Is Raising Prices the Simple Key to SaaS Success?
July 26, 2013
If you’re offering freemiums in hopes of increasing customer acquisition, you might want to reconsider your pricing strategy. Talk to many SaaS entrepreneurs, and they’ll tell you that offering freemium or low-cost subscription plans is a no-brainer. After all, in many cases, the easiest and most effective way for a SaaS business to convince customers to sign up — and ideally pay for premium features eventually — is to have them experience the product.
Talk to other SaaS experts, however, and they’ll tell you that offering low entry-level prices is actually a counter-intuitive customer acquisition and retention strategy.
Why is that?
Because, as Patrick McKenzie points out in this excellent post for the blog SaaS Pricing, very few SaaS businesses can scale (let alone survive) by selling their products for slightly above zero. There are exceptions to that rule, of course (e.g., Netflix, Dropbox, 37Signals, and others), but McKenzie says those businesses are a rarity. And the only reason they’ve been able to get away with low pricing models is because they’ve achieved massive distribution or continue to spend millions on advertising to acquire new customers.
So, does that mean that SaaS founders should forget everything they’ve been told about SaaS pricing and freemium and consider jacking up their monthly or annual subscription fees to levels that better align with the true value of their products?
An Argument for Increasing SaaS Prices
In his post, McKenzie shares the story of A/B testing software Visual Website Optimizer, which, when it was founded considered a $9/$19/$49 SaaS pricing model. Instead, the company’s management decided to go with a $49/$149/$249 pricing model that, in spite of greatly exceeding the cost (free) of Google’s competing product, more accurately reflected the worth of the service.
The result? McKenzie says that one customer generates as much as $3,000 in revenue annually for Visual Website Optimizer, and the company is thriving. By contrast, a more typical, lower cost SaaS pricing model would require the business to acquire at least five customers to reach that number.
Visual Website Optimizer’s experience is not some sort of fringe result, either.
In a post on his blog last August, SaaS Growth Strategies’ Lincoln Murphy wrote about how a 10-times increase in prices helped Stormpulse, a B2B weather tracking and risk assessment application, acquire happier (and more profitable) customers. And in a post for our site earlier this year, SaaS entrepreneur and PopSurvey founder Josh Pigford talked about how dropping his company’s freemium plan and doubling its prices helped the business grow its revenue by 40 percent in just one month.
By not offering the free trial, Pigford believes that PopSurvey forced prospective customers to do more research before they signed up. Ultimately, that’s allowed the business to attract a higher quality batch of educated customers whose expectations better align with what PopSurvey’s product delivers.
“In my mind,” Pigford explains, “that’s not some sort of rogue idea that will only work for our company. It’s a very reasonable, quality-driven customer acquisition strategy that I think many SaaS businesses could benefit from.”
Tips for Testing and Implementing SaaS Pricing Increases
Of course, that doesn’t mean that SaaS companies should blindly raise prices.
As GinzaMetrics founder and CEO Ray Grieselhuber writes in this post, founders must first examine the pros and cons of their existing model, explore how a pricing increase might positively or negatively impact that model, and consider the impact that a pricing shift could have on their company’s market position.
If, after completing that analysis, it’s obvious that a price increase makes sense, there are a number of higher pricing models SaaS companies can consider, including:
- Flat annual pricing: According to Grieselhuber, asking customers to make one annual payment can greatly improve the efficiency of your sales staff. Instead of needing sales reps to close 20 or more deals per month to meet revenue targets, they’ll only have to close two or three.
- Double your price: When WP Engine and SmartBear Software founder Jason Cohen creates an iPhone application, he asks himself a very simple question: “If I increased the price from $0.99 to $1.99, would I lose more than half of my sales?” If the answer is no, Cohen writes on his blog, he doubles the price. The justification for that strategy is simple: even though he may lose some customers, having fewer customers isn’t always a bad thing; it typically means fewer service requests and higher quality customers.
- Continue to offer multiple pricing options: Just because you raise your prices and kill off some cheaper subscription options, it doesn’t mean you shouldn’t implement a tiered pricing strategy. In fact, doing so is critical to selling value to your customers, creating an opportunity for upsell, and appealing to customers with different needs and budgets.
If You Do Eliminate Low-Cost Customers, Don’t Ignore Them
Increasing SaaS pricing isn’t foolproof, however, and the biggest risk in implementing that strategy is ostracizing freemium or low cost customers, who will likely be upset by that decision. In almost every case, some form of backlash is inevitable.
The key to managing that pushback, Murphy points out in his post, is to be steadfast and transparent. In other words, don’t avoid making a strategic decision because you’re afraid of alienating those customers, but don’t ignore their objections, either. If you communicate the reasoning behind your decision and manage expectations, Murphy says most rational customers will understand. You might also consider keeping those customers on board at your old pricing levels for a determined period of time, with an agreement that they’ll eventually convert to the new, higher prices.
At the end of the day, however, Tien Anh Nguyen, VP of Finance at UserTesting, says that the most basic thing to remember is that getting SaaS pricing right is all about determining and communicating the true value of your service. If you do that, you’ll be able to attract more of the right kinds of customers.
“Establishing the value of the product is important because it adds clarity to the pricing model and makes communicating it to the customers a lot easier,” Nguyen explains in this post. “To avoid causing sticker shock, the pricing model needs to speak to the values that customers are familiar with, and ultimately, it needs to be consistent with how the success of the product is measured.”
Has your SaaS business experimented with pricing increases? If so, which pricing strategies have worked well for you? If not, why do you think increasing SaaS prices is a bad idea? We’d love to hear your thoughts in the comments section below!