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You’re a startup that’s just finished developing a functionally successful, innovative new SaaS product. But that’s only half of the process. To succeed in the SaaS industry, you need to differentiate yourself from your competitors. 

At the same time, you need to position your product in a way that allows it to simultaneously meet the needs of any customer and generate the revenue necessary to sustain your business. Figuring out pricing is a good start to achieving those goals, and there are strategies you can implement to help streamline the process of choosing the right pricing model. 

In this article, we’ll explore seven pricing strategies every SaaS startup should consider when their product goes to market, outline their strengths and weaknesses, and discuss the key factors to consider before choosing a pricing model.

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Why Pricing Matters in SaaS

To succeed in the SaaS industry, your pricing strategy must align with your target audience, your broader business objectives, and the existing market for your SaaS product. Your pricing strategy is the most significant make-or-break factor for your SaaS startups’ overall success. 

If you select the wrong model or an unsustainable price, you may soon encounter significant issues with your user base, profits, and operational costs. Let’s talk about some of the larger reasons that pricing matters in SaaS:

1. Pricing as a growth lever: When you key into the correct pricing, you’ll be able to grow rapidly, as you will not only have the revenue to support growth, but you’ll also have a loyal customer base that is willing to pay the price
2. Impact of pricing on customer acquisition cost and lifetime value: Depending on your pricing option, it will determine whether you’ll have a lower or higher customer acquisition cost. If you have a subscription model that’s too expensive and requires expensive retention efforts, then your customer acquisition costs will increase, and their lifetime value will decrease. The best pricing options need to balance all these concerns and ensure that the customer lifetime value is at least three times the customer acquisition cost.
3. Common pitfalls SaaS startups face: Some of the largest issues that lead to a startup's failure are related to pricing. 

• Underpricing and leaving revenue on the table
• Overly complex pricing tier options
• Free users who aren’t compelled to convert
• Retention of customers 

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Key Factors to Consider Before Choosing a Pricing Strategy

Let’s talk about some of the crucial factors that you need to think about as a business before choosing a pricing model. 

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Target Market & Customer Segments

Before selecting a pricing strategy, consider the characteristics of your target market and what they expect from your product. Are they coming to you for the best value, or because they’re willing to pay extra for exclusive, premium features? 

This question goes hand-in-hand with customer segmentation, which divides potential customers into categories based on shared qualities, allowing for analysis of data collected about your customers. These potential categories can include:

• Demographic: Age, gender, income, education, marital status
• Geographic: Country, state, city, town
• Psychological: Personality, attitude, values, and interests
• Behavioral: Shared decision-making processes, brand preferences, and purchasing/usage patterns.

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Value Proposition & Perceived ROI

Value proposition and perceived ROI are two crucial marketing metrics that can determine the right pricing model for your product, based on how it differs from competitors and how it is expected to perform. 

Your value proposition needs to clearly define that difference and entice customers to choose you. Perceived ROI refers to the subjective value that a customer, user, or stakeholder believes they are receiving from your product. This is more about emotion and logic than data. It can be quantified into:

• Perceived benefits
• Perceived costs: the effort/time/money a user is paying versus the moments of friction

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Cost Structure & Margins

Cost structure and profit margins are two factors that directly affect each other. Your cost structure represents the organizational strategy that encompasses all the expenses associated with running a business. At the same time, your profit margins are the quantifiable percentage of revenue from a product after subtracting all overhead costs. A standard cost structure usually identifies and categorizes all of the expenses based on three general ideas:

• Fixed Costs: Consistent expenses that are required regardless of the business’s performance (things like rent/mortgage, salaries, insurance, software licenses, etc.)
• Variable Costs: Expenses that change based on business performance (things like raw materials, shipping fees, sales commissions, and credit card processing)
• Mixed Costs: Things with fixed base costs that can fluctuate based on usage (things like equipment maintenance, overtime labor, and cell phone plans) 

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Customer Acquisition Strategy

Customer acquisition strategy refers to the approach or approaches that your SaaS startup will take to gain new customers. Your chosen approach will determine which parts of your business you want to feed the most resources into and how you will organize your startup. These strategies can include things like:

• Content marketing
• Free trials
• Socials
• SEO
• Paid ads/non-paid ads

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Competitive Landscape

Another factor that will influence your pricing decision is the market saturation for your product. Are there alternative SaaS products that achieve the same goal? Or are you entering a space with minimal competition? Depending on the answer, that can influence how you should attract your potential customers.

Additionally, there’s a chance that you’re entering a space that already has a universal pricing model that you should adopt to keep pace with your competitors. This is a prevalent tactic for startups.

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Scalability & Flexibility

Scalability refers to the ease afforded by your pricing model in growing the number of users, purchases, or necessary data without compromising on performance and quality. Flexibility, on the other hand, refers to the ability of your business to adapt to market changes, feedback, and new technological developments in your industry. 

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7 Effective Pricing Strategies for SaaS

Now we’re ready to get into the seven effective pricing strategies for your SaaS startup, when to use them, and outline their individual strengths and weaknesses. 

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Strategy 1: Freemium Model

The Freemium model is a pricing strategy that offers users access to a basic software product for free. Still, they are charged for additional features or services that expand the software's functionality. With free access, users will easily be able to try the product, and then ideally be enticed into paying for the premium version.

