SaaS pricing strategies are constantly evolving in order to maximize revenue, meet customer expectations in terms of value for their money, and fit ever-changing product offerings.
Choosing the right pricing strategy—and reviewing it regularly—is essential to the success of a SaaS business. And yet, Patrick Campbell, CEO of Price Intelligently, points out that “the average SaaS startup spends just six hours on their pricing strategy.”
There are parts of your business where “setting it and forgetting it” creates efficiencies that allow team members to focus their brainpower on more important tasks. But when it comes to setting a pricing strategy, this mindset can be extremely detrimental. In fact, data shows that businesses that update or review their pricing strategy at least every six months earn almost twice as much average revenue per user (ARPU) than those who spend a measly six hours on the task.
But what if you could take this mindset of regular pricing review further and adjust your prices even more frequently to correlate with supply and demand and market conditions?
Enter: dynamic pricing.
TLDR
- Dynamic pricing is a strategy where prices fluctuate in real-time based on factors such as demand, supply, time of purchase, customer segment, and competitor pricing, with the aim of maximizing revenue by charging the optimal price at any given moment.
- Dynamic pricing works in a variety of methods. Because there are so many factors to base your strategy on, you’ll need to pinpoint what works for your business and then use the appropriate tool to run it.
- When it comes to implementing dynamic pricing, for some companies it may be as simple as using a discount code. But for others, it can be complex enough to warrant a robust business analytics tool and potentially even custom software.
What is dynamic pricing?
Dynamic pricing is a strategy that involves businesses selling their products or services at different prices to different people. It can allow SaaS businesses of any size to dramatically boost revenue and increase their margins quickly and efficiently. Plus, it provides flexibility and insights into your customers’ behavior as well as the market as a whole.
Examples of Dynamic Pricing
There are many examples of well-known B2C companies that use dynamic pricing, such as:
- Airbnb – The price of a night’s stay at a lakeside cabin can skyrocket dramatically from a weekday in February to Fourth of July weekend.
- Utility companies – Many electricity companies charge far more per unit during times of high demand—such as the evening, when people are typically home from work or school and need heat/AC and lights on, versus during midday when most people are away from the home or at least taking advantage of natural light and heat.
- Airlines – The price of an airline ticket can change based on how many seats are available, how much time is left until the flight departs, and so forth.
While we’ve all likely experienced B2C dynamic pricing in some form, it might not be as easy to call to mind examples of B2B businesses that use it. However, many heavy hitters and industry giants have already implemented the strategy. For example:
- HubSpot – HubSpot’s pricing page shows that their Professional plans use static pricing while their Enterprise plans ‘start at’ $1,200 per month for 10 paid users, but their call-to-action button simply says “Talk to Sales,” which is a telltale sign of a dynamic pricing strategy that is adjusted based on the Enterprise customer’s specific needs and market conditions.
- Marketo – Adobe’s Marketo Engage comes right out and says on their pricing page that they offer ‘customized’ pricing. They are leaning hard into dynamic pricing, and all of their call-to-actions simply say “Get pricing.”
- Google Ads – Google Ads allows customers to set hard budget caps, but many factors determine how far that spend will actually reach, including the customer’s industry, their customers’ lifecycle, market trends, targeted keywords, ad schedule, and more.
But wait, isn’t it sketchy—or perhaps illegal—to sell the same product at different prices to different people?
In short, no. As long as businesses don’t segment their customers based on inappropriate criteria (such as race or gender), dynamic pricing does not fall under the category of price discrimination and is therefore a perfectly acceptable practice.
Okay, but is dynamic pricing fair?
There are many different opinions about this, but the bottom line is that customers have the ultimate say on whether they purchase your service or not, in accordance with free market principles. Most people understand that airline tickets are likely going to be more expensive when purchased the day before the flight rather than six weeks ahead of time, but it will take some time until this same pricing method becomes fully embraced in the SaaS world.
As the folks at HireDNA share, “While you obviously don’t want to use deceptive techniques to deliberately shroud how much your products cost, using dynamic pricing in a similar way as HubSpot and Marketo, where you direct leads to a sales rep to discuss deals, is a highly effective way to continually bump up costs up without rubbing leads the wrong way.”
Ultimately, dynamic pricing is similar to haggling. Rather than giving items or services a set price, a seller can change prices based on what different customers are willing to purchase it at. This type of flexible pricing should leave both parties feeling like they won the deal, rather than leaving someone feeling like they got cheated. When done right, pricing optimization should leave a customer feeling like they actually did better than they would have if the item had a fixed price.
Dynamic pricing methods
There are many different ways you can implement dynamic pricing and price optimization. Some of the most popular methods include:
- Demand pricing (also called surge pricing) – With this method, you’ll increase prices during periods of high demand (sometimes called peak pricing) and lower prices during periods of low demand matching market prices.
- Volume discounts – You might choose to offer volume discounts or other dynamic pricing-based incentives to enterprise-level customers and other power users as a reward for their loyalty.
