Setting prices in a SaaS company is complicated but fundamental. The price you charge for your product will have a direct impact on the success of your business. That’s why setting a price is terrifying.
However, especially in a SaaS system where everything is easily measurable, setting a price is relatively straightforward. It is at least simpler in SaaS that when you are selling a physical product.
The first point I want to make is this: don’t ask your customers.
It sounds paradoxical: who better than them to know how much they are willing to pay? Sounds well, but it’s not their job and they don’t need to know. It’s easy for you to come across a lot of Don’t know/No answers and very low figures.
That’s why it’s best to look for different methods to determine the price.
Method 1: a matter of instinct.
One of the first things you find when you search the Internet things like setting prices in a SaaS company is “think about the price your instinct tells you and double it”. Needless to say, instinct may not be the best business advisor.
If you want to have a good pricing strategy it is better to rely on something as measurable as possible. Instinct is fine, but it must be based on facts. Anything that is not supported by facts is going to be difficult to justify and difficult to adjust properly.
Method 2: What the price should cover
It is clear that revenue must cover expenses. Expenses should include electricity, wages (including yours), materials, working time, machinery, rents, etc. The material cost of a SaaS service is relatively inexpensive, given that, once up and running, the day-to-day costs are processing time and storage, but it has to be considered.
It is also clear that in addition to covering costs it must also cover profits: no one wants to start a business in order to reach a financial break-even point.
So think about what the price should cover and then think about how much profit you want to make from each sale.
In other words: if you want to make a 20% profit, you should sell a product whose manufacture costs 100€ for 120.
Profit doesn’t need to be relative to price. Maybe you want to earn 5€ per subscription, so the price you pay should be the cost of production plus 5€.
This is probably the easiest way to setting prices in a SaaS company. And it has another advantage: you cover expenses.
Also has a disadvantage: customers don’t care as much about the price as they do about the value of what they buy. If your price depends on costs, it depends on external factors: if a supplier raises the price you have to raise it yourself.
Method 3: what the competition does
This method is used when there is an established average price. If all your competitors charge 30€ for a monthly service, that’s what you should charge by following this pricing method. If you charge more than that, you start at a disadvantage. If you charge less, you will be perceived as being of lower quality, and you start a price war which, even if you win, you lose.
If you want to charge more you have to offer more: even by charging more you can be considered competitive if what you offer is of greater value than what the competition offers.
With this price-setting method, the only one who can comfortably make changes is the market leader, whom others have no choice but to follow. And the only way to grow is to differentiate yourself from others, to create a new category where you can change the price as you like.
It has one advantage: it’s fast. You can set your price by studying your competition for a couple of hours or less. And it puts the workload on their shoulders: if the competition has this price, it’s to be assumed that it’s the right price, that they have studied it.
But this method has an obvious disadvantage: you’re setting prices in your SaaS company not following your pricing strategy, you’re following theirs.
So far we have seen three methods of pricing in a SaaS company. In our the next post Setting your SaaS price : the right way we will look at the fourth method: what the customer is willing to pay.