Pricing a SaaS product
Pricing a SaaS product appropriately has become very crucial owing to its increasing demand and receptivity.
Gone are the days when using and installing any software required external assistance and resources. The evolution of technology has brought forth a more user-friendly interface of the system and Software as a Service, or SaaS, is one such brainchild of this breakthrough.
SaaS is a flexible model created by developers and delivered on a platform to the customers who utilize it on a subscription basis.
Hence, it is essentially a tool for easy accessibility of certain resources which are neither readily available nor feasible for the general public. Users merely have to log in with their respective accounts and enjoy the service.
It has a wide ambit which includes several categories of software such as educational, entertainment, and social. Given the large number of users they cater to, it becomes crucial for SaaS businessmen to differentiate their offering in terms of product, promotion, and very importantly, the pricing of the SaaS product.
While quite some emphasis is placed on the former, and rightfully so, the latter is equally important as the pricing strategy can ultimately define the success or failure of the product.
Here are a few key factors which you might want to consider before pricing your SaaS:
The price corresponding to the product value
You wouldn’t want to sell your product below its merit and the customer wouldn’t want to buy the same beyond the value they receive and, very importantly, beyond their budget. Hence, a reasonable price would be one that would lie on this spectrum.
Any business/service provider invests his intellectual resources, manpower, and capital on their venture, and therefore, the pricing of the SaaS product must correspond to the service provided.
While the service provider is aware of the value of the services he provides, the price should also speak for its value. Value outweighing the utility would not let the product survive in the market as nobody would want to pay even a dime more than what they are conferred with.
Analyze the market
Finding the target customer group and assessing their requirements from a SaaS and their behavior towards an existing model will help streamline the process by centering it around the relevant group.
Reaching the right audience and evaluating their position will produce a tailored pricing strategy for SaaS which is more likely to produce better results.
Moreover, analyzing the competitor’s strategy can give a fair idea of the market trend. It could help create a blueprint for your arrangement and you should align your approach accordingly. Lowering the price below the competitors’ can attract customers; however, try not to make cheap prices the identity of your product. Exercise a certain level of discretion and make your product unique in some manner which can give it an edge for price variation.
See what makes your product different and price it accordingly. That being said, a great deal of inspiration can be derived from market analysis.
Choose the suitable approach
There are several approaches available to adopt when it comes to pricing your SaaS. The most common pricing model which is quite prevalent in the market is the Freemium Model. It provides the customers with a free trial period of the software and charges them subsequently if they wish to continue using the service.
This makes the customers well acquainted with the product and gives them enough opportunity to consider purchasing it. It also provides the business a great opportunity to pitch their product to people.
Furthermore, if your SaaS is a new entry to the market, the Price Penetration Model could be useful. It allows you to lower your price to make an impressive entry and gradually increase it after covering a significant amount of market share.
The simplest pricing strategy for SaaS, or the Flat Rate Pricing Model, which is essentially a free-size approach can also be employed where the same price is charged from all the customers, irrespective of the service they utilize or the amount of usage.
There exist a wide range of strategies which can be adopted apropos your business. Hence, do your research and see what fits well with the structure of your SaaS.
Lastly, a particular strategy doesn’t provide a straitjacket formula. Certain levels of flexibility should be exercised since being rigid would hamper the growth of your business owing to the dynamic nature of the market.
Market trends are prone to changes and, therefore, planning and implementing the pricing strategies should be a continuous process and not a one-time obligation.
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Frequently asked questions
1. How to price your SaaS product?
- There are essentially three broad steps in setting a pricing strategy for the SaaS product. This includes compartmentalizing the customers, knowing the value served to the group of customers, thereby setting prices for each group.
2. How is SaaS price tested?
- A lot goes into the testing of a SaaS product. For example, zeroing in on a target market, analysing the market position, evaluating the metrics, determining the value for the customers, etc.
3. What are the costs associated with SaaS?
- Primarily, there are two types of costs associated with Saas, viz. Development costs and customer costs. Both of these are incurred by the business and hence are reflected in the prices charged to the customers.
4. What is a good profit margin for SaaS?
- When a SaaS company makes its mark in the relevant market, then its gross profit margin usually revolves around the 75%-80% range. This depends upon the value of service and the professional expertise employed in delivering the service.
5. How do you price a B2B SaaS product?
- In order to arrive at a reasonable figure, first determine what the development and maintenance costs are, and then add the percentage of reasonable profit to be charged by you.