Funding Resources for Startups
“Finance guilt” is an affliction that impacts many startup and corporate finance professionals. Most don’t even realize they have it….
From David Skok of Matrix Partners David Skok of forEntrepreneurs and Matrix Partners gave a fantastic presentation at SaaStr Annual 2017…
SaaS Pricing Best Practices
Also commonly referred to as “software as a service,” SaaS is a new approach to software delivery in the modern era. Even as recently as ten years ago, software was still purchased largely on a license-based model. If there was one particular program that your employees needed to use to do their jobs, you had to buy a unique license for each one of them. Likewise, you’d have to install a unique copy on every one of their work machines. If updates became available, you’d have to install them individually. If there was a new version, each machine would have to be upgraded one at a time – and so on and so forth.
SaaS, on the other hand, takes that same software and makes it entirely hardware independent by delivering everything that a user would need totally over the Internet. SaaS pricing trends still involve paying on a per user basis, but now those users can access that software from literally any computer on Earth with an active Internet connection. They don’t have to worry about patches, bug fixes and upgrades, because they always have the latest version of the software automatically. Obviously, it’s a far better distribution method for both software developers and enterprises alike – but it does present some challenges in terms of SaaS pricing best practices.
As stated, most B2B SaaS pricing models occur on a per user basis or are handled in terms of blocks of users. A company might pay X for up to 10 users, Y for up to 50 users, and Z for up to 100 users. Likewise, most SaaS enterprise pricing strategy models occur on a subscription basis – meaning that rather than buying something outright, clients pay per month for the software and for ongoing support and updates moving forward.
Of course, how to price your SaaS product in a way that attracts the maximum number of customers is obviously somewhat easier said than done. It’s not impossible to hit that magic number, however you need to keep a few key things in mind.
SaaS Pricing Model Template
As stated, the SaaS cost structure typically relies on not only a subscription model, but on a tiered model as well. The more users a client has, along with the level of service they expect, will naturally increase the amount of money they’ll be expected to pay per month.
This is why, when you go looking for an SaaS pricing model template, you need to find one that closely aligns with the type of SaaS product you’re offering. It doesn’t make sense to use software maintenance pricing models if you’re not planning on offering any type of ongoing support regardless of which tier your users invest in.
When building SaaS pricing models for your own company, there are a number of important things you’ll need to consider. For enterprise software pricing models in particular, you’ll want to think about things like:
- Does a cost-plus pricing model make sense for you? This is when you add up all of your costs, add in a few percentage points to make up whatever profit margin you’re comfortable with, and set your prices from there.
- Would a competitor-based pricing model be more appropriate? This is when you take a look at your closest competitors and see what they’re charging for similar solutions, and then either undercut them or charge similarly to the same audience.
- Is a value-based pricing model for services the most appropriate? This is when you offer packages and price points that very specifically meet the needs of their customers, getting them to pay only exactly what they’re comfortable with for your SaaS product and nothing more.
Keep in mind that no two SaaS organizations are created in quite the same way, which means that there is no “one size fits all” answer to selecting the right pricing model. Nobody knows your product better than you do – and nobody knows your customers better than you do, either. Don’t be afraid to just reach out to some of your top customers and ask what they’re willing to pay. You could also periodically adjust your SaaS pricing strategy until you finally hit that thin line.
Regardless of which strategy you land on, it can be helpful to include some type of SaaS pricing calculator on your website for your future clients to use. A software pricing calculator is an invaluable resource because sometimes, saying “you’ll pay $X per user per month” doesn’t really paint a complete picture in someone’s mind. They see “$10 per user per month” and then once discussions get serious and they realize their monthly bill is $1000 because they have 100 users, they start to get cold feet and they think you might be hiding something.
Instead, include an SaaS calculator for people to use so that they can clearly understand your SaaS pricing strategy and how it will impact them moving forward.
SaaS Pricing Examples
As you consider to examine your own SaaS pricing considerations, it may be helpful to let SaaS pricing examples guide some of the decisions you’re making. There are a lot of companies with unique pricing strategies out there and by understanding what choices other people are making and why, you can begin to get a better understanding of which ones will or will not work for your own unique situation.
Salesforce, for just one example, took the approach of creating SaaS pricing pages for each different persona they were targeting. The entry level “Group” tier, for example, gives you basic sales and marketing services for up to five users for $25 per user per month. Features include account and contact management, opportunity tracking, lead scoring, routing and assignment services and more.
The “Professional” tier, on the other hand, offers complete CRM for any size team for $65 per user per month. In addition to all of the features in the “Group” tier, you also get customizable dashboards, collaborative forecasting, mass email capabilities and more.
This continues all the way up to the “Unlimited” tier, which gives unlimited CRM power and support for $250 per user per month. In addition to everything in all of the other tiers users get unlimited customizations, custom apps, multiple sandboxes, you name it.
In other words, Salesforce separated their target audience into five different segments and then created a unique pricing structure to best fit each one. But not only that, there is also a great sense of escalation that allows people to move up from one tier to the next as their business continues to grow – thus making sure that Salesforce always has something to offer them, regardless of how big they get. It’s a really interesting example in how to not only base your prices on what your customers are willing to pay today, but to also take advantage of what they’ll likely be willing to pay in the future.
It’s equally important to note that all of those tiers have free trial versions that people can take advantage of to try out the SaaS service without paying anything at all.
How to Price Software
At this point, the discussion must turn to the age old battle of “software subscription model vs license style structures.” The software subscription model is everything that we’ve been talking about – users pay per user per month for access to the software plus a degree of services like maintenance and support on top of that, while the license model requires them to pay once for probably just access to the software.
The license model certainly has its benefits — chief among them that you’re getting a larger cash injection up front. How to price software licensing essentially boils down to “charge today what the software will be worth to someone over the lifetime of their experience with it.” Meaning, you charge as much as you can based on the perceived value that you’ll be delivering to someone over the year (or five) that they’ll be using the program.
Moving from perpetual to subscription modeling may mean getting less money from clients up front, but it will likely mean more revenue in the long run. Moving to subscription model pricing probably means offering yearly renewals, meaning that you get to keep customers locked in for at least one year increments. Plus, if you continue to hold up your end of the bargain and deliver the value that you’ve promised, they’ll likely keep renewing again and again. Because they don’t have to handle anything like upgrades or patches on the front end (because you’re doing it all on the back end), they’ll likely see less of a need to look for alternatives as well – thus building trust and increasing loyalty at the same time.
SaaS Pricing Research
According to the Price Intelligently SaaS pricing eBook appropriately titled “The Anatomy of SaaS Pricing Strategy,” people in SaaS are literally writing and thinking about customer acquisition seven times as often as they are about monetization. They’re spending so much time figuring out how they’re going to get people to subscribe to their SaaS product ONCE that they’re losing site of how they’re going to keep them coming back for more, month after month, year after year.
SaaS pricing research indicates that one of the biggest mistakes that a lot of companies make to that end involves discounting at the wrong time. A lot of SaaS companies use discounts to increase acquisition, assuming that they can raise prices later. But by discounting, you immediately hurt the value of that product as people think it is worth less than it is. At that point, when you do raise prices, they no longer feel like they’re getting their money’s worth.
In the end, it’s important to understand that B2B SaaS pricing in particular is probably not something you’ll “do once and forget about.” Software pricing models are great because they can and should evolve as your understanding of your customers does the same. Likewise, your product is probably going to change over time, too – and if you’re providing more value and you can communicate that fact, there’s no reason that you shouldn’t be able to adjust your prices to reflect it.