Gauging how to price a SaaS (software as a service) product can be tricky, especially if you’re a newer entrepreneur. So where do you start?
From your own costs to perceived market value, there are a few key metrics to keep in mind. To find out which factors were the most important, we asked seven founders and YEC members their best tips for new entrepreneurs who aren’t sure where to set their price points.
Know Your Operational Costs
In order to properly price a SaaS product, you must have a complete understanding of what it costs to provide the service. Entrepreneurs often do not understand their operational costs and price their SaaS products improperly, leaving little margin for profit. Fortunately, technology operational costs tend to trend down, helping keep your margins healthy over the long run — that is if you price your service properly from the start.
Perform Continual Tests
Run multivariate tests with several different pricing options and see which has the best results.
Price With Margins in Mind
Avoid being the cheapest offer in your industry. You’ll never find sufficient margin to support strong marketing, excellent customer service and overall growth. Instead, start pricing your product with an incredibly healthy margin (after all of the costs are considered) and if need be, discount later to target a more price sensitive audience. Remember, it is generally easier to lower prices than it is to increase them.
Do Customer Interviews
Doing prospective customer interviews is a great way for a new entrepreneur to figure out how much to price his or her SaaS product. This allows you to discover how much a customer is willing to pay for your product, which can then determine what your set price should be. Customer interviews also allow entrepreneurs to understand the factors that influence purchase so you can best position your offerings.
Offer Multiple Versions
Offer multiple versions of your SaaS product, tiered towards the level of business owner it might attract, and price each accordingly. It’s unlikely that your SaaS product is going to fit into a “one size fits all” business model — make it attractive to businesses both small and large.
Just Price It
Price it, and then change it. Always grandfather. This way you’ll learn quickly, but you won’t upset old customers.
– Wade Foster, Zapier
Gauge the Competition
Check the competition and try out their service before pricing your product if you can. Make sure your price is not the only competitive aspect of your product.
Featured Image: Maxx-Studio via Shutterstock