How to Optimize SaaS Pricing for Maximum Profitability

Creating and leading a business truly is a never-ending process, and while setting and achieving goals is a key component of driving your product to success, it is not the end all be all. Within your company there are limitless options for optimization: the sky's the limit when it comes to bettering and transforming your service. And often, these changes are exactly what allows you to achieve the goals you set.

To implement effective changes, every business needs regular reviews, and pricing is no exception. I can almost guarantee that if you haven’t reviewed your pricing in the past year – you’ve lost a substantial amount of revenue. Why? Because pricing is the nucleus of your operations. Research by the Harvard Business School says that when you get a 1% improvement in your pricing you can get an almost 11% profit increase. Yet, especially for SaaS company owners the task of adjusting pricing might be your least favorite thing to do. I get it.

But look at it this way: you are constantly investing time and resources into making your business the best it can be. New functionality, increased usability, quality marketing and robust customer support. Pricing is just one more area that needs your attention too. Besides, if your product is making lives easier – it better be priced accordingly.

To ease your way into pricing adjustments, I gathered together all the best industry approaches and personal tips from experience in the industry. Let’s get into it.

First, plan

As it goes, the majority of your invaluable time is going to (or should) go toward researching the market, analyzing your current status, and finding strategies best suited for your goals.

Here are a few ideas:

Research value-based pricing

This is a method that focuses on the perception of your customers of your product, so that your offer is aligned with their expectation. Unlike other pricing models such as competitor-based pricing and cost-plus pricing, this model is based on the ROI that your business generates for your users. Basically, if you help your clients make money, you are delivering value. By using this model you focus on your customer, increase their loyalty and willingness to pay more for what you are offering.

Price Sensitivity and the Van Westendorp Price Sensitivity Meter

This concept measures the impact price point changes have on the purchasing behaviors of your customers: so the number of sales you gain if you find the right price point relative to lower or higher ones. Understanding the price sensitivity of your product is key to gaining insights on how valuable your product actually is for your customers.

In order to find the optimal pricing point you might want to use the Van Westendorp model to verify if your assumptions about your customers are right. It is essentially a sophisticated survey (although it only includes 4 simple questions). They are as follows:

1. At what price would you think this product is a good value?
2. At what price would you think the product is getting expensive?
3. At what price is the product so inexpensive you doubt its quality?
4. What price would you think is too expensive for you to consider buying the product?

Here, to avoid gathering useless data, you might want to add predefined options, as well as publish this on your app or website for max visibility.

Feature-value preference and analytics

This approach is most often used by Freemium products to increase revenue by monetizing the most valuable features, while lowering the threshold of entry to the product at the expense of fairly valuable free features. Your task is to identify the features that will be sufficient for onboarding into the product, that will provide complete value to the customer and the features that will enhance the user experience and success.

To do this, you need to conduct detailed user experience analytics, using both quantitative and qualitative methods. If you want to evaluate quantitatively it makes sense to conduct a cohort analysis and analyze the feature sets used by each cohort. Also a good option would be to conduct analytics with a simple survey in the product - asking customers to choose their favorite feature and non-favorite feature. This information, also obtained for each of the cohorts will help to make a conclusion and premium feature set. If quantitative data doesn't give a complete picture or you feel there is a lack of hypotheses, it would be great to do some custdev interviews for more clarity.

Retaining existing customers

Changing your pricing can be a hell of a ride, but I promise – it is worth it. Yet, the most prevalent question in this process is handing existing customers. You can choose to apply the new pricing to new customers only or opt for an all-rounded change. If you choose the latter, there are a few ways to approach an existing audience.

Grandfathering

Unlike the common misconception that this approach is only used when you choose to retain old pricing for all existing customers, grandfathering can be used even when you want old customers to transition to new rules. The difference is, you set a time limit. For the next 6 months the pricing is the same because we value you so much, after that it will increase.

Grandfather (Transfer) Discount

This is a variation of the grandfathering strategy, where instead of maintaining the same price forever, existing customers get a special discount for a limited time before you transition them to your new pricing structure. Here, loyalty is mostly retained and your users will have plenty of time to come to terms with the new pricing, giving they already value your product.

