Blog 88: How to arrive at the price of SaaS products?

The right pricing can generate interest, drive sales, and attract new customers. Hence, it can also be used as a marketing strategy.

A. How to arrive at a price?

Cost-plus pricing is a commonly used pricing strategy. However, not when it comes to SaaS products. In cost-plus pricing we bring together all the contributing costs and add a fixed percentage over and above it. However, when it comes to SaaS products, companies prefer to price products according to their value (i.e. value-based pricing), not their cost. In addition, prospective customers feel the need to experience the product before making the purchase.

Value-based pricing: In this strategy, we base our product’s price on what the customer believes it’s worth. Five steps to execute this pricing strategy i) find the price of comparable products ii) identify how our product is different from them iii) place a financial value on these differences iv) make sure the value to the customer is higher than costs v) justify the price to customers, which might include reaching out to them.

Other pricing strategies include:

Price skimming: Companies use price skimming when they are introducing innovative new products that have no competition. They charge a high price at first, then lower it over time. The high price helps the business recover some of its development costs. As market saturates, companies lower the price.

Penetration pricing: This strategy is the opposite of price skimming. In this case the market is saturated with similar products. Therefore, companies set a low price to enter. And raise it later. Initial low price makes the product stand out.

Competitive analysis: A detailed competitive analysis will help us understand how our competitors are pricing similar digital products. We need to price our product based on the value we offer compared to our competitors. We can then choose a pricing that is below or above the competition (closely linked to value-based pricing).

Test price points and iterate: In this strategy, we test different price points and adopt new creative methods to showcase features. In addition, new calls to action (CTA) and a bonus offer will increase the chances of conversion.

Note: For all the above strategies we can incorporate an element of psychology wherever applicable. Psychological pricing refers to a method of pricing items to make them appear like a bargain. Consider pricing them at $29, $59, and $89 instead of $30, $60, and $90.

B. Pricing models:

Refer to blog 87 to look at the different recurring revenue streams (i.e., subscription, usage, seat-sharing). With each of the three streams we can adopt the following pricing models:

Tier pricing: Offer tier-based pricing based on varying levels of service, features etc. Demonstrate the differences between tiers by using a comparison chart.

Trial period: Most companies offer a 7-day, 21-day, or 30-day free trial. Automate the process to contact customers whose free trials are expiring to remind them to renew. Also consider adding a special offer to those who do renew before the trial ends. (refer to blog 89 for more on this topic).

Freemium: A method of offering a basic version of a product for free and charging for additional premium features. By offering a free version, customers can experience the product. If a product is new to the market, this is a great way to make inroads (refer to blog 89 for more on this topic).

Offer a bonus: Several digital products offer a bonus such as eBooks, worksheets etc. with the original purchase. This can be coupled with a growth hack strategy (Blog 45: Growth marketing and growth hacking two sides of the same coin?). Bundling strategy (selling multiple products at a package price) is another model deployed by companies.

Money-back guarantee: Guarantees reduce the risks for prospective customers. If the product adds value, we will see very few returns.

As we create a pricing strategy, it is key to keep the needs of customers in mind. This will help us develop a pricing model that keeps customers attracted.

Jump to blog 100 to refer to the overall product management mind map.

Source:

https://www.entrepreneur.com/money-finance/8-pricing-strategies-for-your-digital-product/283878

https://www.bdc.ca/en/articles-tools/marketing-sales-export/marketing/pricing-5-common-strategies

https://zapier.com/blog/pricing-strategy/

I wish you the best for your journey. 😊