You probably know about some of the most popular billing models available to subscription businesses (and if you don’t, check out our handy blog: ‘Subscription Billing Models: A Brief Introduction’), and now you’re wondering: what’s next? How do I pick one?
Here are a few key questions to consider when deciding on how to choose a pricing strategy – there’s no ‘one size fits all’ approach, so it’s important to ensure you’re picking the best model for your situation.
How to Choose a Pricing Strategy, Question 1: What Are My Costs?
This might sound like an obvious question, but that makes it all the more important to spend time answering. After all, how much does it really cost to run your business? What does each product that you deliver to the customer cost you, in real terms: from your operating costs (such as software, taxes, business premises, etc.) to the cost of delivering your service (supply, logistics, etc.). You’ll also need to factor in any variables – like the cost of hiring contractors, or hosting costs that differ month to month, or miscellaneous expenses (such as travel).
Next, you need to create an average by dividing this total cost across the number of customers you have/intend to have. This will give you a foundational ‘break even’ figure. Of course, you don’t only want to break even – so you will need to add a percentage to this figure to ensure you have a healthy profit margin.
Remember, too, that totting up the numbers in this way could inform your saas pricing strategy in another way and will help you how to choose a pricing strategy – if you find that your costs vary wildly from month to month, depending on it may make sense to charge customers based on their usage (rather than opting for a fixed-fee strategy).
How to Choose a Pricing Strategy, Question 2: Who Are My Ideal Customers?
If you’re just starting out on how to choose a pricing strategy, this question can be a bit tricky to answer, as you don’t have the data to properly analyse customer behaviour – though you can always look at your competitors to get an idea (more on that below). On that note, here’s a pro tip: if you aren’t collecting customer data, start now! Not only is this information essential to monitoring the health of your business, but also if you wish to adapt your pricing model further down the line, it will help you decide on the best direction for your business (and, if you’re a Billsby customer, you’ll find lots of helpful insights all in one place, thanks to our acclaimed Dashboard).
To begin with, instinct can be helpful. What are your customers using your product for? Put yourselves in their shoes. Is it mostly for ease and speed (such as a grocery delivery service) – meaning that they’ll probably prefer a platform that makes things super clear and simple (perhaps a recurring subscription with only a few different pricing/payment options). Would they prefer to pay in advance or at the end of each week/month? Are they big spenders or do they prefer to spend little and often? What features do/would they value most: rapid delivery, flexibility, or something else? Understanding these kinds of behaviours will help you decide how you’ll define – and promote – the value of your product, and how best to serve your customers with pricing and payment plan options.
How to Choose a Pricing Strategy, Question 3: What Do My Competitors Do?
In an ideal world, we’d all like to be ahead of the curve – not simply following what our competitors do. However, it’s important to know what competitors are offering as you’re starting out, and to keep an eye on this as you go along: because increasingly-savvy customers are more likely than ever to shop around, and they’ll certainly be making comparisons (which means you must do this, too!).
Bonus Tip: Don’t be Afraid to Mix and Match
As mentioned at the beginning of this blog on how to choose a pricing strategy, there’s a different solution for everyone: every brand, every business owner, and every customer. So don’t be afraid to mix it up and tread a less conventional path. Perhaps a hybrid subscription model is best for you – something that allows customers to pay a one-off cost for a piece of software, for example, with the option to pay a subscription on top so that the software is automatically updated to the latest version as enhancements are released - or something entirely bespoke, which allows you to tailor your offering to each additional customer (this is particularly suited to large enterprises or high-net-worth individuals looking for a personalised service).
If you’re willing to think outside the box, there are many options available to you – it’s just a question of picking the right saas pricing strategy!
You can also gain more insight by reading the other blog on Five saas pricing strategies and how they could benefit your business.