Pricing strategies software product

Skimming pricing also known as promotional pricing is the strategy of setting a high initial price for a new product, before slowly lowering the price over time.

Skimming pricing is sometimes referred to as "riding down the demand curve": as the product's price is lowered over time, it appeals to different sub-sections of the marketplace, and customers with different price sensitivities. The best examples of skimming pricing can be found in tech: Apple products are famous for heavy discounting just a few months after launch, and in video gaming, prices steadily decline from release.

In SaaS, this strategy works because of the Technology Adoption Lifecycle : early adopters gain utility from the bragging rights of first access to new technology, and they'll often pay more for access to new products. As the product matures and prices are reduced, it begins to appeal to the later market. Prestige pricing also referred to as premium pricing is the strategy of maintaining high prices, in order to convey a sense of quality, exclusivity or luxury.

In doing so, companies can maintain a relatively small customer base of high-value customers; customers that would likely abandon the brand if prices were to decrease. There are a few ways to leverage prestige pricing in SaaS.

If you're a well-known brand, or your product is used by high profile companies, you may be able to differentiate yourself by reputation, allowing you to charge a higher price in the process. The first thing you have to understand is the selling price is a function of your ability to sell and nothing else.

Free trials are a staple of SaaS pricing strategies, and with good reason: by offering the product for free, for a limited time, you provide a quick foot-in-the-door. Customers can start using your product without any financial expense, and as long as they're able to benefit from the product during the trial, there's a strong incentive to upgrade when the trial ends. Free trials are typically time-limited the most common length is 30 days , but it's also possible to restrict it by usage with the trial expiring after 5 invoices, 1 video file, etc.

Crucially, half of all free trial signups occur after the trial has ended , so it's important to have a well-defined follow-up sequence. Cost plus pricing also referred to as cost based pricing serves as a starting point for many SaaS companies. Cost plus pricing doesn't take into account competitor pricing, the perceived value of the product, the price sensitivity of their customers, or any of the other inputs that should influence pricing.

But pricing discussions have to start somewhere, often with limited information - and in these instances, cost plus pricing can be a useful framework for kick-starting your thought process. Cost plus pricing is very company-centric: it's an exercise in choosing the profit the company wants, with little regard for the customer that supplies that profit. Value based pricing works in stark contrast, using the perceived value of the product as the benchmark for price setting, instead of costs, competitors or target margins.

At its heart, value based pricing encourages SaaS companies to view their pricing strategy as a product of the value they provide. Instead of fixating on cost-cutting to improve profit, companies focus on improving the service and value they provide, using extensive research to understand how customers actually value a product. Value based pricing isn't a quick-win - it's a long-term change to how prices are fundamentally viewed - but if you're looking for a good starting point to transition to value based pricing, check out the 10x Rule.

In simple terms, it's the idea that the value your product provides should be ten times its price, providing a simple heuristic for framing your pricing decisions. Even after you've decided on your SaaS startup's pricing model, and settled on your strategy, there's still room to dramatically improve your price. That's where psychological pricing strategies come in.

Think of these like the icing on the cake: smaller experiments that can be used to fine-tune and optimise your pricing. There's a degree of stigma associated with pricing psychology, perhaps rightly so: I've seen companies use the power of psychology to exploit and mislead customers. Thankfully, the strategies deployed here aren't designed to coerce unwitting customers into buying more than they want: we're simply working alongside the brain's innate processes to reduce friction, and make the sales process as effective and efficient as possible.

Price is a relative concept, and when we assess the price of something, we use a reference point to work out its value. If we were buying a car, we'd compare its price to the price of other cars on the lot, or on eBay; an item of jewellery, and we'd turn to similar pieces in the jewellery shop next door.

Price anchoring is a way to leverage this heuristic to increase your customer's willingness to spend. It's suggested that this psychological pricing strategy works because of the "Left Digit Effect". Our brains process numbers extremely quickly, making snap judgments about prices and values without any conscious awareness. Odd-even pricing works on a similar principle to charm pricing: prices are reduced by a few dollars to bring them just under the nearest "rounded" price point.

Zapier take this approach to extremes, with their seemingly random pricing strategy:. Like odd pricing, even pricing applies the same principle with even numbers, as demonstrated by virtual assistant SaaS Zirtual :.

Typically, the bundle price would offer each component product for less than its individual price assuming it's even possible to buy the products individually , but because the bundle encourages the sale of products that might not otherwise be bought, can still represent an increase in overall profit. Product bundle pricing is great for simplifying complex sales process, especially when a multitude of apps and add-ons are available.

It's also great for drawing focus away from the individual product prices, and encouraging outcome-oriented thinking: customers are encouraged to think about the value of a "productivity suite" or "design studio", instead of individual SaaS products. For an example of product bundle pricing, look no further than Microsoft's Office suite. Office products are now available exclusive through a monthly subscription service, and there's no way to pick-and-choose which products you want to pay for, and which you don't.

I use Word, Excel and Powerpoint on a daily basis, and would gladly pay for each application - but I wouldn't touch Access, Outlook or Publisher with a barge pole.

But because the products are bundled together, I pay a flat monthly fee, and I have all a whole host of Office products installed on my desktop. High-low pricing is most commonly used in the retail industry, but it does have some application in SaaS.

In essence, high-low pricing is the act of alternating between a "high" price and a "low" price: a product is marketed at a premium price, before eventually being reduced to a lower, discounted price.

