With Web 2.0 Ad funded sites going out of fashion subscription based services are on the rise. Setting the right pricing for your SaaS and Web App service is a difficult decision. It is also a critical choice. Get it wrong with high prices and you could be losing out on sales. Running with very low prices may result in too many low profit customers. The secret is in knowing your customers and competition.
“Haggle properly!” (Life of Brian)
The seven ways to price SaaS and Web Apps:
- Cost Plus – Conventional wisdom says price on variable sales costs. However this is more of a resell/retail approach. Operational costs per additional SaaS/Web app customer tends to be very low. It’s the customer acquisition and developing new features that requires the high investments.
- Match the Competition – Don’t worry about the costs. Price the service the same as your competitors and move their customers across to your service. Unfortunately this strategy offers limited differentiation and thus customers won’t move. If you don’t have any competitors check that there is a market in the gap.
- Undercut the Competition – Start a price war and storm the market! This may grab the attention of some budget conscious customers. Unfortunately if it does work the impact does not last long. This strategy also leaves less money for acquiring new customers and future product developments.
- Price Higher than Competitors - If your service is very similar to your direct competitors charge slightly more than them. Then focus on being a quality service. However you’ll have do something much better than your competitor. Find a feature or service level that the customer really values and your competitor is weak at.
- Differentiate – Build a very different feature set and charge much more than your competitors. The challenge is you’ve got to have an outstanding service that fits a need. Your business message also needs to be very strong to justify the higher price.
- Hide Your Prices – Many modern SaaS services such as TactileCRM and Freshbooks, etc publish all their prices. Some, like Echosign, have a salesforce to sell the service. Others let the service sell itself. If you don’t publish your pricing your salespeople can upsell the service levels when the customer comes calling. Pricing is often hidden this way in the corporate world of software.
- Segment - Offer several service level to suite different customer types. Huddle and DNS Made Easy offer and range of service levels for small businesses and corporate customers. The pricing on these service levels varies a great deal.
Like I said it’s not easy. A mixture of the above pricing strategies may be the answer. A lot of the decision relies on knowing the market well i.e. the customers and the competitors. Choose a price strategy early on, test the market, and be flexible. A word of warning: it’s much easier to decrease prices than to increase them. Good luck!