How to Choose a Pricing Strategy for Your SaaS Business
It's not one-size-fits-all.
How do you figure out the best pricing model for your business? Should you offer a free plan or a free trial? Charge a flat rate or per user? In this post, we’ll give you a few tips and options to choose the right pricing strategy for your SaaS (Software as a Service) business.
Pricing a service or a product is one of the most tricky aspects of a business that you need to get just right. Especially with SaaS businesses, you have to figure out the best price for your services to avoid being a cheap scam or an expensive rip-off. Different types of SaaS businesses use several types of pricing strategies and this makes it even more difficult for new businesses to figure out the right plan without giving the competitors the upper hand.
If you’re starting a new SaaS business, the best approach to take is to explore the different pricing strategies used by others so that you can position your pricing model to better appeal to your target audience. Here’s how to get started.
Generate leads with free trials.
Free plans are great. But, in the business’ perspective, it’s a disaster waiting to happen, especially when you’re starting out small.
For example, Dropbox is a profitable SaaS business with more than 500 million registered users. But only 11 million users are paying for the service. That’s about a 2 percent conversion rate from free to paid. Giant startups like Dropbox can afford the resources to support 500 million free users so that they can profit from just 11 million paid users. But you can’t.
Free trials, however, are a more effective strategy you can follow to generate qualified leads. This makes it easier for you to convert leads into paying customers at a better conversion rate.
Free trial to paid conversion rates goes as high as 50 percent, which is a much better strategy small businesses and SaaS startups should use instead of free plans.
Offer discounts with strategic payment plans.
Once you hook your visitors with a free trial, the next challenge is to find a way to convince those users to buy a paid plan at the end of the free trial period. Many SaaS businesses do this well by offering incredible discounts for annual plans. Instapage offers a 12 percent discount on its monthly plan rate when billed annually.
At the end of a 14-day or a 30-day free trial, users will already be familiar with your service, and they would want to continue using the service. Offering an attractive deal at a discounted rate will help convince them to switch to a paid plan.
Pricing strategies used by SaaS businesses.
Take a closer look at how other SaaS businesses in your industry price their services. Maybe you can take lessons to combine and create a pricing strategy of your own.
1. Clear and transparent pricing.
Being completely transparent about your pricing and expenses can be a great way to stand out from the crowd. Buffer is a business that does this well by openly documenting its entire pricing model by sharing monthly revenue reports. It even has a real-time revenue dashboard that shows how the business generates money and spendings.
This is a great way to build empathy and trust for your brand and business. However, it may not be the best strategy for all SaaS businesses.
2. Per user pricing.
Charging per user is another pricing strategy you can use, especially if you’re a SaaS that promotes team-based services. Slack uses this strategy by charging per active user per month, which is a great deal for both the company and the customer.
3. Feature-based pricing models.
Offering different pricing plans with access to more advanced features is the most popular strategy used by many SaaS businesses. Some, like Adobe, do this better than others by using a psychological trick where it highlights a recommended plan to drive more people to buy the most profitable option.
4. Usage-based pricing.
Usage-based pricing, or pay as you go pricing, is a strategy that’s being used by many SaaS businesses, especially in the email marketing industry. Companies like MailChimp offer convenient pricing based on the number of subscribers you have on your email list instead of charging a flat rate.
Which strategy is best for you?
There’s no “best” pricing strategy for your business. Choose a strategy that fits your business plan depending on the type of service or product that you offer.
There are many SaaS businesses that occasionally upgrade and change their pricing strategies. And that’s OK too. Because, as a business, you need to evolve with technology and economy to sustain growth.
A good strategy to follow would be to perform market research and ask for feedback from your customers and followers using a survey or a poll. This will give you better insights into your audience and figure out how they think about investing in your product.