Thoughts on SaaS Pricing
Your pricing could make or break your business. It's one of those things that's fairly quick and easy to change but can have a huge impact on the growth of your business, especially for subscription-based software businesses.
Yet many of us probably don't think about it enough. If you're like us, when we initially launched our apps, we basically just looked at our competitors' pricing and used them as a baseline.
This is probably fine in the beginning if you have no idea how to price your product as you don't have enough data. But as you acquire customers and learn more about the market and the value your product brings to them, it's a good idea to set aside some time to periodically review your pricing.
Below are some thoughts I have about SaaS pricing based on my experience running an app business in the last 4 years and also from insights gained by reading SaaS blogs and listening to podcasts.
Please note that each business is different, so what worked for us may not work for you. There may even be cases where doing the exact opposite may make more sense for your specific business.
Set prices based on value to your target customers
As developers, it's easy to undervalue what we've built, especially if building it seemed "easy". What's easy to you might be like magic to someone else.
It's also easy to fall into the trap of pricing your product based on your cost, even if you factor in what your equivalent hourly rate would be to build and maintain the product. You could've built the product very quickly because of decades of practice and accumulated experience. What took you 1 month to build might take someone else 5 years if starting from scratch.
Think about what it would cost a person or a business if they decide to build the same functionalities your app already provides both in time and money. It's not just the initial build either, there's ongoing maintenance cost. Then there's also the risk of them spending all this time and money and end up not getting a working product.
Different customers will also get different value from your product, so it's a good idea to figure out who your target customers are early on if possible. This way, you can focus on building features that will serve those target customers better. This then allows you to price your product accordingly and deliver so much value that it's a no-brainer for them to choose your product.
If your price is too low, some potential customers might associate it with low quality
We've all heard the phrases "You get what you paid for" or "If it's too good to be true, it probably is."
And in a lot of cases, this is true. There will be people who will completely disqualify your product without even trying it if the price is too low.
This all depends on your target customers, of course. If you're a B2C SaaS, then a lower price probably makes sense as consumers are more price-sensitive compared to businesses. It's just good to be aware of the potential trade-offs.
Churn tends to be higher at the lower pricing tiers
On average, customers who are more price-sensitive are also more likely to shop around for better deals as the switching cost for them is not as high. If they're businesses, they may also just be starting out and have a higher chance of going out of business which results in churn. A couple of our Shopify apps have a free tier and we see store closings all the time from those free tiers.
More established businesses who are also willing to pay higher prices, on the other hand, are less likely to churn as long as they're getting value from your product as their switching cost is also higher (especially if they have a team they'll have to re-train). They're also less likely to switch over to another product for the price alone unless it's a significant amount of savings (which would vary depending on the size of the business).
This is worth thinking about when pricing your products. If your customer acquisition cost or onboarding/support cost is pretty high, you might want to consider raising your minimum price to make sure the LTV is worth it.
Consider shortening your trial
Do you really need to offer a 30-day trial?
This will completely depend on what the app does. If it could take some time to see the value or if the app involves a team (like a help desk software), then 30 days might make sense.
But for most SaaS apps, I think 1-2 weeks is plenty of time to try things out to see whether it's for you or not. Having a longer trial could potentially just cause people to delay using your app.
The shorter the trial, the faster you get paid also.
Reduce friction by not offering too many options
Options are great, but too many options could just add friction and cause analysis paralysis.
One very popular example is Starbucks. For sizes, you can only get tall, grande, or venti. At some Starbucks, I actually only see options for grande and venti.
If the customer is having a hard time making a decision because of too many plan options, he/she may end up not making any purchasing decision at all.
It seems having 2-4 plans is the most popular for SaaS. I rarely see more than 4 plan options.
Look for ways to offer multiple pricing tiers even early on
If it's not gonna add a lot of additional work, it might make sense to come up with just one feature that could be placed in a higher tier very early on even if you think very few people will care about it.
You might be surprised to get a few customers who would just subscribe to the highest plan even if they don't really need it as the pricing for them just doesn't matter and they'd rather not have to think about needing to upgrade later.
Then as you add new features later on, you can make that higher tier more attractive to more people.
Avoid offering "unlimited"
Technically, nothing is truly "unlimited", there's always a limit and it can just be a very high limit. Most of your customers will probably understand that what you meant by "unlimited" is simply a very high limit, but some may argue with you about it.
I'd personally avoid offering anything "unlimited" unless there's no cost to you or there's no way for the customer to use up that unlimited feature in a way that would make that customer unprofitable.
For example, if you have a feature that sends out emails, you may offer a plan for $100/month with "unlimited" email sends because you're not expecting any customer to send out more than 10k emails per month. However, you might be surprised one day that a customer with an email list of 1 million users signs up and uses your service to send an email out to all 1 million users, costing you way more than $100.
It might also turn out that same customer is not price-sensitive at all and more than willing to pay a lot more for your product as it delivers a ton of value to them. You could have simply capped that $100/month plan to 10k email sends per month and offered a custom pricing instead based on email sends. That $100/month for this customer could've been a $1,000/month subscription.
Experiment with pricing and have a plan to revert back if it doesn't work out
You won't really know what works until you try things out.
It can certainly be scary to change your pricing especially if your current pricing seems to be working fine. If you don't experiment, however, you could potentially be missing out on big growth opportunities.
Raising prices is typically easier as you can decide to just grandfather all existing subscriptions and only raise prices for new customers. If you must also raise prices for existing customers, it's probably a good idea to give them plenty of notice (I'd say at least 2 months) so they have enough time to switch over to a new solution in case they can't afford the new price.
Late last year, we raised the price of the lowest tier of one of our apps by 25% as we were starting to see the MRR of that app plateau. We figured that if our trial-to-paid conversion goes down up to 25%, we'd still be ahead as the revenue would stay roughly the same while supporting fewer customers. If we see a significant drop after 1 month, then we'd just roll back and make sure to tell the new customers paying the higher price that we lowered the price. We could perhaps even give them a free month so they won't feel like they got screwed over paying a higher price for that first month.
It turned out that the pricing increase didn't affect our installs/trial-to-paid conversions at all. It was a big win for us and got our MRR growth back on track.
If you're lowering prices instead because you think your price is too high and losing a lot of customers because of it, this could be more tricky as you'll also have to lower the price for all your existing customers which could be a big hit to your revenue depending on the current size of your customer base. One thing you could potentially do here is offer a more basic plan with more limited features instead and hopefully not too many of your existing customers will downgrade to this new plan.
Pricing is tricky and there's really no formula that will apply to all businesses. I think most of us will just have to guess and tweak things as we go.
While I'm certainly not an expert at SaaS pricing and still learning myself as we grow our business, I hope these thoughts would prove helpful to others out there who are already running a SaaS business or thinking about starting one.