Your monetization strategy (and pricing, in particular) plays a big role in SaaS. Many founders set their pricing structure early and then forget about it. However, SaaS pricing models should be revisited and tweaked regularly based on performance metrics, customer feedback, and changing market conditions. 

In this article, we will cover:

• What are SaaS pricing strategies?
• Top 3 strategies for your SaaS business (with pros and cons)
• What to consider before changing your model
• Metrics to track the performance of pricing strategy changes

Here are some prerequisites to consider before you start your hunt for the right pricing model for your SaaS business. 

What are SaaS Pricing Strategies?

A SaaS pricing strategy guides the overarching principles that lead you to your chosen pricing model and product packaging. It involves making high-level decisions about your pricing structure, value proposition, and product positioning in the market. Pricing strategies outline the fundamental approach to charging customers for the products they intend to buy.

Deciding on pricing strategies depends upon your market and the customers you serve. It often includes customer segmentation, competitive analysis, and perceived value. Each of these elements can change how effectively your pricing strategy performs.

Here are some prerequisites to consider before you start your hunt for the right pricing model for your SaaS business. 

• Understand and research your customers.
• Calculate your CLV to understand your costs better. 
• Do competitor research to understand their pricing strategies. 
• Always test your pricing before going live.
• Align your pricing with your value proposition.

The Best Pricing Strategies for Your SaaS Business (+ Pros and Cons)

While there are a lot of pricing strategies, there are only three main pricing strategies that you should consider for your SaaS business.

1. Competitor-based pricing

This pricing strategy involves setting prices based on your competitors' charging. If you opt for this strategy, you can price your just above, just below, or at par with the competition. This option is viable if you are a new SaaS company with insufficient sales data to know if you're providing value to your customers. 

In general, this strategy works in three ways. Imagine you’re a new SaaS company that has developed project management software similar to existing products in the market. Since you’re a new player, you don’t have enough sales data to set your prices confidently. You do the following.

• Set price below competitor prices

• Set price to match competitor prices:

• Set price above competitor prices:

Pros

• Less risky since you are adopting a model that already works for competitors.
• It's simple to execute.
• You can combine it with other pricing strategies.

2. Value-based pricing

A value-based pricing strategy is customer-focused. Instead of looking inward at your company (cost-based) or laterally toward your competitors (competition-based), this strategy allows you to look outward. This pricing strategy considers the product's perceived value as the benchmark for setting pricing instead of costs, competitors, or target margins. 

Value-based pricing is considered the ideal pricing strategy for SaaS businesses. This is because you can focus on improving the service and value you provide instead of fixating on cost-cutting to improve profit. You also use extensive research to understand how customers value a product.

Pros

• A great way to increase profitability. You can charge a higher price if customers are willing to pay that much.
• Increase the brand value of your product.
• It makes it easier to sell your product or service and get more customers
• It boosts customer loyalty.

Cons

• Understanding your customers and their wants demands considerable time and effort.
• It’s challenging to set the right price.
• It's more vulnerable to competition.

3. Cost-plus pricing

Also known as markup pricing, this is the most basic pricing strategy. Add up all your business costs and an acceptable markup percentage, and you’re good to go. In SaaS, these costs might include the following:

• Cost of product development and design
• Company’s own SaaS providers - cloud infrastructure, engineering, and support
• Costs of the team

Cost-based pricing strategy is fine very early in a startups existence, but should not the primary strategy after acquiring the first few customers. 

Cost plus pricing = Customer Acquisition Cost (CAC) + COGS + Margin

Pros:

• Simple way to get started. 
• Limits financial downside 

Cons:

• Limits upside heavily
• Doesn't account for competitors
• Slow way to scale as covering costs is #1 goal

Here’s a quick TL;DR of the three pricing strategies we discussed:

3 Things to Consider Before Changing Your Pricing Model

If you’re considering a price change, assessing the tradeoffs is essential. While a significant enhancement in pricing can bring numerous benefits to your company, it's important to consider the harm it can cause if it's not actually an improvement but a mistake. Before implementing any changes to your pricing model, review the following factors:

1. Ability to Quote and Bill for New Pricing

Many companies underestimate the tech requirements to transition between their pricing models. For example, a shift from seat-based pricing to usage-based. They resort to manual workarounds without the right tech infrastructure, consuming finance resources and time. This may result in lost deals and customers, negatively impacting the bottom line.

To overcome this challenge, ensure your technology supports the new pricing model to avoid operational debt.

2. Your ICP Comfort Level

Different customer bases display varying levels of willingness to adapt to pricing changes. Ignoring your ICP's comfort level can strain customer relationships and impact retention.

For a smooth transition, require as little work as possible on their end, and clearly communicate the new structure and pricing terms. 

[Cacheflow’s change quotes feature shows prospects their old deal, what's changing, and the new price so they can understand and accept faster.]

3. Competitive Benchmarking 

Companies in unique market categories have more flexibility in pricing than those in highly competitive markets. In a commoditized or highly competitive market, charging excessively or adopting an unconventional model can alienate customers. 

Conduct a thorough competitive benchmarking to align your pricing with industry standards and customer expectations. Strive for a balance between effectiveness and market norms.

Metrics to Track the Performance of Your Pricing Model Strategy

If your strategy doesn't get you the intended results, you need to tweak it. Luckily, you don’t have to fly blind. By measuring the effectiveness of your strategies post-pricing changes, you can determine if your current prices are performing better or need adjustments. 

Measure the below metrics before and after you change strategy:

Gross MRR Churn

The gross MRR churn ratio measures the percentage of revenue lost due to canceling or downgrading product licenses. A reasonable MRR churn rate should typically be less than 2.5% per month. After implementing the price changes, you should regularly monitor this metric to understand if you’re actually benefiting from the changes you need to change the strategy further. 

Here’s how you can calculate the gross MRR churn ratio:

Gross MRR Churn = (Total MRR / Total MRR Churn) × 100

A decrease in the ratio post-pricing changes indicates that the adjustments positively influenced customer retention and revenue stability, and vice-versa.

LTV/CAC ratio

LTV:CAC metric measures the relationship between the lifetime value of a customer and the acquisition cost of that customer. In general, an LTV:CAC ratio greater than one is considered “good. " On the other hand, a lower LTV/CAC ratio shows that it takes longer for your customer to pay back. While selecting your pricing model, monitoring this ratio is imperative, as LTV:CAC signals profitability. 

LTV/CAC Ratio = [(Revenue Per Customer – Direct Expenses Per Customer) / (1 – Customer Retention Rate)] / (Direct Marketing Spending / No. of Customers Acquired)

Expansion MRR

This metric identifies whether or not your existing customers are paying you more or less compared to last month. 

If a change in your pricing strategy helps you upsell and cross-sell more, your customers are happy with your product and pricing. Keep an eye on your expansion MRR during the roll-out of your pricing strategy to gauge if your users appreciate it. If you don’t see an improvement in expansion MRR, you might want to fine-tune your pricing to better align with your users' preferences and expectations. 

Final Thoughts on SaaS Pricing Strategy

Going live with significant pricing changes is scary. 

But theres new tools that make it as easy as it should be. Cacheflow enables SaaS companies to launch, test and optimize their pricing strategy as often as needed. 

With automated billing, usage-based functionality and CRM plut ERP integrations, RevOps or Finance leaders can make the change once in Cacheflow, and have the rest automated for them.

Book a demo below to see for yourself!

‍