The Pricing Crisis in SaaS

justingovender_ via Twenty20
The Pricing Crisis in SaaS
At a Glance

The extremely competitive nature of the SaaS industry necessitates for the enterprises to get their pricing right. This though a complicated process, holds the key to success for any SaaS entrepreneur looking to hit the jackpot. SaaS enterprises operate in a highly price-sensitive market, where one wrong decision can directly impact profitability.

The moment you make a mistake in pricing, you’re eating into your reputation or your profits.

Katharine Paine, Publisher and CEO, Paine Publishing

Pricing is the most significant component when it comes to maximizing the organization’s revenue. Harvard studies have showcased that a mere 1% increase in pricing can easily add up to 11% of one’s profits. When you do not price rationally, it turns into a bad pricing strategy, and you lose out on extremely easy profits during every transaction. It also impacts one’s reputation and branding.

If the prices set are too high, the consumers may think of you owning an arrogant company. At the same time, low pricing makes a consumer question the authenticity and credibility of your product. Hence, it becomes immensely important to give a great deal of rational thoughts to this essential aspect of pricing.

SaaS Product Pricing

The entire SaaS industry is witnessing rapid growth, and it has been indicated by more than 73% of business enterprises that by the end of 2020, 100% of their apps will be running as SaaS. If you are new in this highly competitive industry, then identifying your optimal pricing strategy can be challenging. Research has established that almost 98% of SaaS enterprises posted positive results after optimizing their pricing strategy.

To devise your individualized SaaS pricing strategy, you ought to contemplate the below-mentioned questions: –

–        What are the traits of your target market?

–        Where do you position your enterprise in the market?

–        Do you follow a B2B model or a B2C model?

–        What is the size of your target market?

–        What is your subscription model?

Once you have answered these questions, it is time for you to explore the various SaaS Pricing Models and select the one which meets your requirements the best.

SaaS Pricing Models

While there can always be “n” number of ways for any SaaS enterprise to develop its pricing model, there are three main pricing methods available which SaaS companies generally make use of: –

1.    Cost-Plus Pricing

In this method, the price the consumer is supposed to pay for the product is added as the margin to the product’s cost. So, if the product’s cost price is Rs.100 and you aim to make a 20% profit, the selling price will have to be Rs.120. This form of pricing is used when the addition of costs such as the equipment cost, traveling expenses, and man-hours invested and then a margin is included to sell the product to the consumer. 

2.    Competition-Based Pricing

When there are competitive products available against your products, your competitor’s products’ price will be set as a benchmark price. So, if your competitor A has priced a product at $90 and a competitor B has priced his at $100, then your product C can range from anywhere between $80 to $100. 

3.    Value-Based Pricing

Here, the value which the customer will derive from your product is quantified. Suppose after purchasing your product; your consumer generates revenue of Rs.1 million. You will price your product at a fraction of this revenue generated, i.e., the consumer’s value from purchasing your product. 

Price is what you pay. Value is what you get.

Warren Buffet

Now, the question that beckons you is, “What method do I use to price my SaaS product?”

The answer is remarkably simple. As a seller, you will want to make sure that you do not leave any money on the table, and the only way you can do this is by the Value-based pricing mechanism. It also lets you change your consumers based on the value they derive from your product. So, if you are launching a SaaS product for the first time, you may go with competition-based pricing; however, if you can reach a product-market fit, then value-based pricing is a good mechanism to value your product.

Process of Value-based Pricing Mechanism

To get your value-based pricing right, there are certain aspects of the decision which require thorough consideration. The steps involved in the process are: –

1)    Divide your consumers

Here, one segments his customers into 3-5 logical groups to understand their customers’ different needs and wants. 

2)    The value derived by each segment

If your segments include freelancers and enterprise, both of them will derive completely different values from your product. And for this, one needs to invest in customer development. Here the pricing for different segments will be different. 

3)    Pricing the product for each segment

The 10X rule says that if the ROI for the customer is 10X, then you should price your product at X. This rule makes sure that you charge for your product perfectly. 

Value Metric

This is the phenomenon based on which an enterprise charges the customers. Based on the value metric, companies might charge their consumers on a user basis, per-agent basis, per transaction basis, or based on the number of subscribers / monthly active users.

Pricing is actually pretty simple… customers will not pay literally a penny more than the true value of the product.

Ron Johnson

Pricing is all about figuring out how much the consumers value your product. Your pricing should be easily understandable by the consumers. It should also align with their needs and vary with usage. If this does not happen, you may undercharge or overcharge the customers, thereby risking losing the customer or facing losses.

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