Like pricing models, not all pricing tips are created equal. It’s important to pay attention to pricing tips because the right SaaS pricing strategy has a huge impact on crucial sales metrics like signup and conversion rates.
But getting SaaS pricing right is a delicate balancing act between providing value and generating revenue. This requires factoring in the price sensitivity of your client base, the perceived value of your solution, and even your competitor’s pricing.
Below are seven SaaS pricing tips so you can start optimizing your SaaS pricing.
1. Fix your SaaS pricing by knowing your worth
Businesses often undercut or undersell themselves because they don’t fully understand or appreciate the value their product brings to customers. You shouldn’t allow yourself to fall into that category.
But the strategy of fixing pricing in relation to product value shouldn’t be centered around perception or wishful thinking. Rather, you have to establish an effective value-based pricing strategy that’s informed by data-driven research and customer surveys.
By correctly pricing your product based on its worth, you ensure your business isn’t losing revenue with each sale or contract.
2. Focus on key SaaS pricing metrics
A corollary to the first tip is to make sure you’re hyper-focused on key metrics that signal value to customers. Just as key performance indicators (KPIs) enable organizations to gauge their progress toward business objectives, SaaS pricing metrics help businesses measure whether they’re moving toward the right revenue targets and goals.
Here are some of the SaaS pricing metrics you should focus on to influence strategic SaaS pricing:
- Conversion rate
- Churn rate
- Revenue per lead
- Customer retention and satisfaction
- Lifetime value of customer acquisition (LTV)
- Monthly recurring revenue (MRR)
- Customer retention rate
- Net promoter score (NPS)
A couple of these metrics appear to be more growth-driven than customer-focused. But improving them ultimately improves customer satisfaction. And when customers place a high value on a product, you’re able to charge premium prices for them. Moreover, every investment you make in improving productivity pays you back in sustainable business growth.
3. Zero in on your desired profit margin
This should be self-evident, but it’s worth emphasizing. The success of this pricing tip is predicated on our first tip: having a crystal-clear idea of how much your product or service is worth. Subsequently, you decide how much you need to charge in order to make the desired profit margin from the product or service.
This pricing approach is appealing for the simple reason that it isn’t complicated.
It entails making sure your MRR (monthly recurring revenue) growth is sustainable and based on a solid foundation. You do this by calculating your costs, then adding your desired profit margin, and then setting the resulting sum as your price. Voila!
4. Offer free trials
Free trials are a time-tested and brilliant way to increase sales conversion rates. They’re a good way to entice users to engage with SaaS products and are commonly offered in 15- and 30-day trial options.
Once users are hooked and you diligently follow up with them at the end of the trial, they usually convert to paying customers.
5. Use a freemium SaaS pricing strategy
While you didn’t get into business to give away products for free, there are benefits to this pricing strategy. A freemium/underpriced strategy is closely related to the free trial as it involves allowing users to enjoy a limited version of your product for free.
This pricing strategy has proven effective for many SaaS companies such as DropBox and Slack. However, this isn’t as simple as it looks.
An important caveat to remember is that freemium pricing erodes revenue. Therefore, you have to ensure your paid users are capable of offsetting/underwriting the cost of maintaining the underpaying users.
You have to ensure your paid users are capable of offsetting/underwriting the cost of maintaining the underpaying users.
Another crucial balancing act you have to do is make sure that users operating on low-cost or free accounts still receive a value that’s useful and substantial. Without this, they’ll see no need to upgrade to pay for more features.
6. Create opportunities to upsell customers
Deeply embedded in the DNA of SaaS products is the inclination to offer upgrades on existing services. This pricing model has proven to be a lucrative revenue stream for the video gaming world. Their customers don’t seem to mind paying for add-ons and accessories like better consoles and costumes for avatar characters.
Another example is WordPress, which offers website building for free but requires payment when customers want to remove WordPress branding and advertising from their site’s real estate.
7. Ensure your LTV is greater than CAC
A proven formula for success in the SaaS ecosystem is ensuring that your customer lifetime value (LTV) is more than your customer acquisition cost (CAC).
This is key because the formula for customer success is to always remember that acquiring new customers costs 5x more than retaining existing ones. Therefore, having a pricing strategy that generates a high customer retention rate is crucial to business sustainability.
Pricing SaaS for profitability
The key to SaaS pricing is based on a customer-focused framework. You need to make sure it’s research based, data driven, and built on understanding who you’re selling to.
VeryCreatives is a digital product agency invested in helping tech companies bring their SaaS ideas to life. Contact us today for a free consultation on your SaaS pricing needs.