Why pricing strategies can make or break SaaS startups

From seven-second TikTok videos on our phones, click and collect McDonald’s orders and generous returns policies on our clothes, our modern existence is characterised by the need for speed, ease and flexibility. Convenience is what we expect and what we now demand from technology providers. There was a time when consumers were prepared to wait a year for a software update and willing to pay extra for new features. Today, expectations have changed and been replaced by an expectation of flexibility and the convenience of pay-as-you-go subscription billing methods.

It comes as no surprise then that the Software-as-a-Service (SaaS) industry has been growing in double digits year-over-year, making it an attractive operating model for startups. SaaS startups contribute a great deal to the UK economy, raking in hundreds of millions in funding in recent years.

But not all SaaS startups make it past the three-year mark. The option to pay a small monthly fee is initially more attractive to new customers than signing up to a perpetual licence and being locked into a contract for years. Once the business reaches ‘cruising altitude’, though, sustaining continued strong growth becomes a challenge – and pricing is often at the heart of this issue.

The emergence of value-based pricing

For any product or service, the end user’s willingness to pay depends on how much value they perceive they’re getting out of the deal. With companies like Slack providing a per-active-user pricing and credit for unused time when users become inactive after they’ve already paid, consumers are increasingly looking to companies to honour principles of fairness. Value-based pricing can help startups get off on the right foot in this space – and the benefits are not limited to their image.

Value-based pricing enables organisations to understand what features people are willing to pay for, which in turn can help them see how they measure up to competitors and where their competitive advantage lies. What’s more, once they’ve identified the features that drive value and revenue, value-based pricing can help them maximise profit generation. By analysing how customers use a solution over a period of time, organisations can identify upsell opportunities – maximising profit-generation while driving more value customers and retaining their loyalty.

But just how easy is it to identify the value levers in a product or service?

Rethink how you view and evolve pricing

As value-based pricing is becoming the preferred strategy for SaaS organisations, it drives home the importance of continuously iterating one’s pricing strategy. In a study of over 6,000 SaaS companies, Chargebee found that businesses that focus on their monetisation continuously have six times the ‘lifetime value’ to ‘customer acquisition’ ratio compared to those that haven’t looked at their pricing since they set up the first page. Yet, surprisingly, the majority (72 percent) of SaaS companies said they spend less than 10 hours a year on pricing!

Running pricing experiments enables organisations to understand customer segments, usage patterns and the willingness to pay at different price points. To do this successfully, organisations must first and foremost shift their mindset about pricing and treating it as a product.

Just as products require continuous improvement and tinkering, so does pricing. Price-setting needs constant adaptation based on competition, market conditions, customer segments, geography and localisation needs. It should always be dynamic.

The main reason why some businesses choose not to optimise their pricing is the perceived operational overhead. Without the right set-up, pricing changes can seem daunting and burdensome. But there are three key focus areas to help with that: technology, people and process.

Continuous pricing iteration through technology, people and process

SaaS organisations only need a few technologies in their toolkit to help identify the features customers value the most and ensure software monetisation experiments yield the best possible results. An entitlements management system (EMS) is one of them. It can grant granular control over features across products, enabling organisations to track and iterate offerings based on revenue and usage insights, as well as accelerates go-to-market strategies for plan bundling, pricing and product launch experiments.

Great SaaS businesses also have dedicated personnel in place to lead research into pricing and evolve decision-making. Organisations should assign the task of collecting pricing feedback, collating findings and presenting them – on a quarterly basis – to a wider pricing committee made up of key stakeholders across sales, marketing, product, finance and more.

Finally, pricing is a process – it cannot be static when the market and customer needs and expectations are constantly evolving. Remember, price is the exchange rate on the value that the organisation is creating, so if the product is improving – and it will – then the price should be changing as well. Commit to making some progress on optimisation every quarter, big or small, and the results will speak for themselves.

Supercharge growth at every step of the way

The SaaS industry continues to grow at pace, and along with that growth comes some healthy competition. Getting pricing right is the secret to building your business in a crowded marketplace. By continuously iterating your pricing strategy, you can effectively gather real-time validation for pricing decisions and discover optimal pricing strategies that drive revenue and maximise market opportunities at every stage of the company’s growth.

After all, even with a game-changing product and a passionate team behind it, if you don’t optimise your pricing, you’re leaving money on the table or inadvertently inviting a competitor to price you out of business.