SaaS Businesses

How to price your SaaS product best optimized for conversions and value

Pricing. One of the most complicated action items on an entrepreneur’s checklist. Take a pause and ping any SaaS founder in your network and ask them if they think they have priced and packaged their product right. I know of many entrepreneurs who are content with how their product is priced. I am yet to come across many who think it is perfect and most optimised.

So what makes SaaS product pricing so complicated?

The fact that you need to find a balance between conversions and most value per conversion. If you price your product too high, you end up driving away customers. Price is too low and many would assume that your product must not be adding much value. Lower price also means you are leaving money on the table for every transaction that gets through.

There are two parts to pricing your SaaS product:

  1. the actual price points themselves
  2. the packaging these price points come with, i.e. what is included in different plans

Essentially packaging refers to how the company offers the same underlying product available to different customers in a slightly different ways at different price points. It could be based on the number of people who would have access to the product, the number of server requests or API requests that can be made, the number of actions one could take, as well as the availability of different features differentiated based on the plan selected by the customer.

A combination of these is what makes SaaS product pricing even more complicated than what it would have been for a non-SaaS business.

SaaS entrepreneurs frequently struggle with the idea of how to improve the pricing and packaging of their products. When I was deciding on the different packages and pricing for Benne Analytics, I remember having countless discussions with product experts on the best way to go about it. And the complicated nature of this whole exercise is the reason why optimising their plan structure is always there at the back of an entrepreneur’s mind.

What is the best way to go about structuring your product’s pricing

Short answer? Experiment with your pricing structure. Experiment often, and be bold about it. It is one of the easiest needles to move in your overall structure, with little to no dependencies on other aspects of your business.

Experiments are the heart and soul of an entrepreneur. Whether it is in your marketing plans, go-to-market strategies, product roadmaps, even audience selection. Your pricing should be no different. And as I said earlier, unlike the other items we just mentioned, changing your pricing doesn’t need you to make a complete overhaul of the processes involved.

What happens most of the times is that entrepreneurs and product owners struggle with pricing their product. They end up doing a fair bit of research on it, spends hours, days and weeks thinking about it, and then they come up with a number and a structure that makes the most sense. Everything is all good till this point. The problem comes with what they do next.

Nothing! Yes. So once the prices have been set, most entrepreneurs ‘set it and forget it’. Often for years. That’s a wrong approach. Change them. Change them frequently. Change them every quarter, if you must. Change them till you are convinced you have deciphered the right pricing structure for your product and your target audience.

So. What are some of the core things you need to take care of while you are deciding on the broader pricing structure?

#1. Reduce decision fatigue for your customers

If you have a lot of different plans, each having their own benefits, you are forcing customers to weigh the benefit of choosing one plan over the other. As a result, your customers end up spending more time on the fence, weighing your pricing not just against competitors but against your own pricing structure. The outcome? You will witness a lot of bookmarking and drop offs.

The fewer options you have on the pricing page, the better it is for conversion. Anything more than two or three, you should rethink your strategy. In such cases, I find the way Firebase prices its products to be most suited - for both customers as well as the business.

pricing strategy 1

Customers can get started for free, and on the premium plan, their monthly billing is based on their usage of Firebase products and services.

A simple way of having a pricing structure dependent on usage is to have just one price point, and then charge for additional usage. For example, you can have a plan for $10/mo that includes 10,000 API calls, and charge $7 for each additional 10,000 API call bracket. (You can either charge it in bulk, or have a completely differential pricing by having something like $0.001 per additional API call).

Complicated pricing pages make the decision making tougher for the end consumer.

Look at the pricing page for ahrefs to understand what a complicated pricing structure looks like:

pricing strategy 2

There are 5 different pricing plans here (including enterprise). And then you have a differential price on three different line-items (highlighted in blue).

What’s interesting is that the additional charges remain the same across all different plans. We will get to that in a minute.

ahref’s competitor, Semrush, has a slightly better pricing structure, but with its own set of complications.

pricing strategy 3

Their pricing is divided into just three different tiers. (They have an enterprise plan as well, but it is listed separately under the pricing table)

They made it better by listing out paid add-ons at the bottom of the feature comparison list, and they made it worse by keeping the price point for additional users different for different plans.

They also have paid add-ons.

What would have been a better way to do it?

The way their pricing is structured, they could very easily have just one pricing plan, and users can add line items like seats, projects, crawl credits to their plan based on their individual needs. The invoice value, at the end of the day, would have come up to be more or less the same. I checked!

As far as add-ons go, instead of being a part of the pricing table/comparison, they could have been in an altogether different segment, or even in the user’s dashboard. There is very little value to actually making the pricing table long and complicated by including these within the table itself. This gets underscored further by the fact that unless a user has selected a plan, he can not buy any of the add-ons, so what’s the point of even having those here? While I would prefer keeping them in the user’s dashboard, even the next screen (where the user is taken to after they have selected a plan) would have been a much better placement for these add-ons.

Ideally it is preferred to have at least two pricing plans so as to have the users differentiate between the two packages, and at the same time for you to guide the user’s interest towards a particular package. But if you have two plans, make sure that there is at least one substantial difference between them. It should not be “more of the same”. If that’s the case, then I would prefer you keep just one metered plan.

#2. Keep it simple to understand, simple to retain

While I can understand the urge to explain to consumers the benefits associated with different products, you need to make them optimized for maximum takeaway - both in terms of communicating the value, as well as retention of key bullet points. Look at the pricing page of Citru here.

pricing strategy 5

While there is just too much text here, that’s not the first thing I take issue with. My problem is having two plans side by side and yet there is no discernible comparison going on. Essentially, as a consumer, I need to evaluate each plan on its own merits instead of making a comparative decision between the two to evaluate which suits my needs better.

