How to price a SaaS product: 5 strategies

In SaaS, pricing is a strategic decision that has a tremendous impact on long-term sustainability. Whether you're a startup finding your footing or an established company looking to optimize revenue, mastering the art of SaaS pricing is essential.

This complete guide will equip you with the knowledge you need to answer that tricky question of how to price SaaS. Here’s a quick rundown of what we’ll cover: 

• An explanation of SaaS pricing’s importance
• A breakdown of each SaaS pricing strategy along with pros and cons
• SaaS pricing models analyzed in detail
• How to price your SaaS according to your target audience
• Tips for your pricing page

Let’s get started.

Why SaaS pricing matters

In SaaS, your pricing strategy is the cornerstone of your business model.

Deciding how to price SaaS products is a balancing act between providing value to your customers and carving out a competitive space in the market. 

Think of it as the Goldilocks principle applied to your business. If the price is too high, customers may jump ship; if the price is too low, your company's growth could be stunted.

The value proposition

This is where the cost-to-value ratio comes into play. Your customers want to feel confident that the benefits they gain outweigh the cost of their subscription. 

When this ratio is finely tuned, you're delivering an experience that customers will gladly pay for, month after month.

The competitive landscape

Well-crafted SaaS pricing models give you an edge in attracting the right customers and setting you apart from the crowd.

Consider this: A newcomer to the SaaS scene might adopt a penetration pricing strategy. This means they’re initially offering a lower price to attract a loyal following. 

On the other hand, a company with a proven track record of excellence might opt for a value-based pricing model. Here they’re charging a premium that reflects the superior quality and features they offer.

We’ll explore these and three more strategies in detail in the coming section.

The growth equation

By understanding your customers' lifetime value, you can make decisions about how much you can invest in getting and keeping them. 

Robust SaaS pricing models let you strike a balance between attracting new customers and keeping your current ones happy. It's about creating a win-win situation where both your customers and your business thrive.

How to choose your SaaS pricing strategy 

The decision of how to price SaaS products can make or break your business. It's about finding the sweet spot where customer satisfaction, growth, and competitiveness intersect.

Here are some key factors to consider when choosing your SaaS pricing strategy:

Business costs

• Consider all of your business costs, including development, marketing, sales, and customer support.
• Your pricing strategy should cover these costs and allow for a healthy profit margin.

Competition

• Research your competitors' pricing strategies.
• You may want to price your product competitively or offer a unique value proposition to stand out.

Customer value perception

• Understand how your target customers perceive the value of your product.
• Your pricing strategy should be based on the value that your product delivers to customers.

Business goals

• Align your pricing strategy with your overall business goals.
• Are you looking to acquire new customers, increase revenue, or improve profitability? Keep these questions in mind at all times.

Market positioning

• Consider how your pricing strategy will position your product in the market.
• Do you want to be seen as a premium product or a value-based option? Choose a path before committing to a strategy. 

SaaS pricing strategies explained with pros and cons

Questions about how to price SaaS can get complicated without some handy strategy. Let's take a look at the most common SaaS pricing strategies and weigh their pros and cons to help you find the perfect fit. We’ll analyze these five specific strategies:

1. Cost-based pricing

Cost-based pricing involves calculating your total costs and adding a markup to determine your price. 

This method is easy to understand and implement. The issue is it doesn't take into account factors such as competitor pricing or customer value perception.

Pros:

• Easy to grasp and put into action: The calculation is undemanding and easy to understand.
• Ensures you cover your costs: This model guarantees that you're not losing money on each sale.
• Provides a baseline: It can serve as a starting point for further pricing analysis.

Cons:

• Doesn't account for competitors' pricing: You might miss out on potential profits. Even worse, you might even lose customers if your price isn't aligned with the market.
• Doesn't capture the full value of your product: Customers are willing to pay more than your cost-plus price if they see high value in your offering.
• Can be inflexible: It may not adapt well to changes in the market or your costs.

