The Ultimate Question: How Do I Price My SaaS Product?

"What is the meaning of life?" may have been all the rage in the nineties, but today's ultimate question is, "How do I price my SaaS product?". To help answer this question, here are some basic guidelines for establishing SaaS pricing.

You Don't Arrive At Price, You Start With It.

The most common mistake clients make when working through pricing is thinking it's the output of a complex, "secret-sauce" type formula only revealed to the Silicon Valley elite. I assure you, it is not.

Only you can determine what is the best pricing model for your offering.

Pricing is an input value for calculating your business revenue and your overall profitability based on conversion rates. Conversion rates directly reflect the value people find in your product. The only way to discover that is to understand what your customers value.

My approach to any MVP is to start with the customer and audience first. Pricing is no exception to why we so heavily emphasize getting deep into your ideal customer's world. Understanding how they perceive value is essential to formulating a solution to a problem they will pay you to solve.

If You Try And Win On Price, You Still Lose

When working through their pricing strategy, clients frequently consider discounting a new offer to attract customers. When they do, my coaching instincts kick in to help them avoid this costly mistake.

You have a grand vision for your product and how epic it will be in the future. Your current SaaS MVP only has a couple of features you know your market wants. Understandably you could be thinking that lowering your price at first will draw more customers who will upgrade later to get a "must have" feature you create.  Buzz – wrong.

People will pay for something that solves a problem they can't resolve on their own or if it frees up their time. Consider the $9.00 large cheese pizza you last purchased. You bought a pizza as take-out because what you can make at home  just isn’t the same. You could have decided to spend $5,000 or more to buy a pizza oven for your house, plus the cost of renovations to the kitchen to fit it between the fridge and the dishwasher. I am guessing you bought the pizza. A pizza that only costs, on average, $0.89 to make. You paid 10X the pizza cost and found it to be a good deal!

Base your pricing on value to your customer, not the cost-plus of total features. When first starting out, go nuts and change your prices wildly. You may be surprised at what your customers would be willing to pay to remove a pain point, free up time, or both.

When first starting out, go nuts and change your prices wildly.

Unlimited Losses

How you choose to price things is your decision. However, I strongly advise clients against offering anything as unlimited. Instead, it would be better to create a top tier with no actual price listed and a "Contact Us" link; allowing the larger customers to negotiate based on what they need. Unlimited tells your customer that something costs you nothing to provide. Once you commoditize something in your customer's mind, it becomes about price and not value. A simple way to create value-based pricing is to focus on the type of organization rather than how you group your product's features.

Once you commoditize something in your customer's mind, it becomes about price and not value.

Let's say a small business owner wants to use your product. They are a single person business who needs only a handful of your most basic features. You can offer them a single-seat plan with everything they need at an acceptable price.

On the other hand, what if your customer has fifty plus employees? They could be a simple enough organization that only a single person would be using your solution. Conversely, they could be more complex and require multiple teams of people to be using it. Either way, they will pick a plan that provides them the most value.

A complex organization will use more of your product than a simpler one. Pricing only on seats or only on feature sets leads to unrealized revenues. Structure your pricing to consider organizational complexity to drive up your revenues over time.

Conclusion

SaaS pricing can be as complicated or as simple as you make it. There are entire companies dedicated to helping you solve it and ton's of content online around the subject. This won't be the last post on the topic I write either.

There are a couple of key points to consider when you start figuring out what to charge your customers.

• Pricing is the input for company revenue, not the result of a calculation.

• Perceived value drives the perception of cost.

• Don't offer unlimited anything – ever.

• Pricing around organizational complexity can drive increased revenue and at the same time provide your customer more value by meeting their specific needs.

• Experiment with it often until you know you have it right.