Recently I took part in a think tank for a SaaS product group that was struggling with pricing issues. The issue at hand was that the product team was having a hard time getting users to opt for what they identified as the best offering out of three possible package tiers for their users.
The product’s standard tier package was originally priced at a fixed cost of 10USD/mon plus additional usage based costs. Further on down the road they added a lower tier with limited features. The usage cost for the lower tier was set at almost fifth of the standard tier price.
With time, as user needs to scale grew, a third premium tier package offering was added. This time, for technical reasons, the price was set at a monthly fixed price of 700USD. Not an unusually high price but in comparison to the two other packages, this was presented as 70(!) times the original standard tier offering. The new premium package offered robustness for high system load, and while the two other tiers did deliver, it was agreed that the new offering was the best offering for the users.
The problem: given three choices, users were opting for the lower tier package and the standard and premium tiers were seldom used even though they were both in fact much better offers (the standard tier for low volume users and the premium tier for high volume users) with better features at a great value for money.
Before reviewing how to untangle this issue, let’s review the things you need to consider when approaching pricing of SaaS products.
Evaluating different pricing models
Here are the 4 most common pricing models:
- Flat rate – paying a fixed price for all the product features. Typically, this will be monthly or annually based. This model is simple and is rarely used as it doesn’t give much room to capture a broad customer base. Simply put, it’s an offer they can refuse.
- Pay as you go – a usage based pricing tier. This pricing model has its appeal to customers, they can moderate their payment according to their growth, and the fact that they can scale down and cut costs if they hit a rough patch can be a good selling point. On the other hand, this pricing model might cause a headache when trying to forecast your company’s revenue, as any bump on the road for your customers directly affects your earnings. Plus, your engineering team will also find this challenging as they will need to have a robust scaling strategy that can grow and shrink to cut your infrastructure costs (remember, your customers do not pay for what they do not use).
The best successful examples for this model would be the big cloud providers – Amazon web services and Microsoft Azure. They are big enough to use the competitive nature of this model and still stay profitable.
- Flat rate + Pay as you go – This fine combination of the two models above is self-explanatory. I like it because it creates Go to the full article.
Source:: Business 2 Community