It's a burning question in SaaS — how much should you charge to maximize revenue?
Charge too much, and you won't have many customers. Charge too little, and clients could undervalue your offering.
The key is to find the sweet spot that keeps profits high and customers satisfied.
In B2B SaaS, finding that sweet spot requires some digging.
At Leadfeeder, we've spent the last few years adjusting our pricing to find the right position in the market. Today, I want to share a few lessons we've learned the hard way — and maybe you can avoid similar mistakes!
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The SaaS pricing model charges a recurring subscription fee for using software or service. This is (clearly) different from standard pricing for a product or B2C businesses that often use a "cost-plus pricing" model, where pricing is based on the cost to create the product, plus a little on top for revenue.
This pricing strategy doesn't work for SaaS businesses.
Costs like development and brand building tend to be front-heavy. Meaning your business might spend a year or more investing in developing your service and creating content before onboarding your first customer.
Another common pricing scheme is competitor-based pricing, where brands look at what other businesses charge. This can result in a race to the bottom — or on the flip side, your clients might assume you offer less value if you're cheaper. A lose-lose situation. 👎
Most SaaS companies (especially those in the B2B market) use value-based pricing. This means pricing is based on how much value you deliver.
For us, that means looking at the value of leads we deliver to our customers.
When you can prove that your solution drives revenue, it becomes a lot easier for businesses to justify the cost — and it makes it easier to convert users.
There are four main pricing models for SaaS. Most pricing structures are some variation (or combination) of these four.
Flat-rate pricing: You charge one rate for all customers. There's no variation, no discounts, up charges, etc. Screaming Frog SEO tool uses this pricing combined with a freemium plan.
Freemium pricing: You offer a limited free plan to reel customers in. The idea being once you get them on the free plan, you can upsell them later. We use this at Leadfeeder with our Lite plan. It offers limited features but is always free. MailChimp uses this strategy as well.
Tiered plans based on features: If you offer a variety of different features (or target different markets), you can offer tier-based plans. For example, a small business might not need a CRM, email automation, and call monitoring, so you could offer just the CRM for one price and a combined package for larger businesses. Salesforce uses this pricing structure.
Tiered plans based on users/leads/connections/emails: Rather than tiering plans based on features, you can also create tiers based on users or deliverables. For example, Constant Contact bases its pricing on the number of contacts. Many CRMs use this pricing model as well.
Why does understanding the different models matter? Understanding what other organizations in your space charge provides insight into what customers expect.
This is not to say you should use the same pricing model — in fact, you might be better off using a different model.
For example, most of Leadfeeder's competitors don't offer pricing plans at all.
Instead, they require users to contact them for custom pricing. While that sounds like they’re giving customers what they want, it also makes it harder to compare different options.
We took the opposite approach by being incredibly transparent with our pricing. We have two core pricing plans and then charge based on the number of leads. (We also allow users to filter out leads they don't want, so they only pay for quality leads.)
Your SaaS pricing strategy should be based on a combination of value, competitive analysis, and overall costs. That's what we've done at Leadfeeder, and it seems to be the most effective at telling us what the market will bear.
Here are a few more pricing strategy tips we've learned along the way.
1. Keep pricing plans simple
Back in 2014, we had four pricing plans:
Actually, there were five — we also had an "if you need a bigger plan call us" option.
By 2018, we switched over to our current, two-tier pricing strategy: Lite, which is free, and Premium, which starts at $139 dollars per month.
I did some digging, and from what I can tell, our conversion rate in 2018 was 1.13% and jumped to 1.83% in 2019 (post-change). Therefore, we can attach a 61% increase (likely among other things) to limiting the number of plan options. Pretty cool 😃.
Keeping things simple and transparent was important to us as a company, and our customers seem to appreciate knowing exactly what they'll pay.
2. Consider offering freemium packages (or combination freemium pricing)
A freemium pricing model means offering a stripped-down version of your tool for (you guessed it) free.
While giving away what you've built for free might seem counterintuitive, it's effective for attracting quality leads.
This might not work if your target audience is solely enterprise-level, but our customers are startups, SMB, and a few enterprise clients.
Startups and small businesses are often working on tight budgets. By offering a free (limited) version, we can reel them in before they’re ready to invest in tools.
Once they start earning more revenue (thanks to our tool 🤑), they're able to get buy-in from the c-suite and move to a paid plan.
Freemium plans can be combined with other packages — for example, you might offer feature-based tiered plans and a freemium plan.
3. Consider both customer acquisition cost (CAC) and lifetime value (LTV) in pricing
Some SaaS teams build their pricing around CAC. They calculate the cost to get a customer and then bake that into their pricing along with maintenance, development, and a little on the top for profit.
That's essentially cost-plus pricing – and it's a mistake.
While it might seem logical, this version of cost-plus pricing misses a huge piece of the puzzle.
You only pay acquisition costs once — so building pricing around those one-time costs is inaccurate. If you can keep those customers long-term, the overall CAC is spread out over much longer.
As a result, you might be overcharging, which can result in more churn and higher CAC.
That is why it's important to consider both CAC and the lifetime value of customers. (And why SaaS brands should focus more on retention than acquisition.)
Like most business strategies, I can't provide a step-by-step process that will help everyone figure out their B2B SaaS pricing model. (If only it were that easy!)
Your market, your industry, and your customer base will impact what you can and should charge.
Start by looking at your data and what your competitors charge. Consider both your CAC and LTV.
Over time, pay attention to what customers like and dislike about your pricing model, then adjust (and readjust) your pricing strategy.
Over time, you'll find that sweet spot.
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