3 SaaS Pricing Models & Building a Strategy Around What Customers Value
SaaS pricing models demonstrate the value of your features to convert subscribers. Use these software pricing strategies to optimize your SaaS pricing page now.
How do the most popular SaaS pricing models stack up against each other?
The SaaS industry grows more attractive every day, but how successful businesses are in this space has everything to do with the right pricing models.
Pricing has the highest impact on your profitability, growth, and customer retention.
Yet the average SaaS company decides its pricing model in less than one business day!
So when was the last time you analyzed your software pricing strategies?
If you’re interested in subscriber and revenue growth, this resource covers:
Building the best SaaS pricing page (with examples)
Pricing models make sure you’re capturing the most value from each of your customers. But there’s one strategy that’s better than the others.
Comparing the 3 Major SaaS Pricing Models
Let’s go over the benefits and drawbacks of the three most popular SaaS pricing models:
Cost Plus Pricing
Cost-plus pricing sets the price of a service by evaluating the company’s costs and adding a markup percentage to earn revenue.
Simple math. It’s the most basic pricing strategy; you sell something for more than it costs to produce and earn revenue on the profit (difference).
Less work. When you know your expenses, you just need to experiment with profit margin percentages to find your sweet spot for growth. This profit margin often ranges between 5% and 20%.
Costs change over time. When you set up a cost-plus pricing model, your expenses will vary wildly from the start to months and years later. As you grow, you’ll need to factor in additional expenses, and your subscribers may not be into fluctuating price changes for every cost your business incurs. This may harm your retention rates.
It doesn’t target your audience. Your pricing strategy should reflect the value you provide buyers, not your cost of doing business. While you need to cover your expenses, this inward-focused approach doesn’t take the customer’s needs into consideration.
Less accuracy. Cost-plus doesn’t take into account all the other variables that go into pricing, such as market research, data analysis, etc.
Competitor Based Pricing
A competitor-based pricing model uses your competition's prices as a benchmark. You can either copy their rates or fall somewhere in the middle of the high/low range.
It’s a logical starting point for new SaaS companies. If you don’t know how to price your services yet, you may try what your competitors are doing first and adjust from there.
It’s easy. All it takes is an afternoon of sleuthing your competitors to compile a list of prices to base yours on. Hover somewhere in the middle, and potential customers may gravitate to your company since you’re neither the cheapest nor the most expensive.
Allows your competitors to dictate your company’s trajectory. You have no idea how your competitors price. What if they never do pricing analysis? Copying their pricing doesn’t account for your goals or operating expenses, and may force you out of business.
Buyers won’t see your unique selling points (USPs) and may not find value in your service. Don’t regurgitate what’s out there; find your own lane and give people a reason to consider your company first. Using your competitors’ pricing shows potential subscribers you’re exactly the same (even though you’re better!). If you offer more value and a better experience, your prices should reflect that.
Value Based Pricing
Value-based pricing (also known as “value pricing”) prices your services in line with how much your target consumer thinks they’re worth.
It’s 100% customer-focused. To set value-based pricing, you’ll need to focus on a single customer segment (or buyer persona), determine which features they need to solve their problems, and find out how much they’re willing to pay a company to help them do so. It’s all about them.
Value pricing lets your USPs shine. When you highlight features that set your company apart, your prices put a value on that differentiation. Customers compare your unique features and see why they’re worth the price.
Attract the right buyer, retain subscribers, grow revenue. Targeted pricing helps your whole team — from sales to marketing and product packaging – attract more qualified leads and reduce subscriber churn.
It takes time and effort to understand your buyers inside and out. You’ll need to spend time on market research and customer outreach to truly understand your target consumer, how you'll meet their needs, and still grow to earn a sizable profit.
Value-based pricing is the best SaaS pricing model, and the one you should be using now that you know the differences between the most popular software pricing strategies.
So I’ll show you how to tackle this one downside next.
How To Use Buyer Personas to Build a SaaS Pricing Model
Quantified buyer personas are efficient and highly profitable. They give you all the data necessary to set smart pricing strategies.
Many SaaS companies only have a broad understanding of their target audience and never collect actionable data, or data you can use to earn a profit, about their distinct customer segments.
That all changes today.
