Split testing for pricing: How to optimize SaaS revenue

Finding the perfect price for your SaaS product can feel like a balancing act. You need a price that attracts customers while also maximizing revenue. In this article, we'll explore the power of split testing for pricing in the SaaS world and how it can help you improve your revenue strategy.

You'll also learn:

• How to conduct effective pricing split tests
• Key pricing elements to test, from price points to free trial period
• Best practices for split testing, including defining clear goals and analyzing results
• Why split testing and usage-based billing are a winning combination
• How Orb's billing platform can help you implement and scale your pricing strategies

Let’s get started by explaining the role of split testing in pricing your SaaS products. 

What is split testing for pricing?

Split testing is a technique where you compare two versions of something to see which one performs better. You’ll likely see it referred to as “A/B testing” too. 

In the context of pricing, it means showing different groups of customers different prices for your product or service. The goal? To see which price point drives the most revenue or conversions. 

How does price testing apply to SaaS?

A/B testing for pricing is valuable in SaaS because finding the optimal price can be the difference between success and stagnation.

Let’s explain it through a quick example: 

Imagine you're offering a new productivity app. You're not sure whether to charge $10/month or $15/month. 

With split testing for pricing, you'd divide your potential customer base into two groups. One group would see the $10 price, while the other would see the $15 price. Everything else about their experience remains identical. Think features, marketing messages, and user interface.

Why is split testing for pricing so important?

By monitoring how each group responds, you gain insights into customer behavior and price sensitivity. Do more people sign up for the $10/month plan? Does the $15/month plan actually generate more revenue despite a potentially lower conversion rate?

Analyzing these responses is key to understanding the subtle dynamics of pricing. It allows you to identify the "sweet spot." To put it simply, that sweet spot would be the price that maximizes revenue without deterring potential customers. 

Why split-test your pricing strategy?

Split testing for pricing might seem like a small tweak, but it can have a big impact on your SaaS business. Here's why:

Higher revenue potential

Split testing helps pinpoint the price that clicks with your target audience. Identifying the ideal price can lead to higher conversions and increased revenue.

As stated before, split testing for pricing is about finding that sweet spot where the price isn't too high to scare potential customers away. It’s also about not setting it so low that you're leaving money on the table. 

Less customer churn

When customers feel like the price they're paying reflects the value they get they're more likely to stick around. Split testing helps you understand how your customers perceive the value of your product at different price points. With that information in mind, you can then adjust your pricing accordingly and reduce churn.

Better customer acquisition

Split testing allows you to test many pricing tiers to attract a wider range of customers. For instance, maybe a lower-priced plan with fewer features appeals to smaller businesses. On the other hand, perhaps a higher-priced plan with premium features attracts larger enterprises.

Customer insights

Split testing helps you understand why customers make certain purchasing decisions. It goes beyond just finding "the right price." 

This information can inform your marketing and product development strategies. It leads to more effective campaigns and a better product-market fit. 

Data-driven decision making

Instead of relying on your gut, price testing helps you make decisions based on cold, hard data. Analyzing and using that data effectively can lead to more confident pricing adjustments. It can also lead to a more sustainable growth trajectory for your SaaS business.

Testing different value propositions

Experiment with combinations of features, benefits, and price points. Doing so will help you see which resonates best with your target audience. 

Knowing what types of value propositions click better with your customers allows you to fine-tune your messaging. You can highlight the aspects of your product that customers value most and capitalize on that.

Continuous pricing optimization

The SaaS industry is constantly changing, and split testing allows you to adapt to new market conditions and customer preferences. Price testing helps make sure your pricing strategy stays competitive and effective over time.

Key steps to run an effective pricing split test

Split testing for pricing can be a powerful tool for optimizing your SaaS revenue, but only if done correctly. Here's a breakdown of the key steps of running an effective pricing split test:

Step 1: Define your goals

Before diving into a pricing split test, it's crucial to know what you're hoping to achieve. Ask yourself: “What's the primary goal of this experiment?” Are you aiming to increase overall revenue, boost customer acquisition, or reduce churn?

Having a well-defined goal will guide your testing strategy and help you measure success later on. 

For example, if your goal is to increase revenue, you'll want to focus on metrics like average revenue per user (ARPU) and customer lifetime value (CLTV). If your goal is to reduce churn, you'll want to track metrics like cancellation rates and customer retention.