2. Competitor-based pricing

Competitor-based pricing involves using your competitors' prices as a benchmark to set your own. 

This method can be helpful for new businesses or businesses in a competitive market. However, it's important to remember that your product may offer unique value that your competitors don't.

Pros:

• Easy to implement: It requires minimal research and analysis.
• Competitive positioning: It helps you stay relevant in the market and avoid overpricing.
• Provides market insights: You can learn about your competitors' pricing strategies and adjust.

Cons:

• May undervalue your product: Your product may be worth more than your competitors, but you won't realize it with this approach.
• Doesn't take into account customer value perception: It ignores what customers are willing to pay based on the value they see.
• May lead to a price war: Constantly adjusting your price based on competitors can lead to unsustainable price cuts.

3. Penetration pricing

Penetration pricing means you’re offering low initial prices to generate demand and attract new customers. 

This strategy can be effective for new businesses or businesses that are trying to enter a new market. However, it's important to have a plan for raising prices over time to guarantee long-term sustainability.

Pros:

• Attracts new customers quickly: The low price can entice price-sensitive customers.
• Gains market share: It can help you establish a foothold in the market.
• Creates a sense of urgency: Limited-time offers can drive quick conversions.

Cons:

• Long-term sustainability issues: It can be hard to raise prices later without losing customers.
• Potential undervaluation: Customers may perceive your product as lower quality due to the low price.
• Reduced profit margins: You may have to sacrifice profitability initially.

4. Value-based pricing

Value-based pricing requires setting your price based on the perceived value of your product to the customer. 

This strategy can help you capture the full value of your product and generate higher revenue. Keep in mind it does require a deep understanding of customer needs and a strong value proposition.

Pros:

• Captures true value of your product: Aligns price with the benefits customers receive.
• Potential for higher revenue: You can charge a premium for a high-value product.
• Builds customer loyalty: Customers are more likely to stick with a product they perceive as valuable.

Cons:

• Requires deep understanding of customer needs: You need a lot of research to determine perceived value.
• Can be difficult to implement: It may involve complex pricing models and communication strategies.
• Subjectivity: Perceived value can vary greatly between customers.

5. Freemium pricing

With freemium pricing, you’re offering a free version of your product with limited features and charging for premium features. 

This strategy can be effective for attracting a large number of users and generating leads. However, there is a risk that customers will stay on the free plan and never upgrade to a paid plan.

Pros:

• Easy customer acquisition: The free version eliminates the barrier to entry.
• Widespread use: It's a popular model in the SaaS industry.
• Upselling: You can convert free users into paying customers by showcasing premium features.

Cons:

• Risk of customers staying on the free plan: Many users may not see the need to upgrade.
• Lower revenue potential: You're not generating revenue from a large portion of your user base.
• Increased support costs: You may need to provide support for free users, impacting your resources.

Different types of SaaS pricing models

We've explored pricing strategies, which are the overarching approaches you can take. Now, let's dive into the specifics of pricing models. 

These are the tangible structures you'll use to bill your customers. The right model can significantly impact your product's appeal and your revenue stream. So, let's unpack the most common SaaS pricing models and weigh their advantages and drawbacks:

1. Usage-based pricing

This model charges customers based on how much they use your service. Billing is based on individual billable events. These are then detailed in the user’s invoice. 

This approach is especially useful for businesses that are scaling up. Since it’s such an adaptable pricing model, moving upmarket and selling to large enterprises in the B2B space becomes easier. 

Pros:

• Scalable and flexible: As your business expands and your needs evolve, this model grows with you, supporting your scale-up journey.
• Cost-efficiency: Aligning costs directly with usage ensures that customers only pay for what they need, making it an efficient model for both high-growth companies and established enterprises.
• Predictable value correlation: Since the costs are tied to usage, there's a clear link between what the customer pays and the value they receive, promoting transparency in billing.

