Value-based pricing for SaaS products
In this article, I try to throw light on how SaaS companies can maximize their revenue by following value-based pricing. Before I delve into the pricing of SaaS product, let me start off with -
Factors that are considered to price of any product
- The economic value of the product: The price of the product should not be more than the economic gain to the customer
- The total cost of delivering the product: The price of the product should not less than the unit cost of delivering the product
- Competition Pricing: The price of the product should not be higher than the price of a competitive product. Demanding a higher price should be by delivering more value
- Customers willingness to pay: Customer should be willing to pay the price
One or more of the factors might be less important for certain products & hence we should make the decision for the type of product.
Pricing of SaaS products
When we look at early-stage SaaS companies, pricing is an important lever which the founders pay the least attention to & as a result, they generally end up underpricing their products; due to the fear of losing customers.
Then what should be the approach to maximize revenue? - Price for the customer.
SaaS products do not work like commodities & the value the product gives each customer is different, which means that there is case for customer-based differential pricing.
How do we apply the above pricing framework to a SaaS context — Should add examples
- Figuring out the ideal consumer persona(ICP) & then the economic value the product can give the customer(for each ICP)
- Price more than the competition by providing more value to the consumer or by offering a product that is not available in the market. If we can't do both ensure the pricing is competitive. Providing more value would be easier for B2B SaaS companies as against commodity businesses
- If the customer's willingness to pay is lower, educate & negotiate with the customer on the economic value gains that they can derive from using our product. This step would also be easier for B2B SaaS companies
- Always ensure that the price is higher than the unit cost of product delivery. This would mostly be the case for SaaS companies, but it should be validated
I hope this content is useful. Do let me know your feedback through the comments section.