Setting Prices in a SaaS Company I: Three Ways
Posted: Thu Dec 12, 2024 10:11 am
Setting prices in a SaaS business is a complicated but essential thing. The price you charge for your product is going to have a direct impact on the success of your business. This is why setting a price is scary. However, especially in a SaaS system where everything is more easily measurable than in the sale of products, setting a price is relatively simple. It is, at least, simpler than in the sale of a physical product.
The first point I want to make is that you don't ask your customers.
It sounds counterintuitive – who better than them to know how much belgium phone number library are willing to pay? But it is not their job and they do not have to know. You can easily find yourself with many Don't Know/No Answers and very low figures.
That's why it's best to search for different methods to determine the price yourself.
Method 1: A matter of instinct.
One of the things you'll find when searching online for how to set prices for a SaaS company is "think about your gut feeling and double it." Needless to say, gut feeling may not be the best business advisor.
If you want to have a good pricing strategy , it's best to back it up with something as measurable as possible . Gut instinct is fine, but it must be backed up by facts. Anything that isn't backed up by facts is going to be hard to justify and hard to adjust appropriately.
Method 2: What should the price cover?
It's clear that revenues need to cover costs . Costs should include electricity, salaries (including yours), materials, working time, machinery, rent, etc. The material cost of a SaaS service is relatively cheap, given that, once up and running, almost all of the day-to-day expense is processing time and storage, but it needs to be considered.
It is also clear that in addition to covering costs, profits must be covered: no one wants to open a company to reach a financial break-even point.
So, think about what the price should cover and then think about how much percentage of profit you want to make from each sale.
That is to say: if you want to make a 20% profit, you should sell a product that costs €100 to manufacture for €120.
Profit doesn't have to be relative to price. Maybe you want to earn €5 per subscription, so the price you pay should be the cost of production plus that €5.
This is probably the easiest way to set prices for a SaaS company . And it has another advantage: you cover your costs.
There is also a problem: customers are less concerned about the price than about the value of what they buy. If your price depends on costs, it depends on external factors : if a supplier raises the price, you have to raise it yourself.
Method 3: Whatever the competition does
This method is used when there is an established average price. If all your competitors charge €30 for a monthly service, that is what you should charge using this method to set prices. If you charge more, you start at a disadvantage. If you charge less, you will be perceived as being of lower quality, and you will also start a price war that, even if you win, you will lose.
The first point I want to make is that you don't ask your customers.
It sounds counterintuitive – who better than them to know how much belgium phone number library are willing to pay? But it is not their job and they do not have to know. You can easily find yourself with many Don't Know/No Answers and very low figures.
That's why it's best to search for different methods to determine the price yourself.
Method 1: A matter of instinct.
One of the things you'll find when searching online for how to set prices for a SaaS company is "think about your gut feeling and double it." Needless to say, gut feeling may not be the best business advisor.
If you want to have a good pricing strategy , it's best to back it up with something as measurable as possible . Gut instinct is fine, but it must be backed up by facts. Anything that isn't backed up by facts is going to be hard to justify and hard to adjust appropriately.
Method 2: What should the price cover?
It's clear that revenues need to cover costs . Costs should include electricity, salaries (including yours), materials, working time, machinery, rent, etc. The material cost of a SaaS service is relatively cheap, given that, once up and running, almost all of the day-to-day expense is processing time and storage, but it needs to be considered.
It is also clear that in addition to covering costs, profits must be covered: no one wants to open a company to reach a financial break-even point.
So, think about what the price should cover and then think about how much percentage of profit you want to make from each sale.
That is to say: if you want to make a 20% profit, you should sell a product that costs €100 to manufacture for €120.
Profit doesn't have to be relative to price. Maybe you want to earn €5 per subscription, so the price you pay should be the cost of production plus that €5.
This is probably the easiest way to set prices for a SaaS company . And it has another advantage: you cover your costs.
There is also a problem: customers are less concerned about the price than about the value of what they buy. If your price depends on costs, it depends on external factors : if a supplier raises the price, you have to raise it yourself.
Method 3: Whatever the competition does
This method is used when there is an established average price. If all your competitors charge €30 for a monthly service, that is what you should charge using this method to set prices. If you charge more, you start at a disadvantage. If you charge less, you will be perceived as being of lower quality, and you will also start a price war that, even if you win, you will lose.