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SaaS Pricing Model and Strategies

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Whether you’re just starting a Software-as-a-Service (SaaS) business or have been in business for years, it’s always helpful to understand the key pricing strategies for your product. In fact, it’s not uncommon to find that companies are overcharging or undercharging their products. With that in mind, the following describes pricing strategies that can help you create your own pricing model.

What is a Pricing Strategy?

As you can hear, pricing strategy is an approach to pricing SaaS products. In other words,  how much your customers will be charged to receive your product is the policy of your choice. The best course of action when it comes to pricing is to make sure your business is profitable and decide how much your customers are willing to pay. 

Many, if not most, SaaS companies are opting for a subscription pricing model that provides a stable revenue stream for their enterprise. When it comes to pricing strategies, it’s important to keep in mind the value of your product and remember that you need to find the perfect sweet spot that will satisfy your customers while producing a healthy rate of return. If they feel you are asking too much, they may look for a competitor.

Different Pricing Strategies Explained

Now that you have an overview of the goals of a good pricing strategy, let’s look at the various pricing strategies that will help you find the best pricing strategy for your SaaS business.

1. Penetration Pricing

The goal of the penetration SaaS pricing model is to enter the market at a low price to attract the customer’s attention and convince them to move away from the more expensive competition. But the problem with such pricing strategies is that they are not long-term sustainable. After all, if a company wants to make a profit, it has little choice but to raise the price.

2. Skimming Pricing

In stark contrast to penetration prices, this strategy focuses on entering the market at high prices, lowering prices later when the product is less popular. This strategy is common in amusement parks. When it’s most popular, prices go up, and when congestion goes down, tickets suddenly go down and bring back customers. 

 A great way to do it steadily in terms of profitability, but such pricing strategies are most effective when there is little or no competition. If you are in a crowded SaaS space, you may need additional services to offset the high prices.

3. Premium Pricing

The idea behind premium pricing is to position  SaaS products as high-end or luxury products. The psychology behind this is that if it is more expensive, it must have better functionality or higher quality customer service. Like fashionable products that achieve the same goal of dressing up, the goal of technology is to make the product look like it has an elite status that justifies costs.

4. Bundle Pricing

The bundle pricing strategy is ideal for companies that offer multiple SaaS products to their customers. By bundling items, you can make a profit for less than individual items. Insurance companies often do this by bundling car insurance, home insurance, boat insurance, and more. Another example is an internet service provider that bundles cable and phone services with internet prices.

5. Loss Leading

Such pricing strategies are most popular in grocery stores and large department stores, but they also make perfect sense for some SaaS companies. The idea is to attract a variety of customers and sell something at a loss, hoping to resell them with higher-priced products.

6. Competition-Based Pricing

As it sounds, this pricing strategy is all about setting your prices based on what your competitors are doing. This is a practice widely used in service stations. If Station X down the street is charging $3.50 a gallon, Station Y is likely to follow suit, with other nearby stations charging the same. That is until terminal Z gets wise and charges a little less, and many customers go there to save some money. It’s important to be careful when using pricing strategies like these because sometimes “stay competitive” can cost you huge profits if you’re too focused on your competition.

7. Cost-Plus Pricing

While not necessarily a good pricing strategy for a SaaS business, this pricing method focuses on how much you want to make from each “unit” sold. For example, if it costs you $10,000 to produce the software and you plan to sell it to 1,000 people and want to make a profit of $10,000, you will need to sell each offers a minimum of $20 to double your amount.

8. Value-Based Pricing

With value-based pricing, you price your software based on what the customer will pay for it. This will require market research to determine customer interest and the underlying price they expect to pay for the value they will receive in exchange for their purchase.

9. Freemium Pricing

This is one of the most popular pricing strategies for SaaS. The way it works is that users can get the software for free, but they will have to pay extra for some features. A good example of this is Dropbox. You can get free cloud storage for up to a certain amount. Then to get more you have to pay.

10. Promotional Pricing

This is also known as a very low price or a reduced price. Website hosting companies are known to use promotional prices. They will sometimes discount their hosting by up to 50% to entice you to sign up and you can avail of this price for a limited time before the full price goes into effect at the end of the promotion period. your forever.

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