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.
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.
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.”
Dynamic pricing methods
There are many different ways you can implement dynamic pricing. 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 and lower prices during periods of low demand.
- 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 pricing plans 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.
Necessary tools for implementing 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, the right software solution can handle the heavy lifting for you, leaving you free to strategize and analyze results. When selecting the right software for your business, look for one with built-in analytics capabilities that can generate clean, reliable data in real time.
Depending on your exact approach to the dynamic pricing model, your customers might call your sales reps to get a price or they may be able to view the dynamic price and purchase your product or service online. In either case, your sales team needs to be able to access up-to-the-minute data on what the price is at any given time based on your chosen criteria.
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
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.