It seems that SaaS companies are having quite the media moment in 2016, what with the announcement of Vista Equity Partners’ acquisition of Marketo in June, Microsoft grabbing up LinkedIn and Oracle purchasing NetSuite. This is all indicative of a great boon for SaaS, with Gartner projecting the market to grow by 16% in 2016 to $204 billion and continued upward momentum through 2017.
One way to make sure that your company rides what promises to be a very giant wave of revenue is through pricing strategically. Our good friends at Bain & Company were kind enough to put forward 6 different pricing models for SaaS products, which we’d like to break down for you.
1. Play the averages.
With this strategy, businesses offer a single competitive package at a competitive price. It’s often used by new entrants and small SaaS companies that don’t have the resources to provide multiple service offerings. The goal is typically to win on simplicity and the quality of your product. For example, VC backed Rainforest QA sells its QA testing software at one price.
2. Be a free disrupter and give the full functionality of the service for free.
What’s the benefit? Growing a user base fast. But your product must show value to free users and gain their trust as revenue comes through other avenues. For example: AddThis provides over 15,000,000 websites with marketing tools that help increase traffic from social media while providing insights along the way. The data aggregated is then sold to 3rd parties.
3. Offer a premium product at a premium price.
Is your product one that you have invested a lot of time and money developing? Then its high quality could justify a premium price. Customers are willing to pay the price for quality. For example: a single Salesforce license can cost over $1,000. On the surface it seems expensive, but you can make staffing efficiencies, or scale Salesforce as it grows with you, never having to worry about expensive rip and replace projects.
4. Be nice and have something for everyone.
We like to think of this as the no customer left behind model – with so many different tiered packages with price points from low to high most everyone will be able to find a package that suits their price point. Pricing tiers are differentiated by features and functionality - the trick is putting together compelling offerings at each price point and enabling users to easily upgrade. For example: Adobe Creative Cloud starts at $9.99 / mo, but scales up to $79.98 / mo.
5. Offer most functionality for free (freemium)
Accelerate user growth by offering a free version of your product. Then, if a customer likes your service, you can upsell them more advanced features. It’s an excellent marketing tool.For example: MailChimp is “forever free” up to 2,000 contacts in a database - to add more people, you have to pay.
6. Provide an integrated solution at a competitive price.
Offering an integrated proposition at a competitive price allows a provider to win by solving customers’ needs with the broadest or most complete offer, thereby saving customers time and effort.For example: Intuit has taken this approach with its QuickBooks bookkeeping suite.
Pricing your product correctly is paramount to growing revenue. Each of these strategies leads to very different growth patterns in the number and type of customers, in the average revenue per customer and in the rate of customer churn. Carefully consider the six different models above before setting up your pricing strategy.