase beer priced at different levels. When there were two differently priced beverages, 80% of consumers chose the higher-priced beer. When a third ‘bargain’ price was brought into the mix, not one person opted to try it.

So, if customers shy away from lower-cost products, why do businesses insist on undervaluing their services?

Let’s take a look at why a low price point can dilute your product offerings.

1. Low prices equate to a lower quality—at least, psychologically.

A price point that’s too low, especially when being compared to similar products, tends to give the impression that it’s inferior to the competitor.

For a customer, that lower-priced product may be perceived as a ‘risk’. Is that risk worth taking to save a couple of bucks? This psychological factor must be considered in any good pricing strategy.

If it’s saving a dollar on the store brand of cereal, it’s probably not that big of a deal.

However, in the SaaS world, budget software often equates to something that’s, at best, going to have a few bugs.

At worst, it may be a security risk.

And, in this era—in which we’re acutely aware of cybersecurity and the need to protect our personal information—a product that could compromise your digital safety isn’t worth the lower cost in the short term.

2. Underpricing your product isn’t a sustainable strategy.

A product that’s priced too low isn’t going to sustain a company or allow it to grow quickly enough. In fact, it’s estimated that even a SaaS business that grows at a rate of 20% annually still has a 92% chance of failing. And a major component in that failure is cash flow—or lack thereof.

It’s tempting to price your product lower than you need to in order to acquire more customers, but if the profits aren’t going to be able to sustain your business, it’s all for naught.

This may be more obvious in a traditional manufacturing situation, because there are material and manufacturing costs to consider.

But what about a SaaS business?

Consider this.

After examining the competition and factoring in your costs, you determine that the ideal subscription price for your software is $100 a month. You have 5,000 customers your business can support, from software engineers to customer service to billing specialists. Now let’s say that software is priced too low at $75 a month.

You have the same number of customers, the same amount of staff, but your profits are eroded by a product that’s underpriced.

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Premium pricing doesn’t need to be exclusive

Just as a price that’s too low can discourage customers, many businesses are concerned premium pricing may be just as much of a deterrent.

Also known as prestige pricing, the premium pricing strategy gives the impression that your product is higher quality than the competition’s product.

Recalling the example of the beer prices above, a whopping 80 percent of consumers chose the premium, highest-priced beverage.

The same concept holds true for other products, and often the higher-priced model may be more attractive than a lower-priced one, regardless of performance.

For some businesses, a premium price might simply be the paid alternative to a freemium version; often, the difference may be paying to have the ads removed.

For SaaS businesses, a premium subscription can actually be touted as the ‘middle’ level. That pricing point can differentiate between a more basic version of the product, while also being priced lower than a ‘business’ version.

Consider Buffer, a platform that manages social media. The company offers three primary tiers: one for an individual with fewer social media touches, a premium tier for growing businesses, and a business version for a greater number of users with more social media accounts.

subscription business premium pricing strategy

Factors to consider when pricing your subscription product

Clearly, assigning an outrageously high price is not a simple solution.

A business needs to do extensive market research on its ideal customer and where that customer’s needs lay. From there, it’s easier to carve out a viable price option: one that will help sustain your business, without undermining the integrity of your product.

There are several factors to consider.

1. The perceived value of your product.

There are two obvious ways to view the product a business is offering: The value of that product, and the perceived value of that product.

There's a significant difference. The value of a product is generally determined by the cost that goes into creating it, with additional factors brought in for maintaining and supporting that product.

The perceived value is different. It brings other factors into the equation, including what are considered the three modes of communication.

    1. Credibility (also known as ethos)
    2. Emotional connection (pathos)
    3. Logical thinking (logos)

In the era of social media, credibility is a frontrunner.

Think about the last time you purchased a product online. Chances are, you looked at on-page customer reviews to validate the product’s worth. Software review sites such as Capterra and G2 Crowd can play a considerable part in the credibility of a product.

Then, there’s the emotional connection. Let’s say you’re getting ready to update your phone. Compared to some other brands, you’ve always wanted to make the switch to an Apple iPhone. It may cost more money than its competitors without, arguably, being any better, but ‘everyone’ has an iPhone.

What’s the difference?

A cell phone, whether it’s an Apple or a more budget-friendly phone, serves the same purpose: it makes calls. It sends texts. But an iPhone comes with the luxury factor, and that emotional piece is the most important selling point to you.

Finally, logic comes into play. For many customers, logic brings the perceived value full circle. Are they getting the best value for their money? Is it worth it? Apple fans would argue that the iPhone is well worth the spend for the ease of use and the integration with other Apple devices and the Apple ecosystem.

A business can address the logic component by digging into the data of your customer demographic and the need in the market.

2. Competitor action.

As the old saying goes, ‘Keep your friends close and your enemies closer.’ Knowing what your competition is doing can obviously help you map your own business and SaaS pricing strategy.

Are they offering new features? How are they pricing and promoting their business and its products?

Being familiar with your competitor’s offerings helps you know what’s going on in the marketplace… and use that knowledge to get a leg up. On the other hand, if you can see what your competition is doing, you better believe they’re watching you, too.

3. Market conditions.

This is no news flash: The marketplace is volatile. Not only are businesses looking to capture niche markets, but also consumer needs are in a constant state of flux. Supply and demand change, and not always as predicted.

Don’t believe it? Ask Kristoff, the ice salesman in the Disney movie Frozen. When your summer abruptly turns to winter, ice sales are likely to plummet.

Keep in mind that even when you settle on the optimal pricing plan for your product, your work is far from over. Careful reviewing and reporting will help you determine if your premium pricing strategy is too aggressive, or still needs to be tweaked.

In fact, CartHook’s price increases didn’t stop when it went from $100 to $300. In July 2019, the popular checkout app announced a base subscription increase to $500.

“Simply put,” they explained, “our merchants find more success when we work closely together as true partners. We’ve discovered something important: the closer the collaboration, the more fulfilling we find the work…This change in pricing and process allows us to build our software and our team in a way that provides merchants with the highest level of service possible.”

 

The SaaS pricing strategy is a challenging process because there are countless ways to price what you have to offer. It takes careful foresight, along with inventive approaches to determine what’s right for your products, your customers, and your business.

Establishing a premium pricing strategy means carefully meshing the perceived value of your product with an emotional connection to demonstrate why your product outshines your competitor.

Is this strategy right for your business?

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Tags: SaaS SaaS Strategy Pricing

Mariah Patterson

Mariah Patterson is a former journalist with diverse writing interests. As a regular writer on the Fusebill blog, Mariah taps into the years of combined knowledge of the subject matter experts at Fusebill. She loves to highlight ways to improve business efficiency in the SaaS and subscription business worlds. Enjoying fiction and nonfiction alike, she has published a children’s book and will be publishing her first novel later this year. Mariah lives in Maine and captures her family’s exploits in her blog.

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