New customer acquisition is important for any business, no doubt about that. But it’s not the be-all and end-all when it comes to scaling.
People in SaaS are writing and thinking about customer acquisition seven times as often as monetization. Meanwhile, monetization has the biggest impact on the bottom line.
But last time I checked, growth doesn’t just mean more customers. It means more revenue. And improving pricing by only 1% results in a 12.7% increase in profits, according to one study of 512 SaaS businesses.
Here’s another stat for you: the average SaaS business spends just 6 hours determining its pricing strategy. If that seems concerning, it should. Not only does pricing directly impact profitability, but it’s integral to brand perception and growth. Dedicating less than one working day to something so vital has spelled disaster for many SaaS businesses. An analysis of start-up post-mortems found that pricing issues account for 12% of failures.
In all likelihood then, you probably haven’t given much thought to pricing, either. And if you’ve been using a manual recurring billing solution, who can blame you? Using spreadsheets or a homegrown system to manage a complex SaaS billing model isn’t just a headache—as your customer base grows, it becomes literally impossible. That’s when you need automated subscription management and SaaS billing software to step in.
When you do move to an automated SaaS billing system, the first thing you’ll need to do is price and set up your subscription catalog. Pricing may not have been at the forefront of your mind up to now, but it’s really important to address it sooner rather than later. Otherwise, it can slow down the implementation of your automated billing software and hold up your SaaS business’ growth.
Here are some things you should consider.
Evaluate your costs
Let’s get back to basics and the very premise of business itself: selling something for more than the cost of production, manufacturing, and distribution. Your profit margin is whatever markup you choose. Essentially, this is cost-plus pricing and the most widely used pricing strategy in retail.
So how does it work in SaaS? First, calculate your customer acquisition cost (CAC), including your:
- marketing and sales team,
- ad costs, and
Add that to your cost of goods sold (CoGS) which typically includes your support team, software engineering, and cloud infrastructure. Then, add your desired margin on top.
Imagine it costs you $265 to acquire each customer and $150 to provide the service to them over a 12-month period and you want a 20% profit margin.
Using the cost-plus or cost-based pricing model, you’d charge customers $415 + 20% = $498 annually, or a $41.50 monthly fee.
It’s an easy way to ensure your business operates profitably. But it has some major drawbacks. For starters, it can be hard to calculate costs ahead of time. Also, it completely ignores competitor pricing or how much a customer is willing to pay—which could be a lot more! A smart, holistic strategy takes both those factors into account.
This brings us to…
Consult industry benchmarks
If you’re a SaaS start-up, how do you get a ballpark of what to charge? Understandably, most recurring revenue businesses look to their competitors. A quick check on their pricing pages should provide that information. After all, it’s definitive proof of how much people are willing to pay for something similar. Now all you need to do is see where your product or service sits in the market.
This is known as competitor-based pricing and it’s a pretty common strategy.
Take Shopify and BigCommerce for example, two giants of e-commerce. Each platform has its strong and weak points, but they’re both very similar—as is their pricing.
Shopify’s monthly plans look like this:
- Basic: $29
- Shopify: $79
- Advanced: $299
And BigCommerce’s look like this:
- Standard: $29.95
- Plus: $79.95
- Pro: $299.95
Hey, at least they named them differently.
While straightforward, basing your pricing on a competitor’s calculated value may not be the best way to develop a solid strategy. You won’t get the deep understanding of your customer segments that’s essential to drive marketing campaigns and make product decisions. You risk sacrificing knowledge of the true value your product provides because you’re too busy comparing with the next guy.
Align price with value
Commonly hailed as the best pricing strategy for SaaS businesses, value-based pricing is calculated according to the value your customers receive—or rather, how much value they perceive. Using data to find out how much they’re willing to pay, you then charge them exactly that amount. You maximize revenue and keep your customers happy, too.
Sounds like the obvious choice, no?
Well, you guessed it, there are some hurdles. Understanding your buyer personas takes time. Then, you’ve got to run surveys and talk to customers to find out how valuable they perceive each feature of your software. That also requires resources.
Then, you’ve got to analyze the data and look for patterns. That should help you put together packages, or a tiered pricing model to suit segments.
So, should you use value-based pricing?
Yes, a value-based pricing model is harder to implement than other strategies. But it could allow you to charge more than your competitors and generate more revenue.