Clockwork Increases

If you want a more systematic approach – this is your friend. You can set a regular interval where your pricing increases, slowly accustoming your users to the new pricing. It is also important to communicate this with your customers way in advance to slowly prepare them for upcoming changes, which (with this clockwork approach) can also be easily justified by external factors such as inflation or increased service value.

Communicating it well

Communication is key wherever you go: relationships, negotiations, and business. Especially business. Price changes are bound to affect all levels at your company, including your internal structures, which in turn affect your employees and the way they work with your users. And, of course, this will be a noticeable change for your customers too, so communicating these changes will be the cornerstone of their success.

• Start by communicating these changes internally. Your team needs to be up to date on all changes and reasons, down to the tiniest details. This will help ensure that your communication with your customers is consistent across all channels, from marketing to customer support. Especially customer support! Since it will likely be the changing factor in retaining old users.

• When it comes to notifying customers, it is better to devise a thorough plan and start notifying customers at least a month before the upcoming changes, through email or in-app notifications.

• One of your strategies can be launching new pricing together with new features, shifting the focus away from pricing and onto the new, exciting changes. But even that won’t keep you safe from complaints or dissatisfaction, so it is better to devise a script and make it as human as possible to tackle emotions that are coming your way, whether you want it or not.

Timings

There are a few factors timing-wise that will affect how your price increase will be received by your audience. There are two mains ones:

• Choose your season: As it goes, a change like this is not very likely to be received well by the majority. There is no perfect time for a price change, but you can choose a season where you can make more objective judgements about the success of your model.

For example, launching a new model during a slow period (summer, holidays) will not provide enough feedback for analytics, and launching during a crowded time (Black Friday) can bring in a lot of customers that will probably soon leave your service. The most neutral month will be specific to your business but somewhere around February or March should be a safe bet.\

• Time to adjust: No one likes to be rushed, especially when it concerns a decision regarding money. When you decide to notify your customers about upcoming pricing changes, it is important to create an environment where they will feel like they have the time to make a rational decision.

Keeping your eye on the pulse

Now that all strategy preparation is done there are a few aspects that need to be considered. But we have extensively discussed the starting strategy of pricing adjustments in SaaS, so I will try to keep the following tips on implementation, monitoring, and backup plans quite short. Here are the main things I believe you need to know:

Implementation

• Phased Rollout: If you want to gauge the reaction of your audience and get an approximate understanding of the effect of your adjustment on your finances, you can start with a pilot group of users before a full rollout. This way, you can adjust in real-time.
• Technology and Systems Update: In order to make the transition as smooth as you need to update all systems to reflect the new pricing, since errors in billing can lead to significant customer dissatisfaction and churn.

Monitoring

• Key Performance Indicators (KPIs): This step is essential, but chances are, you already have everything in place. Monitor new subscriptions, churn rate, and customer feedback closely after the pricing change. A good example would be a sudden spike in churn that might indicate customer dissatisfaction with new pricing.
• Regular Review Meetings: This comes at a later date, but regularly reviewing the result your pricing change yields will give you the opportunity to compare actual performance against the goals you set at the beginning.
• Adjustments Based on Data: Once you receive enough quality data, you can get ready to modify pricing based on customer response and market conditions. For example, Getsitecontrol adjusted their entry-level pricing from $19 to $9 after observing higher than expected churn rates.

Flexibility and Backup

• Backup Plan: Prepare to revert to old pricing if new pricing results in a more than 30% increase in churn. The quicker you respond the more customer relationships you can salvage, which will affect your company reputation.

• Adaptability: Highlight the importance of being flexible and making data-driven decisions to adjust strategies as needed. Fact: Continual adaptation based on detailed analytics and customer feedback forms the core of successful pricing strategies.

A systematic approach to SaaS pricing adjustments can bring you exceptional results when done correctly. The base of any strategy is thorough research, which will allow you to make informed decisions before diving into a big change. This will be a continuous process that needs regular reviewing, and also a process that will elevate both the way you approach your product and the way your company operates.