Further SaaS Cost Pricing Options to Reduce Stagflation
earlier presented on SaaS fees pricing and packaging for stagflation prevention in 2022, but this article is based on the latest presentation given in March 2023 by David Vogelpohl. To find out more or view the prior presentation, check out the additional information at the bottom of this post.
Pricing your software as a service (SaaS) can be hard enough in the good of times. Figuring out how to dial in the appropriate pricing that will generate more revenue in times of inflation can be difficult.
This article offers tips for optimizing pricing and packaging of your SaaS services in a weak economy:
- What is stagflation?
- Applying your pricing model to fight stagflation.
- Optimizing your SaaS Pricing Strategies for new MRR vs. Net revenue retention.
- Test creative SaaS pricing model combinations to generate revenues.
- Inflation isn't flat You can change your strategies.
- What can I do to help.
What exactly is Stagflation?
Simply put, stagflation is the economic state that is affected by three key elements:
- Low growth.
- Inflation is high.
- A high rate of unemployment.
There's more pressure than ever on:
- Prospects' wallets are the ones you'd like to impress.
- The wallets of existing customers that you'd like to upgrade.
That's why carefully considering the SaaS pricing strategy is crucial for you to keep building your company in a tight economy.
Using Your SaaS Pricing Model to Fight Stagflation
The most straightforward solution is to increase your price to the point that you're not the only one to do this.
A third of SaaS software, software, and digital goods customers increased rates in the past year.
Interestingly, SaaS companies tend to raise rates that are higher than inflation rates.
This lever -- not a surprise -- generally works to boost revenue, even though it can be a tricky move to make in a time when customers aren't having as much funds to invest in a depressed economy.
Rethinking pricing and package is one of the least optimized levers of SaaS.
The reason why prices are increasing? What's the reason not to try something else?
There are many other options you can pull to make more money when markets are tight besides increasing your pricing.
Increasing acquisition, increasing the conversion rate, and decreasing the rate of churn can be all possibilities.
All of those choices require lots of effort of cross-functional time and energy in order to put them into practice.
If you consider the effort and money that will need to be devoted to the process of increasing sales or reducing customer churn with strategies like PLG, or product-led growth (PLG) or increased customer success efforts, it can become an unwieldy and overwhelming process as illustrated through large and medium-sized t-shirts:
Every one of the large and medium t-shirts represents how much effort, resources, etc. that are required to put into place PLG as well as customer success strategies in a way that will increase customer acquisition and decrease customer churn.
But product pricing changes take only a few minutes and can be done very swiftly, as is evident by the small t-shirt above.
According to Patrick McKenzie points out, it can be as simple as replacing a number with a bigger number:
All things considered, changing your prices could be the most simple, easy option to make when your business needs to boost revenue rapidly.
Optimizing your SaaS Pricing Strategy for the New MRR as compared to. net revenue retention The Growing Mustache
As you consider implementing various pricing strategies, another aspect to consider is whether you want to maximize for new MRR as well as net revenue retention -- or both.
And then there's the "growth mustache."
The mustache of growth is a bracket with a sideways slant that an ex-CFO from my past frequently was referring to. (I also added the "mustache" description, since it does look as if it's a mustache.)
Growth is fueled by increasing monthly recurring revenue (MRR) and new customers entering the market as well as net revenue retention (NRR) which is how much of your existing customers' MRR and ARR you are retaining or growing.
If your NRR is greater than 100%, this is the basis for a multiplier in your earnings, but the same applies to your valuation.
Generally, there's operational leverage by varying pricing and packaging, but you also know you're in an environment where your customers might have less coming into the store and more being expended. The way you alter your pricing could affect your capacity to acquire new customers, keep and grow existing customers and/or both. So take this into consideration when you start making changes.
Test Creative SaaS Pricing Model Combinations to Unlock revenue
If you've determined that you've decided that changing your pricing is the route to go but there's numerous ways you can experiment. Per-feature pricing, pay-as-you go plans as well as freemium pricing models. flat-rate pricing, use-based pricing, per-user plans -which are right for your SaaS business?
There are several ideas to think about for starters:
- SKUs:
- Platform tiered plans
- Product(s) tiered plans
- Persona tiered plans
- One-time add-ons
- Bundles of accessories
- Entitlements:
- Features
- Use
- Support
- Pricing:
- Price
- Recurrence
- Geography
- Method of payment
- Discounts
- Free trials
Explore these options to find ways you can increase the leverage you have in your operation.
Some may require coming up with a buyer persona-based pricing plan that has a little more average revenues per customer (ARPU).
For others, that means the addition of a new component that lets them increase prices.
For others yet this could mean a switch to a flat-rate price system or a user-based pricing model in favor of a more dynamic, feature-based or usage-based pricing structure.
Monitor the effects of any Modifications to Your SaaS Pricing Strategies
In this case, for example, if the customer base shrinks a tiny amount due to an rise in the price and the remaining users are paying a higher price and generating more revenue in the end, certain businesses may appreciate the new price point.
