Pricing SaaS products presents unique challenges—and opportunities—for product and marketing teams.
For many new products, price is a decision made shortly before launch. But pricing a software-as-a-service (SaaS) product presents unique challenges—and opportunities—for product and marketing teams. With SaaS products, pricing is such an essential part of the product, marketing and business model that you need to nail it early in the product development cycle.
Unlike traditional software, customers licensing SaaS products pay for your product on a recurring basis. This gives you more options for pricing models. And because the product is centrally hosted, you have additional flexibility for offering your product in unique packages.
Finding the right price is more art than science. However, if you get the pricing right for your SaaS product, you can delight customers, provide competitive differentiation and launch a more profitable product.
In the past few years I’ve had a hand in setting pricing for several successful SaaS products, including Citrix GoToMeeting, GoToMyPC, AppFolio and ProductPlan. Here are several key areas to consider when pricing a new SaaS product.
Customer value is one of the most important elements for pricing SaaS products. It’s important for pricing all software products, but even more so with SaaS products.
It’s essential to have a deep understanding of the value your product provides for your buyers and users. This value should be the primary consideration for your price and pricing model—not features, not what competitors charge and not your costs.
The most common pricing model for SaaS products is a recurring subscription. Every month or year, your customers reevaluate whether they want to continue subscribing. This makes it even more critical to ensure pricing is in line with
the value your customers receive.
Let’s define what I mean by “value.” Value can be quantitative, such as time saved or additional revenue earned. Value can also be qualitative, such as pain relieved or lifestyle benefits provided. By understanding and documenting this value, you can begin to narrow in on possible pricing models and a price range.
When we were determining pricing for GoToMeeting, we interviewed dozens of potential customers to gain a deep understanding of the value they might receive from conducting online meetings with our solution. We discovered:
By understanding this customer value, we developed GoToMeeting’s unique $49 “All You Can Meet” flat-rate pricing (an industry-leading innovation at the time). Because the product was SaaS, we had the flexibility to price our product differently from the competition and create a unique product in the market. In a sense, we made pricing a part of the product. It became a differentiating feature that marketing promoted heavily.
One of the exciting advantages of SaaS is that product managers can think differently about pricing models. Your product is no longer tied to a one-time purchase. With SaaS, you can consider models such as:
With so many options, you now have the ability to discover a pricing model that aligns with your customers’ goals. For example, for AppFolio’s property-management software, we developed a unique pricing model based on the number of rental units managed by a property manager. Because we charged a flat $1 per rental unit per month, the pricing was simple and easy to understand. This pricing model resonated with customers because they paid more for our product only if they grew their business. If they were more successful, we were more successful.
When pricing a new product, there is a temptation to set your pricing relative to the competition. It’s common for new products to price using the same model as competitors, but slightly lower. Sure, you can price the same way as your competitors, and perhaps that’s what your customers expect. But with SaaS, there are so many ways to price the product that you have the ability to stand out in the market by thinking differently. Capitalize on the approaches that your competitors haven’t considered.
With SaaS, it’s important to understand what each additional new customer is worth to your product line. A customer’s lifetime value (LTV) is one of the most essential metrics because it influences the resources you allocate to the product, its sales model and what you can afford to spend to acquire customers.
For example, if you license your software at $25 per month, spend $5 a month delivering and supporting the service, and keep an average customer for 18 months, your rough LTV is: (25-5)*18 = $360.
The formula for success is simple in the SaaS world: LTV over time must be greater than the cost to acquire that customer. For example, mature SaaS companies with a recurring revenue stream like Salesforce.com have LTV multiples that are three to five times the cost to acquire that customer. However, your cost-to-revenue ratio may be higher in the early years until there is traction in the market.
Don’t overly complicate pricing. With so much flexibility in SaaS pricing options, there is a temptation to offer various flavors and packages. Sometimes there are legitimate reasons for doing so.
Jim Semick is co-founder of ProductPlan, a leading provider of cloud-based roadmap software for product and marketing teams. For more than 15 years he has helped launch new products now generating hundreds of millions in revenue. He was part of the founding team at AppFolio, a vertical SaaS company. Prior to AppFolio, Jim validated and created version 1.0 product requirements for GoToMyPC and GoToMeeting (acquired by Citrix). Jim is a frequent speaker on product management and the process of discovering successful business models. He contributes at www.productplan.com/blog. Follow Jim on Twitter at @JimSemick.