Vishal BhatiaFor any business, pricing is something that should be balanced between the value to the client and getting fair compensation for your work.
Therefore, it’s surprising that, according to statistics, each SaaS web application development startup spends only about 6 hours to develop a pricing strategy. After all, your prices have the greatest impact on your profits.
The correct price behaviour for the SaaS development company includes 3 factors:
1.Choosing the right pricing model
2. Developing the right pricing strategy that will promote growth
3.Taking the psychological methods that will allow you to adjust prices more accurately
Let’s take a closer look at pricing models, their advantages, and disadvantages.
1) Flat Rate Pricing
This model is the easiest to sell SaaS web application development products. You sell one product or a set of features at a single price. For example, your company offers a tariff plan with a single monthly price. Let’s say it’s $300. This tariff provides access to all the product features.
The main advantages of this pricing model are its simplicity and ease. One product with a single price is easier to sell. After all your marketing efforts you are spending on this product. Plus, a single price is always easily perceived by users.
However, there are drawbacks:
• First, it’s very difficult to determine the price that would satisfy different groups of SaaS development customers. Targeting one segment will make it impossible to cooperate with other groups.
• Also, a single price deprives you of flexibility in the relationships with users. The client either takes the product or not — you will find it hard to convince him to buy anything.
2) Usage Based Pricing or Pay As You Go Model
The cost of SaaS development depends on the measure of its use by the client. The more the user consumes your services, the more he will pay you and vice versa.
Most often such a model is used by SaaS companies providing online platforms and infrastructure, such an Amazon Web Services. They charge a fee based on the amount of data used, requests or the number of transactions. Other companies now also use this pricing strategy.
The main drawback of payment is the separation of value from the product. After all, the quality of the work does not always depend on the number of performed actions. Also, when using such a model, it’s difficult to predict the profit margins, because you do not know how many functions a client will use next month. Clients find it more difficult to plan their costs if they use services in varying amounts. Sometimes this can lead to discontent.
3) Tiered Pricing
This model is the most used by SaaS companies. The bottom line is that one company offers several different plans with different sets of services and functions. Most often there are three packages — with a low, medium and high price.
For example, you can offer several packages of services depending on the customers’ needs:
• Basic — for beginners
• Pro — for professionals
• Enterprise — for teams
The main advantage of the model is the versatility of your offer. Different pricing plans attract different groups of potential customers. Accordingly, your income is increased by working with several types of users. Plus, you still have good conditions for upselling. As soon as the user grows from out of one plan, he can immediately acquire the next.
But the downside is that the pricing strategy can confuse a potential client. Having not chosen the optimal plan, he can cancel. In addition, reaching out to a large audience requires a lot of effort, which you may not even be feasible. When determining pricing plans, you can miscalculate, and active users can purchase the most expensive package and constantly use more than the planned amount of services, and you will not be able to collect an additional fee.
4) Per Seat Pricing or Per User Pricing
This model is also common among SaaS web application development companies. One user pays a certain fixed amount on a monthly basis. If another user subscribes, the cost is increased by 2 times, etc. This method is very simple and transparent: the client easily determines the cost of a monthly subscription.
In addition to simplicity, another plus of this model is the growth of profits with an increase in the number of users. If you manage, for example, to triple the number of users in one company, then your profit will grow 3 times. Also, you can easily predict your income and monthly profit.
However, the customer is interested to limit the number of users inside the company so as not to overpay. Also, customers can resort to dark methods and provide one login to several project participants at once. Another major drawback is the turnover of clients due to limited distribution. And this model is not related to the real value of your product. After all, the value for the client cannot be affected by the number of users.
5) Per Active User Pricing
This model can be called a variation of the fourth model. Such a pricing strategy is relevant if your customers are large companies providing SaaS development that pay access to a large number of their employees for a certain period. After all, there is no guarantee that each of these employees will actually use the product. That is why such customers prefer the system of calculating the cost only for active users. Then they will pay only for those workers who actually use the product.
Naturally, such a pricing plan can be beneficial for the client and reduce the risk of unreasonable costs. Plus, it will also be easier for you to convince the client to distribute the service inside the company, because if the product is not needed and they are not used, then you will not have to pay.
But this model is not suitable for small businesses. For small teams such a pricing plan is irrelevant.
6) Payment for functions
If in the fourth and fifth models the price depends on the number of users, in this model the cost varies depending on the number of functions. The more you use the functions, the more you pay. This model can be very convenient for a SaaS development company.
Naturally, this model motivates customers to upgrade. After all, after each upgrade, the user can use the new features. Plus, you will get a cash reward for the most difficult to maintain functions. You should just place these features in a more expensive pricing package.
But such a pricing policy can scare off users. After all, it’s difficult for them to predict in advance what functions they will need. Therefore, it is very important to think over the set of functions in each SaaS development package. Also, users can get a negative impression of your product, because they paid for it, but could not use all the features.
7) Freemium
The company provides the product to use for free with additional paid functions. Also, this approach can be part of the differential pricing model, where paid packages have free options. Later this option can be limited to encourage users to pay for the upgrade.
The main advantage of freemium is that it can attract a lot of potential customers.
But free access can adversely affect profitability. The income from paid users should cover the maintenance expenses and free users. Also, this model has a high rate of turnover of customers. Customers value the products that they pay for. A widespread product with free access can lose its value. Also, if your service solves the main problem of clients for free, then most likely they will not consider it necessary to purchase a paid version.
Choosing a correct and effective pricing strategy is vital for a SaaS development company. If you charge too much, it will make the customers go to your competitors. If you attract users with low prices, do not forget about your income. Have you already chosen your suitable pricing strategy?
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