Optimizing SaaS Pricing Strategy Based On Data Analysis
Data analysis can make a major difference in optimizing and improving your SaaS pricing strategy. Here's what to know and why it's important.
Trying to create the ultimate SaaS pricing strategy is tricky, to say the least. The point is to make yourself and your customers happy – you want your product to be properly aligned with value so you can earn revenues from it, while on the other side clients want something they deem “affordable.” If the price is too low, it may even deter the buyers as it may be associated with low quality. If it’s too high, you may be considered to have overestimated yourself. So, how is one to strike the right balance? Well, that’s where data analytics and their interpretation come in. But first, let’s take a look first at some types of pricing strategies. After all, this is also a part of the “problem” – how to choose the best one? Usually, it is the combination of the several which have proven to be the most beneficial. We shall deal with the particular ones soon enough, and in the meantime, here are three basic types:
- Pricing according to your value – you set the price based on how much you believe your service is worth. Basically, this is a good starting point, but it should be merged with at least one other type.
- Pricing according to your competition – a method as old as the market and competition itself. You are aware of your qualities as well as your competitors’. Hence, this copy-paste method can help you get some kind of an idea where you stand. Still, are you completely sure about the real worth of their services? Or perhaps this is all just good marketing and their poor quality will soon be revealed?
- Pricing according to customer behavior – this one calls for extensive research and data analysis. For example, you should find out how often a potential customer was tempted to buy your service, what their reviews say about you, what is the age of your average customer, and so on. In short, you will have to collect both objective and subjective (reviews) data so as to fully grasp the situation.
Obviously, the last is the most important to us, as the data analysis regards this group, i.e. our (loyal) customers. In order to fully understand just how challenging it is to differentiate between the vital and insignificant information for SaaS pricing, let’s just say that the worldwide data supply is estimated to hit 24,800 exabytes by 2020, while the demand will be 42,700 exabytes. The discrepancy between the two is huge, and this nicely sums up the fact that there we would definitely make better decisions if we had all the information we need. Therefore, we have to decide which data in particular would be invaluable for our business. One way to do this might be to segment the data in order to:
1. Identify your Top Customers
Even though it sounds pretty straightforward, acknowledging your top recurring customer is a bit complex. If you were to rely only on the data from gross sales report, you would definitely not have the whole picture. Instead, you should be looking at the date from the net sales perspective, and include the discounts into the equation, too. This way, you are bound to get who indeed is the biggest user of your services.
2. Identify and mitigate the business risks
Monitor your clients closely, and try to see if there is any pattern in their behavior. At what times do they tend to shop more, or when do they refrain from your product? This information is certainly useful for your short and long-term plans. From the above two data segmentation results a few SaaS pricing strategies may emerge:
- Tiered user pricing – in this case, the price for the SaaS is determined by the number of customers. For instance, one price is set for up to 10 users, the other for 20 users, and so on. While it may work for some, its main flaw is that solopreneurs won’t find it useful as they do not need extra users. Be aware though that there is a difference in tiered pricing vs. volume pricing, as these two are often confused with each other.
- Make your own pricing – here you would allow your user to create their own package. This is an excellent offer for those users who know exactly what they want and are willing to pay accordingly for the combination of services which is bound to boost their business.
- Free version – you have seen this one a million times. There is one initial package that is free for all the users who register. However, you also have in store some services which will prove desirable and which, naturally, cost money. This way of doing business is very good if you have clearly defined your target audience and have carefully adjusted the services to them.
- Subscription (flat rate pricing) – in this case, whenever you better the quality of your services, your users will be charged a flat rate. Pretty simple, and often in combination with other pricing strategies.
- Pay on the go pricing – this SaaS pricing model is very interesting in a way that a client is charged according to how much they use the service. If the user knows their approximate needs, expenses, and resources, this pricing seems pretty attractive.
Also, let us mention the fact that appearance and descriptive language may also play a big role. As superficial as it seems, we are all largely affected by the fonts, shapes, and colors, and certain pricing will appear to be much more appealing and practical just because its description sums up nicely our major problems, or we find it visually attractive. Finally, a bit more about the data analysis. The process of analyzing data is similar to its collection in the sense that you should know exactly what type of information you need when collecting data. For instance, you will have to conduct research on how old your clients are if you wish to calculate the average age, and this is just one of the indicators. Similarly, you may wish to find out the estimated customer lifetime, as it is essential for your own business predictions in terms of profit. Is it functionality or storage that is most valued? Who seems to belong to your niche, i.e. what is the users’ main occupation? By answering some (or all) of these questions, you’ll be one step closer to setting the perfect pricing strategy for you.
Coming up with the best possible SaaS pricing strategy is no mean feat, but it is definitely not beyond your power. Define your priorities, and work from there. That way, you will know exactly what type of information you need to gather for thorough analysis and later deduce which pricing combination will bring in the highest revenue.