The SaaS Pricing Strategy Guide

In this article you will learn how to turn your pricing into a competitive advantage.

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What is a Pricing Strategy? 

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A pricing strategy is a method or approach businesses use to set the prices of their products or services. It involves determining the optimal price point to maximize profits, attract and retain customers, and achieve business goals. Different pricing strategies consider various factors such as production costs, competitor pricing, market demand, and perceived value.

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Why is Pricing Strategy Important?

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The right pricing strategy can improve every aspect of your business. The wrong strategy can run you into the ground. Here are 6 reasons you shouldn’t “shrug off” pricing but rather invest in your strategy as a key area of the business. 

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1. Revenue Generation: Simply put, the primary purpose of pricing is to generate revenue. An effective pricing strategy ensures that the business covers its costs and earns a profit. 

2. Customer Perception and Value: Your pricing influences how customers perceive the value of a product or service. When we think of $1 hamburgers, we think of McDonalds. When we think of $10 hamburgers, we think of Five Guys. It works the same way in SaaS.

3. Competitive Advantage: A strategic pricing approach can provide a competitive edge. By differentiating your pricing model, you can attract a broader audience or target specific market segments effectively.

4. Profit Maximization: The best pricing strategies optimize profits. It takes into account factors like production costs, market demand, and competitive pricing, allowing the business to set prices that maximize margins.

5. Market Penetration and Expansion: For new market entries or expansion, pricing strategies like penetration pricing (low initial prices) can help gain market share quickly. As the product gains traction, prices can be adjusted to reflect its established value.

6. Customer Retention and Loyalty: Just like pricing can earn you new customers, it can also help you retain existing one. Offering value for money, discounts, and loyalty pricing can help retention rates and reduce churn.

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How To Turn Your Pricing Strategy into a Competitive Advantage

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Does your sales team often lose deals on price? 

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Hefty discounts and price dropping don’t have to be the answer. In fact, there are numerous strategies you can employ when it comes to turning your pricing into a competitive advantage. Here are 3 strategies we’ve seen companies introduce that can have a big impact: 

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1. Option Selling:

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The benefits of different pricing options within your offering cannot be overstated.

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• The Business Package vs. The Enterprise Package
• 1-year pricing vs. 2-year pricing
• Annual billing vs. Monthly billing

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Most buyers aren't looking for a cheap price, they're looking for a fair price. They'll typically determine "fair" by comparing your offering to something else. Providing multiple options can help you keep much of that comparison exercise "in house."

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2. Include "free" features/services:

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Offer the same features for "free" that your competitor is charging for (it's fine if you have to bump up your price elsewhere). It doesn't do your competitor any favors when the prospect sees they're getting charged for the same thing that you offer for free.

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For example, let’s say you have an offer that looks like: 

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• Feature A - $100
• Feature B - Included (Free)

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Whereas your competitor's offer looks like:

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• Feature A - $75
• Feature B - $25

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In the prospect's mind, your feature A looks superior ("it costs more so it must be better") and they now have an aversion to spending money on competitor's feature B ("why do I have to buy it from them when I can get it for free?"). This strategy works best when feature A & B are reliant on each other (i.e. they're not add-on features that can be bought/sold separately).

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3. Find a way to charge less (and advertise it):

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This one sounds obvious but so many startups base their own pricing on their big brand competitors. Big brands have expensive sales/marketing budgets which can inflate their pricing. Hence they will always have customers looking for less expensive alternatives. 

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Startups should have an advantage in that they can exclude those costs from their pricing. Run a margin exercise to better understand what price points you can offer. Then, use lower pricing as an easy, obvious advantage! For example, don’t hide pricing on your website - if your website clearly shows that customers could be paying less for a similar solution, you'll get leads and book demos on that strategy alone.

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How to Pick Your Price Points 

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Think your pricing might be too high? Or too low? Here are 3 pricing strategies you can try when pricing your product/services:

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1. Cost-Plus Pricing - A tried and true strategy trusted by millions of companies. It's pretty simple - first sum up all your costs then add X% points of profit margin. Voilà - you have your price.
   
   This pricing strategy works best for commodities and in highly competitive, saturated markets. 

2. Competitor-Based Pricing - Also pretty simple, look at what your competitors are charging and set your prices based on that.
   
   This pricing strategy works best for new, early stage companies who aren't sure what to charge yet.

3. Value-Based Pricing - Value-based pricing tends to be the hardest to compute but also the most effective. It's based on what your customers are willing to pay for the value that your product/services provide.
   
   It tends to be the most effective because it lets you charge more than your competitors if you can prove that you bring more value.
   
   This pricing strategy works best for companies selling a complex solution and for those who can differentiate their product's value from their competitors through sales, marketing, and branding.

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Conclusion

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A well-crafted pricing strategy is crucial because it directly impacts a business's profitability and competitive positioning. By understanding and effectively implementing pricing strategies, businesses can attract the right customers, enhance perceived value, and drive sustainable growth. Ultimately, a strategic approach to pricing ensures that companies can balance profitability with customer satisfaction, creating a win-win scenario for both the business and its clients.