The most profitable pricing strategies put customer value front and center, are driven by data, and match your customers’ purchasing and usage habits. And they’re not pulled out of thin air. So, find out how you can maximize monetization and retention for your recurring revenue business.
Tiered pricing model
Offers multiple packages with different features and product combinations available at different price points.
- Catered to multiple buyer personas at multiple price points, maximizing revenue for each customer while also providing an easy upsell opportunity as companies outgrow each tier.
Overlooking a Core Revenue Driver
Most subscription companies spend precious little time thinking about pricing
- Pricing is one of the most important levers for revenue growth
- Data shows that monetization has nearly 2x the impact of acquisition efforts and a massive 4x the improvement from time spent acquiring more customers
Fixed / flat-rate pricing model
A single product, a fixed set of features, and a fixed price per month
Value-Based Pricing
Customers decide the right price for your product
- Utilize customer data on the overall value of your product, as well as breakdowns of the relative value of individual features to set your pricing
- All this research takes time, but leads to a price that is closer to the truth
Competitor-Based Pricing
Looks at the prices set by competing businesses in the same sector, raising prices or discounting a little to account for the value of your product, and then adopting those prices for your own business.
- Can get you close, but still forever be undercharging.
Per unit/user model
Easier for buyers to understand, simplifies sales process, and makes forecasting revenue straightforward
- Downside: doesn’t reflect true value of product
- Charging per seat can lead to users sharing logins across teams, cutting into revenue
If your resources are being drained, try a usage model
Charge based on usage instead of fixing pricing.
Usage model
Charges users based on how much of a product or service they consume
- Tying pricing to usage makes it easier for small companies to get started with your product while avoiding the high upfront fees charged by some subscription companies.
- Charging based on usage does make it much harder to predict revenue since billing can vary dramatically each month.
Basing pricing on instinct or “gut feel” over data
Data needs to be at the heart of every pricing decision you make
- Failing to base your subscription pricing on hard data could lead you to overprice or underprice your product or services
- Understand what they value in your product and what they are willing to pay
Use ProfitWell
Find out what’s important to your customers, align it to value metrics, and build pricing around those metrics to maximize monetization and retention.
What companies get wrong about subscription pricing
Companies often spend an average of only ten hours a year on pricing.
- This happens for a number of reasons
- Pressure to acquire new customers
- A lack of knowledge on how to price
- Failure to invest in collecting customer data
5 tips to a SaaS-kicking subscription pricing strategy
There’s still room to enhance your pricing
Give users multiple tiers
Many companies only offer two tiers: cheap and useless or expensive and overpowered, neither of which is remotely valuable to buyers.
Who are your customers?
Understand your customer segments to decide which pricing model you choose and how much you charge
- Match pricing and feature set to your primary customer segments, instead of choosing tiers based on which features you want to include
- How much are they willing and able to spend on your product
How does your competition price their products?
Just as you should be, competitors are constantly updating and tweaking their own pricing models to match their customers’ needs.
Updating pricing infrequently
As your product or service improves over time, you should vary your pricing to track the value you provide
- Failing to revisit your pricing regularly can only hurt your bottom line
- Companies that revisit and update their pricing every six months see nearly double the average revenue per user gain
Upsell and cross-sell when needed
Give customers the ability to upgrade their accounts as they grow
- Look for add-ons that either increase revenue or retention
- Upselling doesn’t have to be automated
- If your customers seem to be hitting a wall in their basic plan, send them an email or chat to show them your premium offerings may hold up better
3 popular pricing strategies
Cost-plus
- Competitor-based pricing
- Value-based
- Best for recurring revenue: high customer acquisition cost, high revenue-per-customer acquisition cost
- Should be used in your own recurring revenue business
- Example: value-based
Cost-plus pricing
Sum up all fixed and variable costs of doing business, add a percentage margin, and set the price
- Requires very little market research
- Customers don’t care about your costs, they care about the value you can provide
- Unit cost of delivering one account can be extremely low, much lower than the value your customers will get
Go freemium
Freemium tiers give potential buyers a chance to try your product before they buy.
What are your fixed and variable costs?
Work out how much it costs you to deliver the base value to the customer
- Add in any variable costs
- Advertising fees, travel, contract labor, and other miscellaneous services
- An absolute baseline you must charge each customer to break even
- Make sure pricing is high enough to achieve healthy margins