Cons:

• Potential for unpredictable costs: Usage can fluctuate. This could lead to unpredictable monthly bills.
• Easy churn: If usage doesn't translate to clear value, customers may abandon the service due to high costs.
• Requires usage tracking: Implementing and maintaining accurate usage tracking can be complex.

2. Per-user pricing

This model charges a fixed fee per user, regardless of how much each individual uses the product. It's simple, predictable, and scales well with team growth. It is often favored by businesses that want an uncomplicated way to budget their software costs.

Pros:

• Easy to calculate: The pricing is transparent and easy for customers to understand.
• Scalable: The price increases linearly with the number of users.
• Predictable revenue: It makes it easier for businesses to forecast their expenses.

Cons:

• Users may share logins: This can lead to lost revenue as multiple people use a single account.
• Growth limitations: Businesses may hesitate to add more users if it means a significant price increase.
• Doesn't reflect individual usage: Heavy users and light users cost the same, which may seem unfair to some.

3. Tiered pricing

With this pricing model, you’re offering multiple packages at different price points. Each has a different set of features or usage limits.

Tiered pricing allows you to cater to different customer segments and their varying needs. That’s why tiered pricing is widely used in the SaaS industry to provide flexibility for customers.

Pros:

• Customizable for different needs: You can tailor packages to specific user personas or business sizes.
• Familiar model: Customers are accustomed to tiered pricing from other industries.
• Upselling opportunities: It encourages customers to upgrade to higher tiers as their needs grow.

Cons:

• Potential for customer confusion: Too many options can overwhelm customers and make it difficult to choose.
• Balancing features and price: It can be challenging to determine which features belong in each tier.
• Middle-tier bias: Customers may gravitate towards the middle tier, potentially limiting revenue.

4. Flat-rate pricing

This essentially means a single price for all features and unlimited usage. It's simple for customers to understand and can be attractive due to its predictability. However, it may not be suitable for all businesses, as it can lead to missed revenue opportunities.

Pros:

• Simple and straightforward: It’s easy for customers to understand and budget for.
• No surprises: Predictable billing eliminates unexpected costs.
• All features included: Customers get full access to everything your software has to offer.

Cons:

• Not personalized: It doesn't cater to different customer needs or budgets.
• Possible revenue loss: Heavy users may be undercharged, while light users may feel overcharged.
• Limited scalability: It may not be sustainable as your costs increase or you introduce new features.

5. Per-feature pricing

With this one, you’re letting customers choose the specific features they need and pay for each one individually.

It offers maximum flexibility and can be appealing to customers who want a tailored solution. However, it can also be complex to manage and may require additional customer education.

Pros

• Scalable: Customers can easily add or remove features as their needs change.
• Tailored to needs: Customers only pay for the features they actually use.
• Potential for higher revenue: You can charge a premium for high-value features.

Cons

• Potential confusion: The complexity of choosing individual features can overwhelm customers.
• Need for product specialists: You may need dedicated staff to help users navigate feature selection. 
• Difficult to forecast revenue: It can be harder to predict revenue due to the variable nature of feature usage.

Understanding your SaaS customers

To create a pricing model that resonates with customers, you need to understand your target audience. Let's break down the three main types of SaaS customers and the pricing strategies that cater to them:

B2C pricing

In the B2C industry, your target market consists of individual users or families. These customers are often drawn to convenience, affordability, and ease of use. To capture their attention, consider strategies like:

• Freemium: Offer a basic version of your product for free, enticing users with a taste of its value before they commit to a paid plan.
• Try-before-you-buy: Allow potential customers to test drive your software. You do this with a free trial, giving them a risk-free opportunity to experience its benefits firsthand.

B2B pricing

B2B customers are a diverse bunch, ranging from SMBs to large enterprises. Their needs and budgets vary widely, so your pricing strategy needs to be flexible. Here are a couple of options:

• Tiered pricing: This approach offers different packages with varying features and price points. It allows businesses to select the option that best aligns with their needs and budget.
• Per-user pricing: Charge based on the number of users or "seats" in a company. This model (also called per-seat pricing) is predictable, making it great for companies that want to keep costs in check.