When to Best Use It: 

• Best for software that can deliver ongoing value
• Large target market

Strengths:

• No barrier to entry, customers can easily try your product
• Greater possibility of word-of-mouth growth, brand awareness
• Ability to collect customer data
• Large user base

Weaknesses:

• Free users don’t generate any revenue
• Expensive to maintain
• Easier to churn on a free package
• Customers may become too accustomed to using your product for free

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Strategy 2: Subscription Pricing

Subscription pricing is a strategy where customers pay on a recurring basis for continued access to your product. It’s the norm in the SaaS industry as it guarantees predictable recurring revenue. 

When to Best Use It: 

• When you have a product whose usage doesn’t fluctuate
• When your product has a clear, definable value to your target market

Strengths:

• Predictable, recurring revenue
• Lower barrier to entry
• Easily scalable
• Opportunities to upsell

Weaknesses:

• Subscribers may cut services if they don’t see value or feel overwhelmed
• Large upfront investment
• Subscribers can be more expensive than the revenue they bring in
• Requires billing and support infrastructure
• Easier to lose customers and harder to keep them

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Strategy 3: Pay-Per-Use (Usage-Based) Pricing

Pay-per-use pricing is a strategy where customers only pay for your product when they actually use it, as opposed to paying a fixed price or subscription fee. If you choose this pricing strategy, you will need to define what 'usage' means, which can be challenging depending on your product.

When to Best Use It:

• Best for infrastructure or platform-related SaaS startups, where you’re based on the number of transactions processed or the amount of data used.
• The target market and customer base comprise many users who can incur higher costs for you.

Strengths:

• Reduced barrier to entry
• Price scales alongside usage
• Compensated for users who frequently use the product

Weaknesses:

• More unpredictable revenue
• Devalues the product
• More unpredictable customer costs

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Strategy 4: Tiered Pricing

Tiered pricing is a strategy where different series of features are available for a product at separate pricing levels. These features can include standard SaaS product variables, such as the amount of storage space offered, usage-based limitations, or other criteria. This pricing scheme also allows for a variety of packages with different feature combinations.

When to Best Use It: 

• Your product features can be clearly classified into different groups
• Your target market is made up of different customer segments

Strengths: 

• Lower price point attracts more customers who may then upgrade to higher tiers
• Target different customer segments with diverse budgets and requirements
• Better user experience when the user has more control over what they’re paying for 

Weaknesses: 

• Billing can be complicated
• If your model is overly complex, you can confuse users
• Not always possible to maintain profit margins across each pricing tier

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Strategy 5: Per-User (Seat-Based) Pricing

Seat-based pricing is a strategy that sets prices based on the number of individual active or passive users, or “seats,” that have access to your product. As additional users are added to the account, your revenue will increase.

When to Best Use It:

• Your product appeals to a variety of users who have different needs and budgets
• Your product can be packaged to meet the needs of small, medium, and enterprise companies

Strengths: 

• Easy to understand for customers
• Predictable revenue
• Easy to customize
• Revenue scales alongside adoption

Weaknesses:

• By charging per user, you make it easier to avoid adding new users 
• More likely to churn
• Doesn’t reflect the real value

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Strategy 6: Value-Based Pricing

Value-priced pricing is a strategy that determines prices based on the customer’s perceived value of your product rather than the cost of production. It does not take into account the market price, competitor pricing, or the cost of raw materials.

When to Best Use It:

• A SaaS product that offers new experiences or functions, or a solution that provides better value and results than your competition. A space with less competition.

Strengths: 

• Can build a loyal, long-term customer base 
• More control over pricing
• Differentiation from competitors
• Highest potential for making more revenue

Weaknesses:

• If you overprice your SaaS product, you’ll be unable to acquire new customers.
• If you underprice your SaaS product, you’ll lose potential money
• Difficult in a competitive market
• Customers’ expectations change, leading to changes in pricing

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Strategy 7: Hybrid Pricing Models

Hybrid pricing models are a strategy that blends two or more pricing models. This enables businesses to optimize their pricing scheme while also providing customers with a system that best meets their needs.

When to Best Use It:

• The value of your product can’t be contained within a single pricing model
• When your pricing takes into consideration multiple products, services, features, and functionalities

Strengths: 

• More personalized pricing for customers
• Eliminates restrictions of some individual pricing models
• Easier to align value with pricing

Weaknesses:

• Very easy to overcomplicate for the customer

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Explore how Supertab can help your pricing model 

When it comes to pricing, it can be challenging to know if you made the right choice until you see how users react to your product and define its value - but you don’t need to feel limited by traditional pricing strategies. 

Consider the unique aspects of your SaaS product and think about how you can best serve your audience. Is it better to set up a subscription service for a regular income or use a freemium model to get users in the door?

You should combine your innovative new SaaS product with a similarly forward-thinking monetization solution, such as Supertab. With Supertab, you can streamline your pricing into an aggregated microtransaction system where your users don’t need to pay until they’ve reached a threshold, decreasing the chance of churn or friction with your payment method. 

Supertab is built to capture revenue from part of your audience who are skeptical about subscriptions or paying extra for premium features. Featuring a user-centric design and flexible integrations, Supertab can help you earn new revenue and keep your customers satisfied.