The most critical issue for any SaaS company is determining the best monetization strategy. While you can get all the traction on the planet, acquire, activate and retain hundreds of users. But until your startup makes money, it is not a business. A good pricing strategy is essential to make your startup profitable.
How to choose the right pricing strategy
It can be challenging to decide the best pricing strategy for SaaS products. However, this decision will impact your brand, marketing, and business.
It is not enough to create a pricing page. Your product will improve over time, and your business team will grow, so pricing shouldn’t be outdated. In addition, you can improve the performance of your pricing page by constantly testing, optimizing, and experimenting.
Andrew is a SaaS pricing expert who claims that companies update their pricing pages every six months. According to the article, companies spend six hours designing their pricing strategy and creating a pricing plan. They then stick with the program for many years without changing it or revisiting it.
Chanty spent many weeks researching pricing strategies to make the best decision. To help you make the right decision, I’m going to share what we learned.
It’s not free to use Freemium
Pricing SaaS products is a topic that requires us to look at one of the most common strategies. The freemium model.
Freemium is an amalgamation of premium and free. Freemium can be defined as either a pricing strategy or business model. Tech-savvy millennials, like me, are familiar with freemium. Simply put, SaaS pricing allows you to use the lite version for free and upgrade to a paid plan to unlock additional features.
Even if your startup is beginning to look at SaaS, chances are you have used products that offer a freemium or free trial. These two models are the most popular in SaaS. However, your pricing options are much more than these.
Six questions to ask when pricing strategies are being determined
You will need to follow the same steps as when you created your business plan to develop a pricing strategy. It will allow you to consider all external and operational factors to establish the best pricing strategy for your company.
Before you jump into pricing models, you should ask the following questions.
1. What pricing strategy do your competitors use?
There are already companies in your market, so you don’t have to create them. They’ve probably tried many different pricing strategies and concepts and have been successful. You can replicate what your competitors do and still succeed; it’s reasonable to believe.
But, you must pay attention to one thing: the size and funding of your competitors. For example, suppose you’re a DIY solopreneur who is struggling to make ends meet. In that case, it’s essential to estimate your chances of success and consider your options before you decide on the pricing strategy for your VC-funded competitor with 200 employees.
Consider the market leaders that are similar in size and potential to yours. Please pay attention to their length of existence and whether or not they have changed their pricing strategies over the years.
Chanty is, for instance, directly competing with Slack. The market we entered was built for virality, which was something that we quickly understood. To be successful in this niche, you need to have many users who will spread the word about your app. Our extensive and small competitors have either offered a freemium model or a free trial, which gives us a good starting point.
2. What is the market size
It is crucial to consider the size of your market. It is not enough to look at the whole market and assume that you have all of them.
It is essential to determine how large a market you will attract and how many you can convert. Pricing models will not work depending on the size of your target market. However, it can be similar to the way your competitors approach pricing. Therefore, it can help you narrow down your options.
3. How do you measure the value of your product?
Is it possible to instantly convey the product’s value? Is it easier to explain the benefits once you have tried it? This question will help you decide whether a trial or free version should be included in your pricing strategy.
Marketing software, for example, has a clear and easy-to-understand benefit. On the other hand, Ahrefs or Semrush products don’t offer freemium. Instead, they either charge a small upfront fee or provide different versions of the tool for testing.
It is more challenging to convince customers that productivity software, such as Slack and Outpost, has benefits. However, it is possible to get more benefits from it as the positive outcomes increase over time.
4. Can you get value from free users?
A law of equivalent exchange states that you must receive something in return for giving something away. So, for example, giving away a freemium application should provide some form of immaterial return. It could be a recommendation, an email address, valuable feedback, or the chance to become a paying customer.
You shouldn’t offer freemium if you don’t see nonpaying customers as a source of value.
5. How do you get your startup funded?
Startups that are financially strapped can’t afford to play freemium games. It is due to the high cost of each additional customer (free) and the low conversion rate between freemium and premium. Solopreneurs must make money immediately with the product to maintain their business.
If you have done the math and your VC funding seems large enough to cover all the freemiums, then go for it.
6. Is your product unique?
If it is, and the product value is clear to you, then you should choose the premium option. It is possible to create a new market for a product. When customers have no other options, it’s easier to convince them to buy an app. No competitors are offering freemium or a free trial.
The pay-to-get started approach will help validate your business idea. Your first customers who pay will be the most convincing proof that your product solves a real problem.
Pricing strategy is a dynamic process
It is essential to consider your pricing strategy before making a decision carefully. Research has shown that freemium is a serious path. You and your team will have to dedicate a lot of effort and time to support thousands of nonpaying users. However, a premium or free trial may not get your product as much exposure as it would with freemium.
Only you can make difficult decisions. However, your decision does not have to be made. Instead, you can experiment with new approaches and iterate in the lean startup world to find the best one for your business. If you have done the math and your VC funding seems large enough to cover all the freemiums, then go for it.
Experimenting with pricing has the ultimate goal of making as many customers as possible pay. Even if you don’t feel your pricing page needs more attention than six hours, keep in mind that any change to the conversion rate could mean thousands of lost sales.
Disclaimer. The opinions and views expressed in this article are the authors Andrew Napolitano.