Everyone, from startup entrepreneurs to software enterprises have begun to recognize the value of SaaS (software as a service). As a concept, SaaS has defined itself as progressive, scalable, and elastic, introducing ideas from sales and employee management, to new analytics, and even time management solutions. According to the Gartner Group, revenue across the world for SaaS should reach $22 billion by this year – a 52% increase from 2012. And there is no evidence the trend is slowing.
That’s the good news. The bad news is, as one senior software executive put it, is “Saas is an incredibly hard model to make money with.” Though there are numerous business strategies that can ameliorate the challenges, one of the most important revolves around an effective and competitive pricing strategy.
Defining Your Company Goals
Developing pricing strategies for SaaS is often much different than the license approach that preceded them. Price isn’t a “set and forget” function, but an evolving concept altered by market feedback and changing market forces. To get themselves on the right track, SaaS companies can hire an experienced pricing strategist and ask themselves a few questions to arm themselves for the journey.
For instance, does your SaaS organization want to capture a high number of customers and make a little money on each, or a smaller number of much more profitable customers? What is the competitive advantage you offer and how significant is it? Can you describe your desired market position -whether you intend to be in the low-end area of the market, or the premium SaaS market – offering prices targeted to the technology elite? Once you have an idea of your target market, competitive advantage and desired market position, you’ll be able to start focusing on customer-based pricing questions.
Identifying Your Customers – And What They Want
Similar to other pricing strategies, a successful SaaS pricing foundation, especially in the B2B world, rests on delivery of both real and perceived value to the customer, relative to the competition. Any strategy that fails to take the customer and competition into consideration as the main inputs in price development are likely to get it wrong.
Often, you’ll find that your research presents a number of “customer segments” – measured by industry, type of individual, geography, or what the customer uses your service for. Chances are that you’ll have pricing tiers aligned with each segment. These tiers are built by understanding step changes in value delivered, based on information you gather through a usage data combined with primary research. Your ability to earn a profit is directly tied to your understanding of value and how it is different between groups of customers. In other words, it is essential to understand how different customer use and benefit from your SaaS offering.
Because your buyer personas will form the basis of your pricing strategy, you’ll need to build your structure on top of them, considering which features to align to which personas. Companies considered best in class will map features to benefits and value at each tier. The goal is to have a plan for each buyer persona.
Understanding what makes your buyers tick will influence everything from your financial planning, to the product you produce, and the way you market it. Before you can come up with a reasonable pricing solution, you’ll need to use well-researched market persons to answer the following questions:
- Is there a specific price your customer seems willing to pay? – You might get an idea for this from the prices of competing products, or what previous customers have been happy with in the past.
- How much value does each customer have according to the amount of money or profits they will deliver to your company?
- How much do you have to spend – in terms of marketing and other efforts – to keep or acquire the customer?
- Where are the best places to find that customer? Can you reach out to them online, in local avenues, or through events?
- What part of your SaaS offering does the customer attribute the most value to? What matters to them?
Combine Features into the Targeted SaaS Offerings
Remember that there’s never a one-size-fits-all solution to the SaaS world, and although using a wide range of services which appeal to multiple customer segments can add value to your project, you need to be sure that you convey the reasons that your product has been broken up into different packages. Often, the complex pricing that prevents customers from investing in your product comes from tacking on features and charging extra for them – even though your market doesn’t want or need them.
Instead of trying to come up with new ways of making money or adding cost to your SaaS packages, create prices based on the value you give to your customers, as a way of focusing on how you can combine the right features into the optimum packages for each market segment you are servicing. An attractive and simple pricing scheme means understanding your customer’s perspective and developing a valuable solution to their problems that meets with their expectations and perceptions. Determine who your buyers are, what they want, and what they’re willing to pay to meet their needs.
What strategies do you use in understanding your customer needs and establishing a pricing solution? Let us know in the comments.