Step 2: Select variables to test

Once you've established your goals, it's time to decide which pricing elements you want to test. There are a variety of options here, including:

• Price tiers: Experiment with different price points for your various subscription plans.
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• Discount strategies: Test discount offers like percentage-based discounts, free trials, or limited-time promotions.
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• Billing frequency: Compare monthly vs. annual billing options or explore other billing cycles.
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• Value proposition: Test how different ways of framing your product's value affect conversion rates.

We'll get into more detail about some of these elements in the next section. For now, let’s say it’s important to select the variables that are most relevant to your goals and your business.

Step 3: Segment your customer base

It's essential to divide your customer base into distinct test groups. You should do it because making this division helps make sure you can then draw meaningful comparisons. 

These groups should be as similar as possible in terms of demographics, behavior, and other relevant factors. The goal is to isolate the impact of the pricing changes you're testing and reduce the risk of skewed results.

For example, you might segment your audience based on their plan, their level of engagement, or their acquisition channel.

Step 4: Run the test

Once your price testing has run its course, it's time to analyze the results. Analyzing results involves comparing the performance of each test group and gauging success based on your goals.

Extra tip: During the testing period, closely track key metrics and track any significant changes in customer behavior.

Step 5: Analyze and interpret results

Once your price testing has run its course, it's time to analyze the results. Interpreting results involves comparing the performance of each test group and measuring success based on your predefined goals.

Key metrics to consider include:

• Conversion rates: This metric represents the percentage of visitors who subscribe to a plan.
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• ARPU: This metric measures the average revenue generated per customer.
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• CLTV: Here, you’re looking at the predicted total revenue from a customer throughout their relationship with your company.
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• Churn rate: This percentage shows the rate at which customers cancel their subscriptions or stop using your solution.

By analyzing these metrics, you can determine which pricing strategy performed best. You'll also gain valuable insights into customer price sensitivity and preferences. 

Remember: The goal is not just to find the "perfect" price but to continuously optimize your pricing strategy based on data.

Common pricing elements to test

Split testing for pricing allows you to test elements of your pricing strategy to see what resonates best with your target audience. Here are some common pricing elements you can test:

Price points

Perhaps the most straightforward element to test is the actual price point itself. Are you charging too much, or could you potentially charge more? Experiment with various pricing levels for your tiers to see how they affect conversion rates and revenue.

For example, if you currently offer a single plan for $50/month, you could test a lower-priced plan at $40/month and a higher-priced plan at $60/month. Remember to keep a close eye on key metrics like conversion rates, ARPU, and CLTV to see which price point performs best.

Pricing models

Beyond just the price itself, you can also experiment with different pricing models. Two common models in the SaaS world are:

• Usage-based pricing: Customers pay based on their usage of the product or service. This can be a good option for products where usage varies significantly between customers.
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• Tiered pricing: Customers choose from a set of predefined plans with different features and price points. This is a popular model for SaaS products with a range of features and functionalities.

Split testing can help you determine which pricing model is most appealing to your target audience. It also helps you tell which one best aligns with your product's value proposition. We’ll analyze split testing for pricing and usage-based pricing in more detail later in the article. 

Discounts and promotions

Discounts can be a powerful tool for attracting new customers and encouraging existing users to upgrade. Price testing can help you evaluate the impact of different offers, such as:

• Percentage-based discounts: This is a promotion where you offer a percentage discount on monthly or annual subscriptions.
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• Limited-time promotions: Here you’re creating a sense of urgency with limited-time offers or special promotions.

By testing different discount strategies, you can find the best way to boost subscriptions and revenue.

Free trial periods

If your SaaS product offers a free trial, the length of that trial can affect conversion rates. Is your current trial period too short, preventing potential customers from fully experiencing the value of your product? Or is it too long, delaying the moment they become a paying customer?

Test different trial lengths to see how it affects conversion rates and customer acquisition costs. You might find that a shorter trial period leads to quicker conversions. Conversely, a longer trial period may result in higher-quality leads who are more likely to stick around.

Best practices for split testing pricing

As you know by now, split testing for pricing can be a powerful tool for optimizing your SaaS revenue. Because of that, it's important to approach it strategically. Here are some best practices to keep in mind:

• Run tests for as long as you need: To get an accurate picture of how different pricing strategies perform, run your tests for several weeks or more. By doing so, you’re accounting for any seasonal variations or temporary trends that may skew results.
  