First, Segment Your Customers Into Three To Five Individual Buyer Personas
Separate your highest value customers from the rest.
What do they all share in common? How are they different?
When you dive deep into the subscribers who already find the most value for your service, you can learn how to clone them and reach out to similar leads.
Learn as much as possible about these users and try to craft individual target buyers based on a few metrics like their:
Role within the company
Source of those problems/challenges
Most valued features of your service package
Least valued features of your service package
Features subscribers specifically upgrade to have
Most often used features
Least used features
Understanding your target audience helps you better position your service and pricing to best appeal to each demographic.
Start Asking Different Buyers Questions
Probe your loyal subscriber base for data to create your well-rounded customer segments.
Send out questionnaires or reach out directly to ask why they like your service, what features they’d also like, and how much they’d be willing to spend for specific upgrades.
Ask people to rate their answers on a scale of 1–10, with 10 being features they really like and 1 being those they care less about.
Through this data analysis and market research, you should find clear enough differences to segment your subscriber base.
Craft Pricing Models to Reflect Your Subscribers
Let’s say a chunk of subscribers craves more robust analytics while another wishes for better integration into their work systems.
Now you have two different packages to offer to two different customers.
Offer consumers multiple ways to find your service attractive, and you’ll grow your base and revenue.
So price out the costs of these features into attractive tiers that demonstrate value to these new, targeted segments.
Building Your Website's SaaS Pricing Page (with Examples)
Your customers have a general idea of how much they’re willing to spend on features they need in a subscription software service.
Your pricing page should show them exactly what they’re getting for their subscription price.
Make it easy to understand or else no one’s signing up.
The best pricing page includes tiers with:
Identifying Demographics of Your Buyer Personas
Describe your buyer personas in one quick, fun term they’ll connect with.
Check out how website builder Wix breaks down their buyer personas:
They’ve segmented their buyer personas into defined tiers like “VIP” and “Pro.” Users can select the best fit based on who they are and what they need.
HubSpot also uses a similar strategy and clearly breaks the options down between Start, Professional, and Enterprise.
Coincidentally, these explanations emphasize which features each pricing plan prioritizes.
Bonus: Wix placed their most expensive tier on the left; this is a psychological strategy we recommend!
Package your features according to what each buyer segment values most and show them what they’ll get for the price.
This allows you to target each personas’ pain points with solutions and strategies worth paying for.
Your value metric and which package fits their needs should be obvious to each buyer persona within seconds of landing on your pricing page.
Slack does this well:
Wix does this well again:
The tiers describe specific features found in each plan so consumers can compare what they’re getting for the price.
With a low entry point and a description for personal use, new subscribers can test the Wix waters with a Combo plan and score most features within their budget.
But as their website grows and becomes a business, they’ll earn features like $300 in Ad vouchers, a site booster app (worth $60), and a visitor analytics app (another $60 value) for a measly $4 bump up in subscription price to Unlimited.
These features and their value are clearly defined.
Bonus: Check out how Wix above (and G Suite below) highlight the targeted features for the option they think you’ll find most attractive.
Distinct Pricing Tiers
Distinct pricing points for each buyer persona shows consumers where they’ll start and how they’ll grow with your company.
But the more time it takes to understand your pricing, the less likely people will sign up.
G Suite does this in a digestible way:
Again, Wix makes it unbelievably easy to compare plans by price. There’s a clear delineation between the offered features and the budget of the buyer that tier is best suited for:
As you help subscribers solve problems, they’ll be more successful.
And as they grow in profitability, so will your SaaS company if it continues to scale up and offer features your growing subscriber base needs.
Bonus: Be careful not to have too many pricing tiers or you’ll risk analysis paralysis. That is, confusing prospects by giving them too many options to choose from.
Set Up the Best Pricing Page for Your SaaS Biz Now
Almost every SaaS company puts pricing models on the low end of the totem pole when aiming for subscriber growth and increased revenue. But now you know better.
Determine what your target audience values most and truly wants from your service via data and market research, and you’ll be in the best position to meet those needs at a profitable price point.
Knowing your buyers inside and out allows you to provide the right value at the right price to the right subscribers.
And that’s a recipe for success.
If you need help creating your pricing page or pricing strategy reach out to us today!