- Variable package-based pricing – You can offer different price points based on specific features or services sold, where each customer can choose exactly what they want and you can price accordingly.
- Localized pricing – This pricing structure involves adjusting prices based on the customer’s geographic location. If you operate internationally, this can include techniques like displaying an equivalent price in your customers’ local currency, or adjusting the price altogether (and displaying it in local currency) based on factors such as market saturation and willingness to pay in each area.
Pros of dynamic pricing
The key pro of dynamic pricing is maximized revenue. By flexing pricing lower during slow times, you avoid losing sales, but flexing higher during peak times means you don’t lose potential profit margin. That said, there are plenty of other benefits of dynamic pricing.
Optimized Inventory Management
Dynamic product pricing helps in managing inventory effectively by adjusting prices to match inventory levels. When inventory is high, prices can be lowered to stimulate demand, and when inventory is low, prices can be raised to balance supply and demand.
Competitive Advantage
Businesses employing dynamic pricing can stay competitive by quickly responding to changes in market conditions, competitor pricing, and customer behavior. This flexibility allows them to adapt to market fluctuations and maintain their edge through competitive pricing.
Revenue Management
Dynamic pricing is particularly beneficial in industries where perishable goods or services are involved, such as airlines, hotels, and event ticketing. It allows businesses to adjust prices based on factors like time until departure, remaining inventory, or time until the event, maximizing revenue from each unit of capacity.
Cons of dynamic pricing
Like most things, dynamic pricing has its cons, the biggest of which is customer perception and poor customer experience. Even in industries where consumers are accustomed to dynamic pricing (like airline tickets), price changes can easily irk people and cause them to feel that the company is trying to bleed them dry.
Perhaps one of the best examples of this was fallout of Ticketmaster’s dynamic ticket pricing on Taylor Swift’s Eras tour. (It’s so famous it has its own Wikipedia page.) Seat originally advertised as low $49 shot up into the thousands, with no seats available for less than triple digits. And while the strategy certainly worked to maximize profits – Swifties still sold out every show – the public backlash was intense. It has even resulted in the DoJ suing Ticketmaster’s parent company. Perception is far from the only con, as well.
Customer Loyalty
Constantly changing prices may erode customer trust and loyalty, as customers may feel uncertain about when is the best time to make a purchase. Loyalty programs and transparent communication can help mitigate this concern, but it remains a challenge.
Complexity
Implementing dynamic pricing requires sophisticated algorithms and data analysis capabilities, which can be complex and resource-intensive. Small businesses or those with limited technical expertise may struggle to effectively implement and manage dynamic pricing strategies. Dynamic pricing can introduce operational challenges, such as the need to update pricing systems in real-time, monitor competitor pricing, and manage customer inquiries or complaints about price fluctuations. Businesses must have robust systems and processes in place to handle these challenges effectively.
Regulatory Concerns
In some jurisdictions, there may be regulations or laws governing pricing practices, particularly concerning price gouging or anti-competitive behavior. Dynamic pricing practices need to comply with these regulations to avoid legal issues or fines.
How to Implement Dynamic Pricing
While it might sound like a Herculean task to constantly monitor supply and demand and make real-time pricing adjustments for all of your products and services, implementing dynamic pricing is not as hard as it sounds. The right software solution can handle the heavy lifting for you, leaving you free to strategize and analyze results.
Let’s take a look at the steps you’ll take to implement dynamic pricing for your business.
Collect the Data
Of course, you’ll start by collecting relevant data on customer behavior, market demand, competitor pricing, and other factors that influence demand and pricing. Use advanced analytics tools to analyze this data and identify patterns, correlations, and insights that can inform pricing decisions. There are business analytics tools that exist specifically to do this kind of work for you, like IBM Watson Analytics. However, unless your company has a huge budget, you should be able to use analytics tools you already have, like Google Analytics and the analytics provided by your payment processing software.
Define Pricing Variables
Identify the key variables that will drive pricing adjustments, such as demand levels, time of day, seasonality, inventory levels, and customer segments. Determine how each variable will impact pricing and establish rules or algorithms to adjust prices accordingly. A few examples of how those variables could impact your pricing:
- For a bakery who can sell day-old items, the approach of the end of the day increases the urgency to sell inventory, meaning they may want to offer a discount on buying items in bulk after 3PM, in order to encourage customers to clear more inventory.
- Seasonality has a huge effect on any company selling winter holiday items like Christmas trees. While in October and November, consumers are willing to spend full price on items, once late December approaches or passes, consumers no longer need the items. Many companies choose to run deep discounts on their holiday season wares in the second half of December in order to maximize sales.
- Excess inventory is another reason many companies discount. Sitting inventory represents tied up cash flow. By discounting the items to increase sales, you are able to free up your cash flow for better investments.
