Offering a free plan is a common standard operating procedure (SOP) for SaaS businesses. However, this pricing strategy wasn’t working out for Outseta.
While the membership software platform had more than 5,000 users, the “majority of them” were on a free plan. And Outseta’s modest team of five just didn’t have the capacity to support all of these users that weren’t bringing in any revenue.
So, the SaaS business decided to run an experiment: it ditched its freemium plan. If businesses wanted to use its product, they would have to sign up for a paid plan right away.
The result? Outseta doubled its growth rate. It also reduced its support volume from free users, allowing the team to focus on support requests from paying customers.
Like Outseta, you may be dissatisfied with the results of your SaaS business’s pricing plans and want to run your own pricing strategy experiments.
After all, your price sends a subtle signal on the value that your product provides—and the type of customers that would benefit from it. Pricing adjustments could hence help you grow your customer base and attract best-fit customers.
And if tweaking your pricing could help you earn more recurring revenue with little pushback, then why not?
Of course, conducting a successful pricing strategy experiment isn’t as simple as randomly changing the numbers on your pricing page. Instead, it calls for a systematic test of your pricing strategies and a thorough review of the outcomes—while being enabled by an advanced SaaS billing solution.
1. Split your customers into different cohorts
Remember the days of running science experiments in high school?
To evaluate a certain hypothesis, you’d set up a control group, to which you’d do nothing at all. You’d then have one or more separate test groups, to which you’d apply certain changes and observe the results.
Things are no different in a pricing strategy experiment. You’ll want to A/B test various pricing strategies on different groups of customers at once. This way, you can compare each group’s reactions to your pricing changes afterward (more on this in step #2).
For instance, Adobe previously sold perpetual licenses to its creative software tools for $900 a pop. But when dipping its toe into SaaS, it ran a limited pricing strategy test in Australia, offering its Photoshop graphics editor software for $50/month.
According to Jason McClelland, Adobe’s then-Head of eCommerce and Inside Sales, Americas, this experimental offer “took off like wildfire, exceeding all our expectations.” No prizes for guessing why Adobe scrapped its perpetual license model, went all-in on subscription-based pricing, and is now the SaaS behemoth that it is!
As you try to replicate some of Adobe’s success for yourself, use your SaaS billing software to split your customers into separate cohorts. Afterward, assign each cohort a certain pricing model. You can experiment with:
- Billing models: Whether you charge customers based on user licenses, recurring pricing plans, usage, or something else.
- Cost models: How much customers have to pay to access your product, based on how they are being billed.
2. Monitor each cohort’s subscription lifecycle
You’ve shaken things up and introduced your pricing changes to your customers. Now, how are they reacting?
The more vocal—and usually displeased—minority of customers may express their opinions on social media. But even if they don’t, the actions the silent majority takes—or doesn’t take—in response to your new pricing or billing model can indicate their feelings toward it.
A modern SaaS billing software will allow you to generate reports that help you follow customers’ behavior in the subscription lifecycle. For example, you can monitor the following by activation cohort:
- Sales: Whether there are significant differences in the amounts that historical and new customers are contributing to your sales.
- Customer churn and revenue churn: Whether customers are canceling their plans as a result of your pricing changes, and how such activity affects your monthly recurring revenue.
In particular, you’re likely to experience some churn as some dissatisfied customers terminate their plans. But don’t panic and pull the plug on your experiment right away! For all you know, it could be your bad-fit customers that are churning—which is a good thing.
Give your pricing changes some time to set in. This way, you will have more data to work with when you…
3. Review the results and act accordingly
After obtaining data on the results of your pricing experiments, go over it with a fine-toothed comb. What seems to have worked well, and what hasn’t? And just as importantly, why?
From your findings, you can then push the winning pricing strategy to the rest of your customer base. Alternatively, if your pricing strategy experiment wasn’t as successful as you’d hoped, then roll your pricing back to a previous version—or try something else.
In its maiden pricing strategy experiment, customer feedback management platform Canny tested a $2/month pricing plan. And after two months of experimentation, the SaaS business concluded the pricing plan was a “bust.”
Unlike the deluge of sign-ups that Canny expected to get, reactions were lukewarm. The extremely low cost of the plan made customers perceive the business’s product to be lacking in value.
Even when Canny managed to persuade customers to sign up, it had to expend a significant amount of time “chasing people for what ended up being only $24/year.”
The $2/month plan was therefore duly scrapped in Canny’s second round of pricing experimentation.
Advanced SaaS billing software enhances the agility and flexibility of your pricing strategy experiments
While many billing and subscription management activities can be automated, pricing isn’t something you set once and leave on autopilot. Your prices need to evolve over time to reflect the ever-changing value of your product.
Or, as Naomi Pilosof Ionita, investing partner at venture capital firm Menlo Partners puts it: “Your product roadmap is never done. You’re constantly developing new features and functionality, so why on earth wouldn’t you revisit your pricing?”
Enter the importance of testing various pricing strategies to nail—and refine—your ideal product price over time. Your SaaS recurring billing software needs to complement your experimentation efforts, allowing you to rapidly set up and test multiple pricing strategies at once.
The right SaaS subscription billing solution will be able to not just split customers into cohorts, but also have built-in functionality for setting prices at the customer level. You’ll need such catalog flexibility for the vital activity of assigning separate prices to different customer cohorts.
Running pricing strategy experiments on a legacy SaaS billing system that sets prices at the general catalog level isn’t impossible. However, you’d have to repeatedly duplicate and price your products for every customer cohort, and for each pricing test you carry out.
And nobody has the time for such tedious configuration work. Most certainly not you, as you strive to unlock the revenue potential of your product.
