How much should you charge for your SaaS product?
Without a doubt, that is the hardest question you’ll ever answer because it is the most important. If you price too low, you’ll lose money. If you price too high, you’ll lose customers. Striking the right balance can be maddening. Fortunately, this guide is here to help. Below, we’ll discuss how to arrive at the right price for your SaaS product.
When you begin your pricing quest, the very first question you must ask is, “What are our pricing goals?”
Hint: Your pricing goals must align with your business goals.
As we’ll discuss later on in this post, your business goals will change as your company grows and responds to your customer base. For this reason, your prices should also change and never be written in stone. Instead of trying to predict the perfect price for all of eternity, anchor your pricing to your immediate business goal.
The most common business goals are as follows:
To increase profit – If you have few competitors and enjoy a relative monopoly on the market, you may be able to charge a higher price.
To sell more products – If you’re looking to move more products but not necessarily at the highest price, you may be able to set yourself up for a higher long-term profit.
To survive – If you’re fighting a lot of competitors for a small number of customers, you may find yourself in survival mode. This pricing objective is focused on covering costs to ensure that you stay in business.
To become the market leader – If you’re aiming to provide the premium product and become the market leader, you may be able to charge more than your competitors.
As you see, your business goal should influence how much you charge for your SaaS product.
Understand Your Customer
Pricing always depends on a deep understanding of your customer. Let’s start by answering three basic questions:
Who is your customer?
Make a profile of your customer. If you cater to more than one customer type, repeat this process until you have a profile of each. Detail their basic demographics, such as age, job title, and income.
What is your customer’s pain?
What problem can you solve for your customer? Once again, this answer may shift for different personas. It’s crucial that you understand your customer’s pain from their perspective and not just yours.
How desperate is your customer to find a solution to this pain?
Some pain requires an immediate response while other pain can be endured indefinitely. The more pressing the pain, the more you may be able to charge for the solution.
Remember That Buying Is Emotional
When coming up with the right price, remember that buying is an emotional experience and is rarely grounded in logic.
If the pain is strong enough, you can get away with charging your customer more. This is especially true if you don’t have a lot of competitors and/ or if you know how to position your product for the emotional buy.
There are many reasons why customers will buy your product (and pay more for it). These reasons include urgency, trust, and fear.
But how do you come up with a price based on emotion? Let’s consider how you can leverage the emotion of trust. You can charge more for your product once your prospective customers trust you. Simply standing behind your product with an extended 60-day money-back guarantee can allow you to charge more than your competitor who only has a 30-day money-back guarantee.
If you strike an emotional chord with your customer, they’ll find a way to justify the cost.
Estimate Your Customer’s Lifespan
When calculating your product’s price, consider the lifespan of your average customer. How long will they use your product? For some SaaS, the lifespan of an average customer may only be 90 days. For others, it may be several years.
Take a look at your current data to determine how long your customers remain active. Not only will this give you a realistic projection for the future, but it may also provide pricing insight.
If your average customers have a long lifespan with your SaaS, you may be able to charge less but still make a decent profit. However, if your average customer does not stick around very long, you may need to charge higher prices to make a profit.
Don’t Believe the Hype
We’re survey crazy these days, but surveying isn’t likely to help you find the right price for your SaaS product. Let me be blunt: Asking a group of prospective customers what they would be willing to pay for your SaaS product is a useless activity. Why? People will say anything as long as they’re in the magical realm of what if’s and make believe. The truth comes when they actually have to pay for it.
Take a look at what your current customers pay. This is the best starting point for future pricing. Raise rates by 10%. If you don’t want to raise rates across the board and offend your current customers, consider testing prices with a limited group of new customers.
Money talks. If they’re willing to pay the price you’re asking then your product is worth that price.
Factor in Your Costs
How much does it cost for you to generate new customers? You must consider the cost of acquisition when determining the price for your SaaS product. Otherwise, you could be paying for customers without making any profit.
Which marketing channels do you use to find new customers? How much do you spend on each customer from awareness to purchase?
Your final acquisition cost per customer should always be lower than your customer’s lifetime value (i.e. the total profit that you’ll make from your customer over their lifespan with your company).
Take a Peek at Your Competitor’s Prices
I’m not a big fan of piggybacking off of your competitor’s prices, but it’s impossible not to peek. It’s also irresponsible. Why? Because, even if you don’t know how much your competitors charge, your customers do. You need to know exactly how you compare to the rest of the marketplace. It helps you determine your position and better justify your pricing.
It’s important to know what others charge but don’t obsess over their prices. If you do, you may find yourself trying to undercut their prices in a bid for market dominance. That, my friend, is a race to the bottom.
Also, it would be a big mistake to assume that your competitor actually knows how to price their own product. All of us are scratching our heads together. No one has pricing completely figured out. You don’t want to follow behind your competitors who may be doing it all wrong.
Instead, look at your competitor’s pricing to know what your customer may encounter when comparison shopping. Competitor’s pricing (along with a thorough examination of what they’re offering) can help you determine where your own product ranks in the market.
Remember to Tweak as You Go
Your product’s price is not etched in stone. You can’t expect to come up with one price that’s good for the rest of time, unless that’s part of your marketing pitch. For most SaaS, product price should be re-evaluated at least once a year. You need to consider the needs of your customers, the evolution of your product, and your position amongst competitors in the marketplaces. Your prices are connected and must respond to these three factors.
While it’s scary to admit it, SaaS pricing relies on a lot of trial, error, and guesswork. It may be difficult but keep at it. Use these tips to help you find the right price.