Over the past few years, I have had many clients functioning within the SaaS sector. One thing I have found common in both a well-established player and a SaaS startup is the lack of concern they have for optimizing their pricing. This is a huge problem.
Well, while I firmly believe that products, website and the brand image of company matters, this doesn’t take away from the fact that pricing of a product can make or break a deal.
Considering the fact that global IT spending is already down compared to the past few years owing to the ongoing pandemic, the last thing you would want to do is further suppress your conversion rates.
According to BMC, the global decline in 2020 has accounted for over 300 billion USD! And the competition is as tough as ever, with 99 firms reporting the number of SaaS companies to be 6,823 as of 2018.
What is a good conversion rate for a SaaS startup?
Before addressing the elephant in the room (read: saas pricing models), let’s begin first with setting some benchmarks. After all, to assess the success of a given pricing strategy, you must first decide what conversions you aim to achieve.
Now, the challenge here is that there is no industry standard for a good conversion rate for SaaS companies. Instead, they tend to differ, case by case. For starters, you should aim to get more conversion rates from paid methods than by organic tactics to receive a positive return on investment. However, you could still avail SaaS SEO to get a better conversion rate through organic means.
However, a study by Adachen provides some foundation for the SaaS startup pricing model. According to the study, SaaS companies that adopt a freemium model witness a conversion rate of 4 percent to up to 30 percent. The former is the general rate for solutions like Dropbox, while the latter has been achieved by Slack.
Additionally, solutions that offer free trials without requiring credit cards gain a conversion rate of about 10 percent. For those who do require credit cards, conversion rates are generally 25 percent.
Therefore, an educated assumption could be that a 25 percent conversion rate can be a doable aim. You can alter this according to your firms’ specific revenue needs as well as competencies.
Top 4 Pricing Strategies
Once you have decided on a standard to strive for, now is the time to adopt a quality SaaS pricing model. Here are four strategies you can choose from.
Flat Rate Pricing
For any SaaS startup, the safest bet is to set a flat rate price. However, for this to work, you must sell a single product with a given set of features. In fact, this strategy mirrors the old software licensing model that was a range before the cloud infrastructure took over!
Since most SaaS providers have moved on to other types of pricing models owing to diversification in the product portfolio, it is hard to find a lot of examples of the tactic. However, eCommerce SaaS provider Carthook is an excellent example of the method.
As you can see, it charges a single annual fee for access to all of its products’ features.
You might wonder, if the method is seldom used now, why should you use it? Well, for startups, this model is the easiest to communicate and hence sell to customers. For those of you who are just starting out the journey, you wouldn’t want the added pressure of communicating difficult pricing models to customers.
It does come with its limitations as well. For example, it renders the business incapable of extracting varying value from different users. For instance, if your solution is ideal for small business, it will exclude a large market of enterprise companies looking for a SaaS product.
Yet, as mentioned, it is a good stepping stone.
Leverage the power of Number 9
According to USA Today, over 90 percent of retail prices end in either 5 or 9. Another independent 1997 study published in the Marketing Bulletin reported that approximately 60% of prices in advertising material ended in digit 9, and 30% ended in digit 5.
One might wonder, what is this sorcery, and how can SaaS startups jump onto this bandwagon?
Well, this pricing strategy – one where you end the price with 9, leverages consumer psychology. There is an inclination for people to consider 1.99 USD to be a smaller quantity than 2.00 USD. Why? This is because they tend to focus on the first digit when judging its cost-effectiveness.
Here is a SaaS business model example that uses this pricing method.
This is the best pricing strategy if your SaaS solution is considerably pricier than other options. Here, if you can’t afford to reduce its price, give an illusion of cost-effectiveness through the power of the number 9.
This idea usually works with multiple startups under different niches, but it is best to see what kind of customers you have and take decisions accordingly.
Position your best plan in the middle
The idea is to position your best plan in the middle. So let’s say if you have three packages, try to place the best-selling package in the middle and others on the right and left side of the page.
Why? Again, the answer is human physiology. According to research, regardless of the products are placed vertically or horizontally, human minds prefer the one that is placed in the middle.
Here is HasOffers, which adopts this pricing tactic by highlighting its most popular pricing in the middle. Additionally, it offers a free trial which is also highlighted at the top, increasing the chance of a conversion.
There are others BuzzSumo, Brief Metrics who also nailed it beautifully on their pricing page.
This is an excellent tactic to test. There is a chance that a given placement (not necessarily the middle one) works best for you. Try different placements and see what is working best for you when it comes to conversions.
Discounts and Exclusive Offers
I guess almost all SaaS businesses I know are doing this because it’s a win-win situation for users and the business. Users get a beneficial discount upfront, and businesses tend to retain customers for the rest of the year.
If you are a SaaS startup and not planning this, you probably should because people tend to opt for (and place a higher value on) a small gain upfront. For instance, Kickserv offers an annual discount of 10 percent and mentions this right at the top of its pricing models.
If others in the market are doing this, you really don’t have a choice. Not providing discounts on annual subscription will only make you less of an ideal choice in the eyes of a customer. The idea is to cut your profits a bit and offer higher than average discounts in order to become eye candy for a potential client.
Moreover, you can take it one step further by introducing exclusive and time-bound discounts to appeal to the consumers’ love for scarcity. Here, the consumer behaviour of “Fear of Missing Out” comes into play.
Here’s a thought, provide an “exclusive discount to early adopters” for a limited time period that can be from few hours to few days. The reason why this will surely work is that the human mind places high value on objects that scare it.
Not sure if you should go for it or not? Billion-dollar businesses like Expedia, Trip Advisor and American Airlines are doing this for years to get customers on board. It’s worth a try!
Test till you get there!
There is no clear answer as to which of these pricing strategies are the best solution for your startup. After all, every business is different. And customers of a given niche react to different tactics in a varying way.
So, the best way to proceed is to test different strategies and placement until you find the perfect fit. Run pilot tests and see which improves your conversions the best.
Does placing your best offer work the best for you? Or maybe placing it in the first is the right approach? You will only know through testing.
The same is the case with ending your prices with the number 9. Maybe your target audience is wary of such tactics. Only consumer surveys and focus groups can help you identify this.
Making sure your SaaS startup succeeds is surely no easy feat in today’s highly competitive landscape. Therefore, don’t underestimate the role of any of the elements of a business. Whether it be a robust online presence, the beauty of a website, or your pricing page and strategies, each of them help in converting a customer.
So, perfect each of these steps. Once you do so, there is no challenge that your business cannot overcome.
Are you a SaaS business that increased its conversion rate through a specific pricing tactic? Do let us all know by commenting below and help your fellows out!