If you get to the end of this blog, you will get some understanding of 3 common pricing strategies for SaaS.
In general, pricing is how much you charge the customers for your product(s).SaaS pricing embodies how much you charge a customer on a regular basis based on the continued usage of your product(s).
3 common SaaS Pricing Strategies
There are various ways of pricing the SaaS products, and each has its own advantages and disadvantages. Let’s look at 3 common SaaS pricing strategies
- Cost-Plus / Cost-Based Pricing
- Competitor-Based Pricing
- Value-Based Pricing
Cost-Plus / Cost-Based Pricing
This is the instinctive pricing model for any SaaS company that is going to market and certainly a good starting point. It involves selling the product for a cost which is derived by adding certain margin to the design & development cost of product, cost of the teams and any other significant cost involved in the product development. Advantage of this pricing strategy is, simple and straight forward to deduce the pricing. Yet, it is not the most flexible of the pricing strategies in practice. For example, what if the SaaS provider would like to expand their Sales team? The cost may change quickly and the prices cannot be modified all the time to absorb the fluctuations in the company.
It involves setting the price of the product based on the competitor’s prices. It is more like getting inspired by the benchmarks set by your competitors due to the uncertainity in deciding the initial value of the product or not wanting to go too low or too high. Advantange is again the simplicity but the downside of this approach is you are not making the decision of the pricing strategy instead influenced by the competitors. It should not be seen as an embarassing act to be influenced by competitors unless you are offering more value and a better offering, otherwise you shouldn’t be building it. This strategy can be used to know where your competitors are pricing the product so that you are around the same ballpark, but they should not be guiding your decisions.
It involves selling the product based on how much value they provide to the target audience/customers or how much they think it is worth. Compared to above discussed pricing strategies, this strategy is not as straight forward and simple as they are. It needs dedicated effort to understand the target audience and your product to execute this strategy effectively. Advantage of this strategy is, you can charge more than your competitors if your customers perceive the value of your product more and you can raise the prices based on the new features added to your product and the value that is added by virtue of it.
Hope this article gave some high level understanding of the SaaS pricing strategies and was helpful!