Correctly pricing any product is of utmost importance. The pricing strategies followed by a firm can shape its overall profitability for the future. However, Joshua Melick points out that it is the factor of pricing that creates the most confusion for entrepreneurs running companies that offer SaaS software. They usually follow the same type of a pricing structure, featuring a version of bronze, silver, or gold plans, while adding more features to each tier.
The bronze, silver, or gold plans used by SaaS companies can be considered to be two dimensional plans. One of their dimensions is the tier and the other one is the usage. Joshua Melick, however, mentions that for the long term growth and profits of a business, adding a third dimension is needed. The price structure followed by a company must rise with the increase in the price of almost every other thing in the society. A company must not just rely on upgrades, changes and inflation to grow their price. Moreover, increasing the price range strictly as per inflation can even cost a company quite a bit in the long run.
Here are certain points mentioned by Joshua Melick that a company needs to take into consideration in regards to their price structure:
- SaaS companies should ideally change their price on a yearly basis. There is no better way to acquire customer feedback, no matter whether it is good or bad, than to raise the price. Every SaaS company that has been in the market for a while will have a certain number of customers loyal to their platform. Hence, it can be a viable business strategy to run some models on how many of these customers a company can afford to lose, and come out ahead with their higher prices. Increasing pricing is a standard practice in the Private Equity takeover playbook, and is followed by several companies.
- SaaS companies might include a clause into their annual agreements that the price of their offerings shall increase by a percentage in each renewal cycle. This system works quite well in industries that have negotiable pricing. Even if the customers do negotiate this clause, it shall give the sales team of the SaaS company a bit of a wiggle room. They even can agree to do away with the increase if the customer is not satisfied with the offering by the end of their term. If a SaaS company has confidence in their products, then they should try this method. Customers are highly likely to use products even at an increased price if they are satisfied with its output.
Once the automatic price increase has been implemented, one may try to negotiate with customers. The aim of the negotiation should always be on up gradation. For example, a company may waive the 7% increase in favor of an upgrade to the next, with more users or features.