Set Pricing Objectives
Clearly define your pricing objectives, whether it’s maximizing revenue, optimizing inventory utilization, gaining market share, or enhancing customer satisfaction. Align your dynamic pricing strategy with these objectives to ensure that decisions support broader business goals. You don’t want to slash prices if the company is trying to achieve perception as a premium product, after all.
Segment and Personalize
For some businesses, dynamic pricing will depend on the consumer’s relevant criteria such as purchase history, demographics, location, or behavior. Uber is rumored to raise fares on a ride the more times you look at the app to check pricing on a certain ride.
If this works for your business, you’ll need to develop personalized pricing strategies tailored to each customer segment, taking into account their willingness to pay and value perception.
Use Dynamic Pricing Tools
Some companies, like a bakery, can rely on simply discounting for their dynamic pricing. However, many companies, like Uber, will need to invest in dynamic pricing software or machine learning tools that can automate pricing adjustments based on predefined rules, algorithms, and real-time data inputs. These tools enable a robust dynamic pricing strategy that can respond in real time to trends.
Ensure that your chosen pricing technology integrates seamlessly with your existing systems, such as inventory management, point-of-sale, and e-commerce platforms.
Testing and Optimization
Conduct A/B tests and experiments to evaluate the effectiveness of different pricing strategies and parameters. Continuously monitor and analyze the results to identify opportunities for optimization and refinement.
Be Transparent
Be transparent with customers about your dynamic pricing practices to build trust and mitigate concerns about fairness or price discrimination. Clearly communicate the factors that influence pricing fluctuations and the value proposition behind dynamic pricing.
Check Compliance
Ensure that your dynamic pricing practices comply with relevant regulations and laws governing pricing, consumer protection, and competition. Uphold ethical standards in pricing decisions to maintain customer trust and integrity.
Continue Iterative Improvement
Dynamic pricing is not a one-time implementation but an ongoing process of refinement and improvement. Continuously gather feedback from customers, analyze performance metrics, and iterate on your pricing strategy to adapt to changing market dynamics and customer preferences.
Additionally, you’ll need to create clear organization and procedure guidelines for everyone involved. And, while it’s not strictly a tool, team buy-in will go a long way toward ensuring the success of your dynamic pricing strategy implementation.
Avoid potential pitfalls when implementing dynamic pricing
Dynamic pricing can be a lucrative and effective system, but there are certain downsides to consider and pitfalls to avoid, such as:
- Customers may get upset or be turned off – Some customers may not like that in order to find out the price of your service, they’ll have to contact your sales department—especially if they suspect that the call might involve high-pressure sales tactics. Additionally, customers can become upset if they discover they are paying higher prices for the same service or if the fluctuating price increases to a point where it’s no longer affordable for them. You’ll need to find a balance between price and value, be transparent with your customers, and ease into the new pricing scheme so as not to drive away your current customers.
- Revenue uncertainty – It can be difficult to accurately forecast and project revenue with a dynamic pricing model. Again, this is where clean and reliable data become necessary to help mitigate this issue.
- Developing and managing your dynamic pricing system can take a lot of time and resources – Before making the switch to this pricing strategy, take some time to analyze if the lift will be worth the effort.
Dynamic pricing may not be the best solution for every B2B SaaS business, so don’t just adopt the system because others in your industry are doing so. Carefully evaluate additional risks and potential issues that could affect your specific business before diving in.
Set yourself up for success with an agile subscription billing platform
Before you even consider implementing variable pricing, ensure all of your ducks are in a row with your subscription management, invoicing, billing, and so forth. One of the easiest ways to do this is to use a modern subscription billing platform that automates these types of processes, provides a wealth of data, and frees up person-hours to work on higher-level projects such as pricing strategy and implementation.
Laying this foundation allows you to dedicate the necessary time and resources to assessing whether variable pricing is right for you, and if so, to create a successful dynamic pricing strategy that incorporates the tools and avoids the pitfalls we discussed in this article.
FAQs about Dynamic Pricing
Q: What is dynamic pricing?
Dynamic pricing is a strategy where prices are adjusted in real-time based on market demand, competition, customer behavior, and other data-driven factors. This approach allows SaaS companies to optimize revenue on a per-customer basis.
Q: How can dynamic pricing benefit a SaaS company?
Dynamic pricing can help SaaS companies maximize their revenue by allowing them to charge more during peak demand and reduce prices to attract more customers during lower demand. It also enables personalized pricing strategies, which can improve customer retention and satisfaction.
Q: What are the challenges of implementing dynamic pricing?
To successfully implement dynamic pricing, you need sophisticated analytics and real-time data processing capabilities. Challenges include maintaining fair pricing practices, managing customer perceptions, and the technical integration of dynamic pricing algorithms into existing sales systems.
Q: How do customers react to dynamic pricing?
That depends. Some customers appreciate paying for the value they receive, as long as your pricing is fair and transparent. On the flip side, others might view variable pricing as unpredictable or discriminatory.