On similar lines, if there are items in your plan inclusions common to both, I would advise you to either get rid of them completely (and mention separately that all plans include x, y and z), or do it in a way we saw earlier for firebase.

pricing strategy 4

This way, you are not just letting consumers know these items are present in both plans, you are eliminating any need for them to compare the different plans on these parameters. Remember the ahref’s example earlier where there were paid add-ons in each plan, but at the same rate? Wouldn’t it make more sense to have a similar structure where it is now easily communicated to the customer that irrespective of the plan, additional units can be procured at $x? It is all about eliminating the need to make comparisons and simplifying the consumers’ decision making process.

#3. Put thought into naming your packages. They are not just for show.

You will often come across pricing tiers named Silver, Gold, Platinum, or, Lite, Standard, Premium.

That’s just a waste of space. Sure, silver, gold, platinum gives the sense that the plans are getting progressively better, but your customers can already see that by the difference in monthly cost for different plans. So what’s the point of having this redundancy?

A much better approach would be to have a naming system that enables and aides your customers’ decision making process. For example, you would have seen naming conventions like Starter, Content Creator, Content Editor etc. Makes more sense, doesn’t it? For best results, you can use a combination of two elements - a name, and a short descriptive text. Something like, “best suited for freelance content creators”.

#4. As a rule of thumb, don’t have “unlimited” in your plans

As an early stage startup, charging a customer $349 per month or $999 per month seems like a lot of money. So, it is a natural impulse to say everything is unlimited if a customer ops for your most expensive plan. That’s a great way to get shortchanged.

You have put a lot of time, energy and thought into making a product that adds a ton of value to your customers. And those customers can come from anywhere - one person team or huge enterprises. And if an enterprise is using your product, and you are charging them $349/mo or $999/mo - depending on what your most expensive plan is - you are essentially leaving lot more money on the table and collecting just a tiny fraction of what they would have been willing to pay.

#5. It is always better to charge more, from the get go

Charging down is always easier than charging up.

You can always play around with promotional prices, discounts and n number of customer acquisition offers, but as far as the anchor prices on your main website goes, when in doubt, always lean towards the higher end of the spectrum.

There is a lot to your SaaS product than just the product your customers would be using. While most of the work you would be doing (for example creating content) would be one time, there is a huge component in form of providing support, onboarding and sometimes even quite some handholding. Those tend to take a toll on your bandwidth and resource availability, and yet they are often ignored by founders when they are looking at factors that affect their pricing decisions.

An ideal pricing strategy is to offer an economical version of the product for your customers to sink their teeth in. This way they can take the product out for a spin without an expensive commitment. And as they get sold on the value that the product is adding to their lives, they make the decision to upgrade to a higher plan.

#6. Your entry plan (most affordable one) should never be your focus when planning for revenue

This is an extension of #5.

Most entrepreneurs look at all of their plans as revenue pipelines and streams. That is the wrong way of looking at it.

Yes, most of your customers would at least start with the most affordable plan you offer, as a result of which you should expect it to bring around a fair bit of revenue. But, as we discussed around the end of #5, the primary reason your most affordable plan exists is to have your customers dig into your product and start experiencing the value for themselves.

There are a couple of ways to do it, the most popular of which is the freemium model wherein you make one tier completely free to use. There is a downside to it though. A substantial percentage of your free tier consumers would not be looking to upgrade. So, any user behavior analysis you do on this segment would give you mixed insights since it would be data generated by customers who might be willing to pay (at some time), and customers who aren’t willing to pay for the product. Take Hubspot’s CRM, for example. The product is free to use, and there are paid upgrades to it. But, there are many users out there who choose Hubspot for the sole reason of it being free. So, if you are following a freemium model, you should be expecting not more than single digit (or low double digit) conversion from free to paid.

I lean more towards an economical plan - one where you aren’t asking the customer to shell out a lot, but you are asking him to pay for the product. While the revenue per customer would not be high, it helps you shortlist customers who show a willingness to pay - which means they consider their pain-point worthy of spending a few bucks on, to get solved, and they are in favor of your product being that solution.

Once you have identified these customers willing to pay for the solution, it becomes a matter of proving to them the immense value your product can offer so that they choose to upgrade for a higher tier.

There would definitely be a mental block in a segment of this audience on how much they are willing to spend on a solution. Which means, you would not have a 100% conversion from this entry plan to an upgrade. But the percentage conversion from tier 1 to tier 2/3/higher would definitely be much better than that of free to paid.

Once again, lets fall back to Firebase and their pricing strategy. To get started with Firebase is absolutely Free, which means for most websites, you can end up using its functionalities - hosting, database, authentication, storage - at absolutely no cost. But, if you want to use their Cloud Functions (i.e. serverless functions), you would need to upgrade to the paid plan. What’s interesting here is the fact that even though you upgrade, most of the times your monthly bill would be just a few cents. What’s important though is the fact that you are willing to put your credit card on file to avail this functionality. Essentially, you are ready to pay. Free users and free use-cases weeded out!

Wrappin’ up

That’s it.

With a few simple decisions, you can come up with a better pricing strategy for your SaaS product - one where you are maximising revenue potential for your business, without compromising on your growth in terms of users acquired each month.

What methodology or framework do you follow when you are pricing your SaaS product? Do you need help with optimising your pricing structure? You know where to find me at, I’ll be happy to help.

That’s it for today, see you tomorrow.

Cheers

Abhishek

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