But know which changes are important to your business strategy. An established SaaS firm may have different priorities than a startup will.
Success is spelled with 3 S's
Often when we think of pricing and packaging, we often think of our ability to make more money with the ability to come up with something fresh.
For instance, consider the innovation curve: We make something and it becomes more popular and then it stalls. And it's easy to get trapped in thinking that the only option to get an additional revenue stream is to develop a brand new product entirely.
Then, we can break the thought process and begin to think that fresh revenue S curves are made by altering package, plan as well as add-ons all by providing users with new ways to purchase from you, and to use your platform.
When we also take into consideration a usage measure based on the value metric with overages the new plans and extensions themselves could increase ARPU over time.
SaaS Prices and Packaging Accessories
Add-ons offer an easier path towards increasing the average amount of revenue per user, for both current and potential customers with the tightest budgets, since they have the option of choosing what to purchase from you as opposed to paying, say, flat-rate prices for a bigger package with a variety of options they do not want or don't need.
In other words, do you have existing entitlements you can offer as an add-on without needing to do any engineering work? Are there any of these functions that can be sliced out to create an entirely new SKU, without creating the product completely new?
Add-ons can be found in numerous varieties So you'll be able to include a variety of add-ons, or make multiple bundles.
There is a risk involved -since they may lower your upgrade MRR when fewer users upgrade to a bigger package. But accessories can also be a significant factor in NRR.
To minimize the risk, carefully measure your upgrade and downgrade rates when you start making adjustments to your packages and add-on services.
In addition, you may delay pitching add-ons up to after users have signed up for your core product. Once they're using your product and like it -- and after the additional purchases they make could be considered upsells that can boost your revenue retention numbers and pitch them other add-ons to further improve the experience they get from using your product.
Customers can purchase the SaaS service at the lower cost which will help build your MRR and ARPU with those sales.
Also, a cheaper price point can also give you an edge when going after market share, too -particularly if you are able to undercut competitors' pricing by a bit.
Creating a New Pricing Tier to Drive Achieving Average Price Per User (ARPU)
It is possible that the ARPU-boosting tier you need is one that exists between your existing plans?
As an example, if you're using a tiered pricing model, with $15, $150 and $300 options, maybe the best pricing level for generating more profit can be found somewhere between the three about 75 dollars.
Segmenting SaaS Plans can help you understand the Value of Your Product and increase ARPU
Another possibility is to segment your packaging according to specific customer needs.
For example, WP Engine is a managed WordPress platform which handles various types of websites, however they noticed the opportunity to focus on WooCommerce users in particular, so they created a package specifically targeted at that group.
It allowed them to focus on customers' needs within this one segment to attract their attention, and to get additional sign-ups. Over time, WP Engine was able to provide more value to those customers, which increased WP Engine's revenue.
The Payment Frequency increases leverage
The annualized pricing option offers customers the advantage of a discount by paying for the entire year upfront, but it also gives customers the advantage of decreasing your churn rate while improving the customer's overall lifetime value, or LTV.
In order to further benefit from this approach, you can provide additional discounts on annual prices for new subscribers or for subscribers who are willing to switch from monthly fees to annual charges.
Intro period pricing can also aid in the adoption process for customers.
TIP If you're providing the Enterprise plan, and the price starts to look somewhat more costly when paid for annually make sure to keep the price under $5000. A lot of procurement departments follow an policy that requires staff members to be approved on any purchase that is greater than this, and when you keep costs lower than that and make it easier for customers to easily make that payment with a credit card, without having to go through the internal hurdles in their own organizations. It's possible to vary this and it's not any kind of rule but it's an excellent idea to test.
It's not flat: Adjust Your Strategy
As you consider changing the way you manage your SaaS company's pricing strategy, potential customers' willingness to pay isn't just the one issue to think about. Inflation can vary a lot within a short period of time. That variation can be further varied across every region or country.
Financial headwinds as they relate to different geographical areas can suggest the importance of localization if you offer your saas product globally.
Eliminate Unnecessary Purchase Friction Localization
Localization typically involves multiple aspects that include but are not including:
- Accepting the preferred payments for the region you're selling into.
- The localization of the price.
- The currency is localized.
Each comes with an additional advantage that is not just for buyers, and for your profit margin also.
Pricing for localization converts to 2 times for B2C SaaS firms. Make sure that you provide an adequate reason for having different pricing in diverse regions or countries, in case a potential customer finds several prices.
Local currencies are much easier to be approved for as well as customers in your target market to grasp. When new customers see your SaaS costs displayed in a local currency and understand, it is much easier for them to buy and removes the hassle of maths involved in conversion before they make the decision.
What Can You Help?
The data in the article was recently presented by David Vogelpohl in a webinar hosted by Cumul.io. Watch the original presentation on their YouTube channel.
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