Enterprise pricing

Enterprise customers are the whales of SaaS, representing a significant revenue potential. They often have unique and complex needs that require tailored solutions. When asking yourself how to price software for enterprise clients, consider these strategies:

• Custom quotes: Rather than showing prices, offer custom quotes based on the specific needs of each customer. This allows for greater flexibility and the ability to negotiate larger deals.
• Detailed pricing pages: For enterprise customers who prefer transparency, create detailed pricing pages. These should outline the various features, benefits, and pricing options available. 

Tips for your SaaS pricing page

Let's talk about how to make your pricing page a powerful tool for attracting and converting customers, no matter their size.

Your pricing page is more than just a list of numbers. It's like a salesperson working around the clock. It should clearly communicate the value of your product and guide potential customers toward the right plan.

Here are some tips to craft a pricing page that converts:

Structure

Single package vs. multiple tiers:

• If your product caters to a specific need, a single, flat-rate pricing model might be the way to go. Keep it simple and focus on communicating the core value proposition.
• If you have a range of features and target different customer segments, consider a tiered pricing structure. Clearly label each tier (e.g., Basic, Pro, Enterprise) and highlight the key differences in features and benefits.

Content

Clear value propositions:

• For each pricing tier, clearly state the value customers will receive. Don't just list features; explain how those features will solve their problems or improve their lives. Use persuasive language that speaks directly to their needs and desires.

Feature highlights:

• Make it easy for potential customers to compare the features included in each tier. Use bullet points, tables, or even a visual comparison chart to make the information easy to digest. Highlight the most valuable features for each target customer segment.

Design

Clean and uncluttered:

• A cluttered page can overwhelm visitors. Keep your design clean, visually appealing, and easy to navigate. Use white space effectively to give the eye a break and guide the reader's focus.

Clear call-to-action:

• Each pricing tier should have a prominent CTA button. Think classics like "Sign Up," "Get Started," or "Start Free Trial." Make it clear what action you want visitors to take.

Additional tips

• Use testimonials or case studies: If you have happy customers, showcase their success stories on your pricing page. Social proof can be a powerful motivator.
• Offer a FAQ section: Address common questions upfront. This way, you alleviate any concerns or hesitations potential customers may have.
• Test and optimize: Your pricing page is not set in stone. Experiment with different layouts, content, and CTAs to see what resonates best with your audience. Track your results and continuously refine your page to maximize conversions.

Next steps

You've crafted the perfect pricing strategy tailored to your ideal customer. In short, you’ve learned how to price SaaS products.

Now, it's time to make it a reality. The next hurdle? Implementing a billing system that can seamlessly handle the nuances of your chosen model.

That's where Orb steps in.

Orb is a billing platform designed to handle the intricacies of SaaS pricing. It empowers you to focus on growing your business. Whether you've chosen a usage-based or per-feature model, Orb simplifies the entire billing process.

Here's how Orb supports your SaaS pricing journey:

• Accurate and reliable billing: Orb tracks every billable event. It ensures your customers are billed precisely for the value they receive. No more overcharging or undercharging — just accurate invoices that build trust.
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• Effortless scalability: As your business grows and your pricing model evolves, Orb scales alongside you. Our Plan Versioning and Migrations features eliminate the headaches of complex data migrations.
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• Granular usage insights: Orb's tracking transforms raw usage data into actionable insights. Understand how your customers use your product, identify trends, and make data-backed decisions.
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• Easier integration: Orb connects with your existing data infrastructure. This includes popular data warehouses like Snowflake and accounting software like Netsuite. This streamlines your operations, so your billing data flows seamlessly across your systems.
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• Tailored billing metrics: Define your own billing metrics to align with how you measure and charge for usage. This guarantees fair and transparent pricing. Orb's intuitive interface and custom SQL editor make it easy to customize your billing logic.

Learn more about Orb and test it out yourself. Schedule a demo to see Orb in action.