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How to Choose the Winning SaaS Pricing Model

How to Choose the Winning SaaS Pricing Model
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Why pricing is so important

Because it is one of the most flexible and influential parts of your business.

It is easy to change, compared with other variables

Product, positioning, traffic, team – changing any of these variables is an expensive and lengthy process. Moreover, in some cases, it is impossible to conduct a pure experiment when they are changed.

For example, Mailchimp, like many other marketing services, initially developed in a narrow specialization – a tool for email marketing. They recently decided to change their positioning to the Marketing Platform. For users to begin to consider them this way, huge efforts are needed: both to change the minds of people who are used to consider them as email marketing service, and to grow a product that is equal in its capabilities to other marketing platforms.

To change pricing is easier: to conduct experiments, and make changes. At the first stages, often the marketer / product manager can launch experiments on his own, without the involvement of a designer or developers.

A large number of hypotheses for experiments

Any product can be packaged, described and demonstrated in dozens of different ways. The pricing page is your product cover.

One of the key pages where a purchase decision is made

Pricing is one of the first places where the user is aware of the product’s capabilities. Inside a product, it’s hard to capture all of its features with one glance. They are spread out on different pages, screens, buttons. On the selling pages, you talk about specific functions, solving user problems, but rarely cover all the features of a product in one screen or table.

Pricing is one of the first places where the user is aware of the product’s capabilities

Ivan Palii, Product marketing expert on Sitechecker.pro

When a user can compare the available features each package proposes, he can evaluate what features are available only in the most expensive packages, he easily forms the product’s understanding and its most valuable and paid features. 

This is the first page that authors come to make a selection of solutions for specific problems

When your product hits the radars of customers, partners, bloggers, it begins to participate in a competition that takes place in the minds of people between similar products. When bloggers create reviews or collections with assumed problems and their solving decisions in your market or niche, they rarely examine each of the products in detail. The focus is on the pricing page. Just by exploring pricing lists of all competitors, you can already get the first data for product analysis and draw conclusions that give more value for less money.

First-year working process with pricing: key mistakes

1. Working without pricing

This is the most common problem among startups with traffic or have-part ready product, but there is no understanding of what to take money for. We also made this mistake. We had a fully working SEO page analysis tool, we got the first audience that liked it, but we did not sell anything.

At this stage, we had a lot of options where we could deploy our future product:

  • making money on SEO services delivering;
  • limit the number of available checks for free users and take money for a certain number of checks;
  • create a helpful SEO course and sell access to it;
  • making money with other SEO tools affiliate programs;
  • creating another, but a more valuable product and selling it, and making the page analysis tool-free.

After a long time of brainstorming, we came up with the last option. About six months we worked without a pricing page at all. And it was a huge mistake.

Your pricing will be changing inevitably, there may not be anything left from the first version. But its presence helps to evaluate feedback from the audience much better. If users are ready to pay for the product you offered, what competitors they compare you with, what features they would like access – find answers for all of these questions are much easier exactly on the pricing page.

At the moment you realized that you immediately need a price list, try not to get the second mistake.

2. Long work on the first version of pricing

If you have no ideas on how to create an interesting tariff grid, do not waste time thinking, make the first version based on your key competitor’s version. At the first stage, it is more important for you not to make money on the first customers, but to understand what competitive advantages you put into your product and its importance for users.

If you have no ideas on how to create an interesting tariff grid, do not waste time thinking, make the first version based on your key competitor’s versions

Ivan Palii, Product marketing expert on Sitechecker.pro

Here is the example of one of the first versions of our pricing for Sitechecker.

Sitechechecker pricing model
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3. Conduct a few pricing experiments

It is always necessary to keep in mind that we have a limited amount of traffic for conducting experiments and obtaining statistically significant results (I use this tool to estimate the number of required users in a sample).

In the first year, the startup has basically little traffic and every user counts. Therefore, breaks in experiments cannot be made. After completing one, you immediately need to start another.

And you should always remember why you make these experiments. In the first year, you do this in order not to die for the reason that most startups die – the lack of need for your product.

why startups fail

If you don’t want to become a victim of this error, you need to constantly check your forecast with the pricing experiments’ results and conduct interviews with users.

But besides the lack of need for the product, there is a mistake related to this – the problem with conveying the value of the product. Do not underestimate it. Your product can satisfy the needs of users better than competitors, but if you can’t convey it, then your advantage loses its strength.

It seems that if people have a need, they will figure out your product and get it purchased. This option only works if there are no alternatives on the market. In other cases, users become customers of the product, which reduces the user’s cost of understanding and using the product.

