SAAS PRICING - HOW TO STAY AHEAD

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Recently, I was part of a think tank for a SaaS product group that was struggling with pricing. The current problem is that it is difficult for the product team to let the user choose what they think is the best product for the user out of the three possible packaging tiers.

The standard tier package for this product starts at a fixed price of $10/month, plus other usage-based fees. Next, they added lower layers with limited functionality. The cost of using the lower tier is set at almost one-fifth the price of the standard tier.

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Over time, as user demand grew, a third premium package offering was added. This time, for technical reasons, the price is set at a fixed price of $700 per month. That's not an unusually high price, but compared to the other two packages, it's 70(!) times more expensive than the original standard tier offering. The new premium package provides robustness against high system loads, and although the other two tiers are deliverable, they agree that the new product is the best product for the user.

Here's the thing: considering these three options, the user chooses the lower level package and standard, and rarely uses the premium level package, even though it's actually a better product, with better features, and for the money value.

Before reviewing how to solve this problem, let's review the things to consider when determining the pricing of SaaS products.

Evaluate different pricing models
Here are the 4 most common pricing models:

Flat Fee - Pay a fixed price for all product features. Typically, this will be monthly or yearly. This model is simple and rarely used because it doesn't have enough space to appeal to a broad customer base. In short, it's an offer they can refuse.

Pay-As-You-Go - usage-based pricing tier. This pricing model is attractive to customers. They can adjust payments as they grow, and if they get stuck, they can scale down and cut costs, which is a nice selling point. On the other hand, this pricing model can cause headaches when trying to forecast your company's revenue, as any bump in the customer's road will directly affect your revenue. Also, your engineering team will find this challenge as they will need a robust scaling strategy that can grow and shrink to reduce infrastructure costs (remember, your customers won't pay for unused products ).
The best and most successful examples of this model are the large cloud providers - Amazon Web Services and Microsoft Azure. They are big enough to take advantage of the competitive nature of this model and still remain profitable.
Flat Rate + Pay- As-You-Go — The perfect combination of the two models above includes a flat flat rate (e.g. $10/mo), and pay-per-use (e.g. 100 emails = $5, 1000 emails = $15. ). I like it because it creates a predictable safety net for a pay-as-you-go model.
Tiered - Typically 3.5 products are offered on average (constituting a combination of all of the above), in this model we want to reach a wider audience and provide a safety net in the form of a mid-range price in case the premium price affects users.
On the downside, hierarchical model planning is the most complex because it involves more than just cost plus profit. It involves strategy, psychology and an understanding of the elements of game theory. It's important to decide what features should be included in each tier and how to price them correctly. The SaaS product team understands that they are not playing this game correctly. Now let's break down the problem and learn from it.

Pro tip on Frog Boiling : It's also common to add basic or even free tiers, which will create a trap to convert potential users into future paying users. Christopher Penn on the legendary podcast "Marketing With Coffee" talks about a "frog boil" approach that sees companies gradually reducing the supply of free products over time. With this approach, companies offer free software packages and then downgrade the license to the point where it's not worth having. As a result, the free tier gets less and less effective, and the "Pay Now" button (and ads) get brighter and brighter. The message: "If you want to do better, it's a paid option" is heard loud and clear by these users. If these companies flip the switch overnight, they'll be pushed back – the trick is to turn the dial all the way down a bit at a time.

Core elements to consider when building a product

Which model is best for your product. I always advocate for a layered model where possible, but don't force a model without a valid reason. SaaS product teams realized their use of layered products at an early stage, when there were only two products that actually led people to choose the one they didn't want them to choose. In the early stages of a product, an effective alternative solution would be to offer a successful flat-rate + pay-as-you-go model.
Alternatives out there . How do your competitors package and price their products? What is your USP? How can you stand out and make your product more attractive? Even if your goal is to be considered more expensive than your competitors, make sure to make an informed decision (remember that no matter what you do, you are always part of the competitive landscape and choosing to pay you is always because of not paying give to someone).
product value . Assume that bottom-line prices can determine the success or failure of converting demand into sales. You want to help a potential customer make the right choice and choose the most relevant product for him. In the digital world, "bottom line" pricing is considered an art form in which there is no ultimate right or wrong, but it is the difference between make and break.
"Pricing is actually pretty simple...the literal value that the customer pays doesn't actually exceed the true value of the product." — Ron Johnson Although this is an oversimplified statement (I would add that the customer pays The price of silver will not be a penny higher than expected.
value of the product), it does convey a truth - we have a job to communicate the value of the product to the customer and to help the customer feel that the price is fair and reflect that value - it is important to keep this in mind when choosing a pricing product. Ask yourself - is there a correlation between the price charged and the value offered? Make sure to do your market research.
The SaaS product team is delivering great value, and its current pricing product doesn't reflect that. This makes users choose packages that are not suitable for them. With this in mind, people think they are rational, but they are not. Identify the tiers you want to target and price in a way that helps them choose.
Decoy Effect When the team decides to add a more Special Database expensive product, users can choose between 3 premium packages priced at $700, $1,400 and $2,800. Would you rather choose a cheap $10 product for a high-performance system based on our new pricing view?

List of your features. This is closely related to the value of the product. Simply put, the longer the better. The solutions are as follows: 1. List everything you can offer. Write down everything you know and everything you can think of 2. specific. Don't overlook differences like limited versus full warranties - each should be listed separately.

3. List the features you want to offer your best value tier, then add or subtract other features. Consider the perceived value to users and apply it to your structure. Make sure to be as quantitative as possible. The SaaS product team provides shared computer resources for the standard tier and dedicated resources for the premium tier. Most users will ask, "I know dedicated is better than shared, but is it $700 cheaper?" The solution is to add another feature to the list. While the first feature is still declaring shared/dedicated resources per tier, the second feature details how much computing power will be allocated to users. This quantitative information allows users to assign and rationalize values ​​to it.
4. Make sure that the length of each tier list is related to the perceived value (premium should be longer than base value, etc.). SaaS product teams all have feature lists of the same length, which can confuse users.