Most people think that the SaaS model became popular because it gave companies a competitive advantage. Software-as-a-Service is a modern solution offering users continuous updates while allowing them to save the company’s IT resources. Even better, you don’t have to install these programs to use them.
But to be honest, this isn’t why many software developers are switching to SaaS. While competitive advantage is nice, the biggest reason for developing these solutions is connected to money. Basically, the SaaS model allows you to squeeze more cash from your users over their lifetime cycle, which can result in massive profits over time.
In this article, we’ll talk about the pricing process nuances and why it makes sense to hire a SaaS development company for your next digital solution.
What makes SaaS unique?
SaaS is basically a subscription-based service. Similar to Netflix, users have to spend money every month or year to gain access to the tool. As soon as you stop making payments, the developer company will prevent access to the software.
Given that this isn’t a simple transaction, companies have much more leeway when determining pricing plans. Software developers can limit the number of features and seats you get based on your plan. They can even experiment with credits where customers are charged based on how frequently they’re using the tool.
Why do you need the right pricing?
Not only should you find the optimal pricing model for your software, but you should also set the right prices. Unfortunately, many brands go with their gut when determining prices and available features. Some of them blindly copy their competitors’ strategies without thinking about whether a new brand could justify such pricing plans.
On the other hand, there are also those that sell too cheap, which would eventually affect their growth potential. When they finally decide to adjust prices to their right level, they inadvertently alienate many users because the company is suddenly perceived as “greedy.”
Like in any other business, setting the right price is critical for software companies. Here are a few main reasons why creating optimal plans will affect your long-term development.
Competitive advantage
In an ideal situation, you would want to squeeze as much money as possible from your users without breaking the bank. Pricing your products on the edge can provide a significant boon to your business while ensuring maximum client coverage and long-term growth. As such, it can sometimes ensure a better competitive advantage than the product quality.
Brand loyalty
Whether you’re pricing software, a book, or a toy, you should always look at things from the customers’ perspective. If they believe your solution is too expensive, they will always feel robbed, no matter the product quality. In these cases, they’ll switch to another provider as soon as it becomes available.
So, by finding the right price, users will feel as if they’re getting the right value for their money. Most importantly, as long as they’re happy with the service and features, they won’t jump ship as fast.
Increased usage
No matter what kind of software you’re selling, you need to ensure that people are actually using it. This is especially true with subscription-based programs, as customers can easily switch to something else if they stop utilizing your solution.
Basically, you can entice consumption with slightly higher prices. Most people will feel compelled to use the software if they’ve spent money on it. Continuous usage will build brand loyalty and will also improve the software perception, making it seem more valuable. That being said, there are cases where free models can actually backfire, as clients will perceive them as cheap.
4 Popular pricing strategies
There are four main strategies companies use to find optimal pricing for their software:
1. Flat rate
A flat rate is the simplest pricing strategy that everyone can comprehend. Basically, a user will pay a certain amount of money to use the product during an allocated time period. The best thing about this approach is that both users and providers can assess the spending at the end of a period.
Pros
- Easy to sell as people know what they’re getting
- Companies can better predict revenues, and users can predict monthly spending
Cons
- This can lead to a potential loss of revenues, especially if you have many clients who overuse the tool
- Given there’s one inflexible pricing policy, some people won’t understand the value
2. Tiered model
With tiered pricing, you’re offering several plans, each with its own set of features. This is a much better, more comprehensive strategy where each individual or business can choose the right solution based on their needs. Unlike the flat rate, this gives clients some wiggle room, which can be critical for uses with smaller budgets.
Pros
- Can attract a much larger number of users
- It can increase your revenues as all businesses can find a plan fit for their budget
- Upselling is made easy; all that a client has to do is upgrade to a bigger plan
- Similarly, you can reduce losses if a customer decides to downgrade
Cons
- Some users might not understand what you’re offering with each plan (especially true if they don’t understand different features)
- Like with a flat rate, you can’t profit from overuse even if a client goes with the most expensive plan
- Downgrading might cost you some money
3. Credit-based
As the name implies, credit-based pricing plans charge you based on how much you’ve spent. This model is ideal for squeezing more money from frequent users, but for some software, it might be counterproductive.
Pros
- Makes it easier for a client to commit to a tool
- Great solution for basic clients who don’t overuse the program
- It might significantly boost your profits depending on the client base
Cons
- Hard to predict revenues
- Frequent users might perceive it as unfair and could switch to companies with flat pricing plans
4. Freemium model
Freemium is another model where you get the basic functionality for free and have to spend money on certain features.
Pros
- Good for building a client base
- When a user spends any money on the tool, they feel committed to it
- You give out “lousy” features for free while charging the feature that took time to develop
Cons
- It’s sometimes hard to determine what should be free and what should be charged
- Can significantly reduce your profits