In total, during the first year, you need to constantly conduct experiments with the pricing page in order to:

  • Check if there is a need for your product;
  • Does your product bring value to the target audience?

4. Testing hypothesis for too small changes

For each pricing list, there is a small number of the riskiest, radical hypotheses and a huge number of small ones. The colors of the buttons, the names of packages, the type of pricing design are all small changes that can bring great results, but on large volumes of traffic.

5. Testing obviously useful elements

If you already have product reviews or publications on well-known sites, you do not need to test them, post them immediately. The only thing is, do not include outbound links inside the content. In general, I highlight 4 points for pricing, which you can add immediately to pricing without conducting experiments: reviews, ratings on the pages of reviews, comparisons, the logo of the companies that use you, answers to common questions.

For each pricing list, there is a small number of the riskiest, radical hypotheses and a huge number of small ones

Ivan Palii, Product marketing expert on Sitechecker.pro

If you examine the pricing pages of all the companies in your market, you will see that despite the large differences in design, types of blocks in pricing will often overlap. Someone comes to such blocks with their experiments, someone uses established practices. But the fact is that such elements are unlikely to harm your pricing. They can influence neutrally, or even slightly improve your conversion, and therefore it makes no sense to test them at first.

6. It’s not enough to communicate with the audience on the pricing page

You need to place chats and use automatic messages on the pricing page for two reasons:

  • This is the place where the users have questions. You can watch videos of user behavior on the pricing page, click cards, scrolls, but the most important thing is communication using online chat. When you get the first questions, you will see what nuances in your packages excite users the most, which causes them to doubt what information it is worth adding to pricing in order to exhaustively answer all internal user requests. It is important to remember here that users often do not understand what they want. Therefore, your task is not only to compile a list of questions asked but also to build hypotheses about unasked but implied questions in the process of communication.
  • This is the place where the user can negotiate. This is communication, but a different type. You are already dealing with a user who is interested in your solution. He may have clarifying questions, but the main subject of his interests is different – to get cheaper, what you offer or get more value for the same price. The fact of such negotiations already indicates the value of your product. Any expenditure of time and intellectual effort that the user makes in order to gain access to the use of your product is a good sign. It is not worthwhile at the first stages to immediately reduce the price in tariffs after such negotiations. Do not make concessions to users, but only to those who write to you about it.

Sources for hypotheses

You have studied the key errors and decided to generate a large plan of hypotheses that you need to test in the first 6-12 months. Where to get them? If you have an experienced product manager in your team, then your hypotheses backlog will surely come up with some of the options. But for an exhaustive list, it is better to use all available features.

1. Competitors

The more creative ambitions entrepreneur, founder or product manager has, it is more difficult to copy successful solutions from competitors. Creative ambitions almost always oppose monetary ones. This can be changed if you realize the value of copying competitors (other than that prohibited by intellectual property laws).

Copying working solutions, samples, behavior models is one of the three principles of the theory of evolution. Thus, living organisms, culture and civilization develop. Children learn from adults, losers from winners, and entrepreneurs from other entrepreneurs. Distinguishing the good from the bad and introducing the good for oneself is a rare skill. If, in addition to copying a working idea, you can expand it with your creative solution, then you will advance progress one step further in your market, and possibly in the world as a whole.

Gather a list of your competitors and pay particular attention to the market leaders in terms of income and age of existing

Ivan Palii, Product marketing expert on Sitechecker.pro

We move away from the lyrics. Gather a list of your competitors and pay particular attention to the market leaders in terms of income and age of existing. They are the most important ones since it is likely that their pricing pages went through the largest number of experiments and you can use their solutions as the best practice. 

By the way, it was one more mistake we had made. I said that for a long time we were working without a pricing and monetization model. If we immediately identified our key competitors and just tried to copy the main features of their pricing list, we would get feedback from users and find our product / market fit even faster.

2. Qualitative research of user needs

Why communication is important, we have already discussed. I will give an example of an important hypothesis that we formulated only after communicating with our users. As can be seen at the bottom of the picture, our rates are based on 4 main variables: the number of sites and pages on the site, the number of keywords and backlinks.

The number of individual packages can be formed on the basis of these variables – is huge. One user works with 1 site for 200 thousand pages, another with 100 sites of 10 pages and between them thousands more intermediate options.

sitechecker pricing model2

Having talked a little with users, we saw that we have a large number of users who are not suitable for our packages. They need more sites, but not necessarily with a lot of pages. In the new pricing, we expanded the number of sites in each of the tariffs and thus began to satisfy the needs of another additional audience segment. If you compare one of our first prices, then the difference in the limits is clearly noticeable.

