In the early 2010s, the subscription business model exploded in popularity, in large part thanks to the beauty subscription box phenomenon. Overnight, everything became a subscription.
Consumers loved it for convenience, and businesses loved it for its promise of sweet monthly recurring revenue (MRR).
But, contrary to the seemingly popular belief at the time, the subscription model isn’t a magic revenue solution. There’s a right way and a wrong way to go about running a subscription business—and a lot of its success depends on how you price your product.
“Pricing is an incredible lever due to the relatively infinite number of options available to your organization,” says Cameron Deatsch, Chief Revenue Officer at Atlassian. “In my experience, pricing strategies tend to have their own version of entropy. Unchecked, your pricing strategy will end up in chaos.”
Are you leveraging the best pricing strategy to set your business up for success? Or are you making these pricing strategy mistakes and bringing chaos to your MRR potential?
You aren’t revisiting your pricing strategy often enough
When was the last time you did a thorough review of your SaaS pricing strategy? According to ProfitWell, the average SaaS startup spends a grand total of just six hours—ever!—on defining, testing, and optimizing its pricing strategy.
But, naturally, few things can impact your revenue as much as your pricing model, so experts recommend setting aside a couple of days semi-annually to review what is and isn’t working.
“Pricing holds the keys to boosting the bottom line. So, it’s time that SaaS companies start treating it as such,” SaaS strategist, Adam Fard says, likening the process to walking a tightrope. “Your pricing strategy should be a living, breathing thing. Review it constantly, using customer data to drive your decisions. When it comes to SaaS pricing models, research is your best friend.”
The idea of changing your pricing often can be intimidating—what if your customers get annoyed and move elsewhere?
Well, if you roll out your changes thoughtfully enough, you can see huge returns in revenue. In fact, 98% of SaaS businesses that make core changes to their pricing strategy see positive results. Website builder Podpage increased its annual recurring revenue (ARR) by 28.5% after implementing a new pricing strategy. What’s more—the business didn’t lose a single customer as a result.
You offer flat-rate pricing and no alternatives
Ah, the flat-rate pricing model with three to four pricing tiers—a small one for startups, a mid-range or “most popular” tier, and one for enterprise companies. It’s the classic pricing model for most SaaS companies and other subscription businesses.
But if your pricing strategy is to fit all potential customers into one of three boxes, you’re probably missing out on revenue.
Take the usage-based pricing model, for example. It’s picked up steam over the last few years, and for good reason. Businesses that implement usage-based pricing have an average of 137% net dollar retention. For comparison, the average net dollar retention of publicly traded SaaS companies, regardless of pricing model, is 115%.
“[Usage-based pricing] is designed to capture more value, based on the assumption that the functionality customers are paying for is measurably improving their own bottom line, so they’ll be happy to pay,” explain David Wehrs, Chris Parker, and Christine Deakers of Bessemer Venture Partners. “For example, if they’re using more API calls, that means they’re delivering more orders.”
For your business, a usage-based SaaS pricing model brings the potential for quick spikes in revenue as customer usage grows. However, the opposite is also true—your revenue can suddenly drop if usage dips.
If that’s too intimidating for you, there are plenty of SaaS pricing models out there that allow you to better monetize your product. Consider:
- a per-user pricing model, where customers pay per active user,
- a feature-based pricing model, potentially unbundling your plans and charging per-feature pricing, and
- value-based pricing or premium pricing to increase your product’s perceived value and increase revenues, even with a small user base.
The next time your pricing committee meets to review your pricing strategy, consider running a test: would you make more money if you switched up pricing models completely?
You don’t run pricing experiments
You’ve resolved to re-evaluate your price points annually. You want to try out new pricing models. But you’re nervous—what if you make a major change and all your customers hate it?
Successfully rolling out pricing changes across your entire customer base happens only after testing them on smaller groups.
- Split your customers into cohorts. You’ll want a control group and one or more test groups. Just like high school science class.
- Monitor the customers in each group. Are you seeing significant differences in the behavior of customers in one group compared to the other? Compare usage rates, expansion and contraction MRR, and churn.
- Review the results and act accordingly. If the experiment was a great success with your test group, it’s probably safe to roll the new pricing out across the board! If not, roll your pricing back to a previous version or try something else.
The key to doing any of this, though, lies in the tools you have available. Modern subscription management software with a flexible catalog will allow you to run SaaS pricing strategy experiments with ease and simplify any reporting on your findings.
Your contracts are too short
One seemingly small aspect of your SaaS pricing strategy with a potentially huge impact on your MRR: contract length.
- On average, month-to-month SaaS contracts have a churn rate of about 14%, according to data from 99firms.
- Meanwhile, for contracts of 2.5 years, the average churn rate drops dramatically to just 8.5%.
On a month-to-month contract, customers have many opportunities to reconsider how badly they need your product or service. Customers on a longer contract, however, are locked in for enough time to realize value and may see your product as an investment they need to get the most out of.
Consider incorporating longer-term contracts into your SaaS pricing strategies and see if your churn rate—and by extension, MRR—adjusts itself accordingly.
As for regularly iterating on your pricing while locking customers into multi-year contracts? Bake annual or semi-annual price uplifts into your contract terms. That way, your pricing increases over time and your customers stay on your roster.
For maximum MRR, don’t let your SaaS pricing sit static
Many SaaS companies, especially those in their infancy, don’t give their pricing enough attention. A flat-rate or tiered pricing model becomes the default and, as a result, the business loses out on potential revenue.
There’s no objective best pricing model for any business—I wish it were that simple!
But, by thinking of your SaaS pricing as something dynamic, something to iterate on and experiment with, you can avoid pricing’s entropy and benefit from all the MRR you deserve.