  
• Include a control group: A control group provides a baseline for comparison and helps isolate the impact of your pricing changes. Without it, it becomes difficult to know whether any changes are due to the new pricing or other factors.
  
  
• Limit tested variables: Don't try to test everything at once. To get the most out of your price testing, focus on one or two variables at a time. Taking a measured approach makes it easier to identify what's actually driving the results.
  
  
• Check your test groups are comparable: When dividing your audience, ensure test groups are comparable in terms of demographics and behavior. You want to make sure that any observed differences in results are truly due to the pricing changes.
  
  
• Maintain transparency: Avoid long-term or permanent price discrepancies for similar tiers when testing different prices. Split testing helps gather data but can lead to customer trust issues if one group feels they’re paying more without extra value.

Why split testing and usage-based billing are a powerful combination

In SaaS, usage-based billing has emerged as a popular pricing model, allowing customers to pay only for what they consume. But how do you determine the right usage-based pricing structure for your product and your customers? That's where split testing comes in.

Combining split testing with usage-based billing can be a powerful strategy for SaaS businesses looking to optimize their revenue and improve customer satisfaction. Here's why:

Align pricing with customer usage patterns

Some customers might use your product extensively, while others might only need it for occasional tasks. Usage-based billing allows you to tailor your pricing to these usage patterns. The goal is to make customers feel like they're paying a fair price for the value they get.

Split testing helps you fine-tune this alignment. By experimenting with different pricing tiers, usage thresholds, or overage charges, you can pinpoint the pricing structure that best reflects your customers' actual usage habits.

Test variable pricing structures

Usage-based billing offers a high degree of flexibility in how you structure your pricing. You can experiment with different variables, such as:

• Pricing tiers: As stated in an earlier section, you can create different tiers with varying usage allowances and price points.
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• Usage thresholds: You can set specific thresholds for usage, with different pricing for usage above or below those thresholds.
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• Overage charges: In this case, you implement charges for usage that exceeds a certain limit.

Split testing allows you to test these different variables and see how they affect customer behavior and revenue. 

Maximize revenue predictability

Split testing can help you increase revenue predictability in usage-based billing. By analyzing customer usage patterns and identifying the most effective pricing structures, you can create a more stable and predictable revenue stream.

For example, you might discover that a tiered pricing model with clear usage thresholds leads to more consistent revenue than a simple pay-as-you-go model.

Drive customer retention

When customers feel like they're being charged fairly, they tend to stay. Usage-based billing, combined with A/B testing for pricing, can help you create a pricing structure that's seen as fair. As a result, you’re fostering customer loyalty and reducing churn.

By continuously monitoring customer usage and adjusting your pricing strategy accordingly, you can ensure that your pricing remains aligned with customer needs and expectations.

Use split testing with Orb's platform to boost SaaS revenue 

So far, we've talked about the impact of using split testing for pricing. The question now is: What happens after you've gathered those valuable insights? How do you actually implement those pricing changes and make sure they're reflected in your billing system?

That's where Orb comes in.

Orb is the billing platform built for modern SaaS pricing, especially hybrid and usage-based models. We help developers and finance teams use the insights gained from split testing and translate them into pricing adjustments. 

Here's how Orb helps you leverage the power of split testing:

• Scale successful pricing models: With Orb, you can translate the winning pricing strategies from your split tests into your billing system. Adjust pricing tiers, usage thresholds, and billing cycles to match customer preferences.
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• Understand customer value perception: Orb's detailed usage tracking and reporting features provide granular insights into customer behavior, allowing you to fine-tune your pricing strategies and maximize customer lifetime value.
  
  
• Align pricing with customer needs: Orb's billing models let you create pricing structures that align with customer needs and usage patterns. Offer tiered pricing, discounts, and prepaid credits — all while ensuring accurate and transparent billing.
  
  
• Real-time pricing adjustments: Respond to market dynamics and customer feedback with Orb's real-time pricing adjustment capabilities. Make changes on the fly, test new pricing models, and optimize your pricing strategy without affecting billing operations.
  
  
• Flexible billing models: Orb supports various billing models, from subscriptions to usage-based pricing. You can implement the pricing strategies that best suit your company and your customers based on the insights you've gained from split testing.

Ready to try Orb’s platform to make better use of your split testing insights?

We offer a free 30-day trial, so you can explore our platform and experience firsthand how Orb can help you boost your SaaS revenue growth. Consult our pricing options to find a plan that fits your budget and needs.