High-low pricing uses price anchoring to encourage sales: the product's value is associated with the original "premium" price, so when a discount is applied, customers view the reduced price as a particularly great deal. But a word of warning: high-low pricing will drive-up demand in the short-term, but long-term discounting is dangerous.

If you regularly discount your product, you risk anchoring the product's perceived value to that lower price, and create a culture of bargain hunting where customers will wait for a deal before ever purchasing your product. Black Friday is the most blatant example of high-low pricing used in SaaS, with all-manner of typically restrained SaaS companies deciding to slash their prices in an attempt to capitalise on the consumer frenzy:.

Trial pricing is the tactic of offering your SaaS product at a reduced price for a limited time, usually as part of an introductory offer. Whereas the industry-standard free trial is, as the name suggests, free, trial pricing still charges the customer a lower-than-normal fee.

Trial pricing reduces the barriers to actually starting with your product, with the idea being that once a customer has seen how useful your product is, they'll be more than happy to pay the increased rate after the trial expires. Most of the companies I've seen using trial pricing fall toward the shadier end of the business spectrum, often using the approach in combination with other less-than-savoury tactics, like auto-renewing for a higher price as demonstrated by Digital Marketer.

The psychological pricing strategies covered here are designed to work alongside the brain's decision-making framework. Analysis paralysis also know as the paradox of choice is an example of a heuristic your pricing strategy needs to avoid triggering. If a decision requires the assessment of a greater number of choices say 10 , it becomes much harder to remember the choices on offer, and accurately decide between them.

This means that, past a certain point, there's an inverse relationship between number of choices and decisions made. Intercom offer a range of products, and a whole host of variables which can alter pricing: features, teammates, messages, people reached One thing remains the same across the board — you must know your competitive market to be successful.

Source: Wordstream. Once you know what the competition is doing, you can make an appropriate digital product pricing decision. With a digital product, you may not have the same measurable metrics as a manufacturer does think material cost, labor, utilities, etc , but you can still get a fairly accurate estimate of how much it cost you to create this project and how much it will cost to support your business. Digital products can offer something that physical products usually cannot: tiered saas pricing options.

Usually, a base model will offer the basics of a program — enough to be useful without giving everything away. These can be limited features, a restricted number of accounts, or some other requirements. For instance, consider how OptInMonster limits their Basic plan users to 5, page views, installation on 1 site, 3 campaigns at a time, and no option to removing branding:. Spend time with the finance team with respect to the appropriate revenue recognition elements.

Keep in mind that when considering revenues, also consider the sales compensation models. Success in any sales environment will mean that the sales team must be adequately and appropriately compensated to keep them selling.

Often, when we think of services, we think of support services—but there are many services that can form part of the product offerings. Getting to the right price is one of the hardest challenges for the product manager.

We will be looking at various elements that must be considered, in order to get to a viable price for your business. There are two basic initial approaches to making the right decisions. Value-based pricing can drive the best return for a product investment. Pricing must be established to meet or exceed the gross margins goals, based on a business plan with expected revenues.

Ideally, this should NOT be a method of determining the pricing that is presented to the market. Take the time to determine value-based pricing, especially in a SaaS opportunity. In a value-based pricing model, apply quantitative estimates to the differentiable value of the offering against the current customer situation.

Does it save them money? Does it make them money? Does it reduce risk or liability? Does it provide value? How much over what period? There are multiple approaches to coming to a number, but as a starting point—do the market research. Find out what are the numbers that others are using. Determine if they are getting discounts, and if so, what is the foundation for the discounting?

Make sure to explore what associated services are being charged for, and for what rates. Do the homework as a valuable tool in developing the confidence to defend pricing proposals. The price s that are discovered from your market research will be the number on which to create viable ROI models. This is NOT the price on the price list. With a sense of the amount that the market would be willing to pay, step forward through the business needs to come up with the manufacturer standard retail price MSRP.

The MSRP is the value that would go on any commercial price list. Design for the long term. Find out what standard compensation models are for channels and partners.

Be assured that the model will need volume discounts. That is the biggest discount level to start with. For simplicity and SKU management , limit the discount levels to only 5 or 6 levels. Look at the market. Determine where the customers are on the volume scale if the meter relates to volumes of usage.

For example, in selling to a telecommunications service provider in a specific geography—and the largest service provider had 50M subscribers; with subscriber-based price calculate the largest discount level for 75M 50 x 1. It really depends on evaluating the target market.

If this customer was an anomaly—then look at the overall customer base and determine where most of the customers will fit. Design a scale to meet the requirements of the specific market. Tiered pricing is common in the SaaS realm. Customers are already familiar with typical tiered pricing models, and you can offer varying levels of service, information or access to the features of your product at different price points. Many companies that offer tiered pricing demonstrate the differences between high- and low-end packages by using a grid or comparison chart.

You can clearly see the enhanced value with each added tier in its comparison chart. Think about ways in which you can graphically show the added value of your product, using a tiered pricing strategy. Nearly every company offering SaaS lets customers try before they buy. Most companies offer a 7-day, day or day free trial. Be sure to have an autoresponder in place that will automatically contact customers whose free trials are expiring to remind them to renew before the trial ends.

Consider adding a special offer to those who do renew before the trial ends to make it easy for customers to say "yes" and buy the full subscription package. Psychological pricing refers to a method of pricing items to make them appear like a bargain. Shop in a high-end store and you'll see that the items end in zero; shop at Wal-Mart or any typical discount store and note that prices end in "7" or "9. Everyone loves a free gift with a purchase. If you do offer an added bonus, be sure it adds substantial value to your core offering.