Also, things move fast in the SaaS industry. Why should your pricing stagnate while other facets of the business are being innovated upon and optimized? Basing pricing upon value requires regular re-evaluation. As products evolve, services improve, and behaviors change, your pricing should reflect that.
I’d recommend that you…
Revisit your pricing twice a year
Actually, make that at least twice a year. More, if necessary.
A SaaS business that adjusts its prices continually tends to have extremely robust unit economics, according to a survey of 96 SaaS businesses with annual recurring revenue (ARR) of over $5 million.
You don’t need to radically overhaul your pricing every month. You might just slightly increase or decrease a couple of product price points, adjust SaaS billing models, or tweak recurring billing frequencies.
Research shows that 98% of SaaS businesses earn positive results from making core changes to their pricing policy. It’s essential that you keep an eye on your pricing plans if you want to maximize annual revenue while making sure you don’t annoy customers with constant changes.
An easy way around that? Use automated recurring billing software and a subscription management system that lets you…
Run pricing experiments
With a flexible catalog in your toolkit, you can run pricing experiments. Modern SaaS billing systems let you determine the best price point for your offerings by running A/B tests. For example, you could try out one pricing model with a new cohort of customers. If it doesn’t seem to be working, simply roll back to the previous pricing model.
Catalog flexibility is vital for price optimization. An automated SaaS billing system should give you the power to enter customer-specific agreements from on-the-spot negotiations, make price overrides, and apply customized discounts. This reduces operational friction, enables your sales team, and ultimately helps your SaaS business to reach profit and revenue goals at distributed levels of granularity and for different segments.
To measure the success of a pricing model or strategy, it’s vital to track metrics like LTV, churn, and expansion MRR. Consider conducting an impact analysis and creating an internal customer advisory panel. At the end of the day, pricing your catalog no longer serves the simple purpose of listing products. It should support the dynamic customer engagement journey in your recurring revenue business.
Consider your SaaS business model
Do you have a low-touch model, where you collect payments directly from your website and customers manage their SaaS subscriptions? They’re often associated with B2C SaaS businesses, like Spotify or Netflix, but low-touch models also work for B2B businesses, like MailChimp. The learning curve for these products is low, so a fixed-rate pricing model with optional add-ons tends to work well. But what about those big enterprise customers?
They tend to be associated with high-touch models and complex SaaS billing models because the software plays an essential role in a specific business operation.
Because B2B customers get more value, they pay a higher price point compared to self-sufficient sign-ups. The pricing model, or billing model, may also be different. For example, they might use a usage-based pricing model, tiered system, or metered SaaS billing model. Other SaaS billing models include flat rate, hybrid, prepaid, and events-based.
Note: A SaaS billing model refers to the way you collect revenue, whereas pricing relates to the actual price you charge customers.
Low and high-touch models are not mutually exclusive, however. You can have a mix of both, like graphic design platform Canva. Canva’s customers can sign up for its software as a service under a freemium plan or begin automated recurring payments on the Pro plan. But Enterprise customers must contact the sales team before they get access to this creative subscription business.
An invisible pricing model for enterprise customers vs. a transparent pricing model for SMBs or midmarket businesses is fairly common in the software as a service industry.
Keeping your software accessible for consumers but also not leaving money on the table when selling to large businesses is a delicate balancing act.
Other dos and don’ts
- Don’t: create SaaS billing plans only a rocket scientist can understand
- Do: make it easy for your customer to calculate what they’re paying and why
- Don’t: limit your ability to price correctly by not having a sophisticated billing ecosystem
- Do: work with SaaS billing software that provides flexibility and control over pricing strategies
Making your pricing and SaaS billing customer-centric is essential in the competitive world of SaaS. Getting the pricing of your catalog right can result in huge ARR gains—and getting it wrong can tank your business!
It’s important to implement SaaS billing software that allows for regular review, testing, and development of complex pricing strategies. Optimizing pricing with an automated billing platform specifically built for rapid growth subscription businesses should:
- remove internal operational roadblocks and
- support adoption pathways and conversion events—from acquisition to upgrades, add-ons, and increased usage.
In this sense, subscription management software does much more than collect recurring payments or automate your entire billing process. It allows you to build a powerful pricing machine to skyrocket your growth.