3. Quantitative research of user needs

Quantitative research is difficult to do in the first year of a startup’s life for two reasons:

  • Not enough traffic to collect statistically significant results. Purchasing traffic is also difficult to solve. In many niches, market leaders with large budgets burn out the search results of their advertising, and at this cost per click, attracting a user will be unprofitable.
  • Product analytics takes a lot of resources. You need a person who knows how to configure, maintain and work with the received data. From our experience, analytics support takes much longer than it first seemed. Your product will change and the whole structure of the data collected must also keep up. Since the role of a product analyst in a startup is often performed by a marketer or product manager who has many other tasks besides this, analytics takes less time than necessary.

If you set up a good product analytics system, you are so lucky. But if you don’t have the resources yet, you can run quizzes for your audience as one of the quantitative research methods. No matter where they are made: in Google Forms, HotJar, TypeForm, any other option. The most important thing is to use the right quiz maker tool and make sure to ask the right questions. 

Here is an example of our survey, that confirmed our hypothesis we formed in the process of communicating with users in chat. 9% of users work with more than 20 sites, and 5% of users work with 11-20.

polls

Our first pricing did not cover 15% of the audience. But the most important thing is that users who work with so many sites are the most valuable to us. In SaaS businesses, the bulk of revenue comes from a small sample (5-10%) of the most loyal users who have been using the product for years. And according to our research, the more websites a person has, the more he appreciates our product and remains a paying user.

In SaaS businesses, the bulk of revenue comes from a small sample (5-10%) of the most loyal users who have been using the product for years

Ivan Palii, Product marketing expert on Sitechecker.pro

4. Products from the other industries

It is useful to copy competitors, but it is also useful not to limit your scope of research only to them. It is precisely due to the fact that products operating in the same market become more and more similar to each other over time, it is important to carefully consider pricing in radically different niches.

Types of experiments

You have already discovered all types of errors and started collecting the hypotheses from all sources. A large list of hypotheses can vary by difficulty and potential effect. Even if they have their own priorities according to the value / cost formula, you have the same experience as experimenting with similar priorities.

Therefore, I propose to divide them into thematic types.

1. Functional

Almost all functionality on the pricing page is displayed in 3 ways:

  • Quantitative restrictions. Only a few different options are available: the number of sites, users, emails sent, documents created, etc. This may be related to the value of your product.
  • Qualitative restrictions. The function is available only in other packages.
  • Mixed restrictions. When both options are alternate in pricing.

Right now, only quantitative restrictions work for Sitechecker. We also tested the option of mixed restrictions (for example, see the screenshot below), but according to the results of the experiment, a decision was made until all qualitative restrictions were eliminated and this type of function was opened for all packages.

sitechecker pricing model3

What option to choose for testing firstly highly depends on the product’s specifics. But it is practically guaranteed: when you increase the number of product features, it will become mixed for you.

When testing the product’s functionality mentioned in pricing you need to remember – when you change some elements on the pricing page, it is not necessary to really configure these changes in the product. When you have a small audience, the risks that you bear from the fact that the user will pay for a package with inaccessible functions are small. Basically, in such cases, the user writes to the chat and you can configure the promised functions for him. At the same time, without making changes to the product, you save the resources of your developers.

2. Business model

Experiments with a business model are some of the most expensive in terms of cost and difficult to evaluate results. Almost always, you need to make product changes changing the entire user’s funnel and marketing strategy. But such experiments are the most influential. Many public companies that have been successful for a long time have resorted to changing their business model when things went wrong. Since the process of changing the model is expensive and complicated, it is better to conduct these experiments in the first years of a startup.

It is important to remember what are the most popular options for business models for your market / similar niche and that the option that you chose at the beginning does not have to be left forever

Ivan Palii, Product marketing expert on Sitechecker.pro

Briefly about the possible business models.

Product and marketing are inextricably linked. Imagine that you have 100% of the value the product provides. You can work with this value in many ways:

  • Freemium Model. You provide access to 10-20% of the product’s value forever, and the user must pay for the remaining 80-90%.
  • Free Trial model. You provide time-limited access to 100% of the value, and at the end of the term, but the user before the choice – pay or lose all 100% of the value.
  • Mixed model Freemium / Free Trial. You set both time limits and function limits.
  • Selling data. Your customers and users are different audiences. Users – those who use the product for free, customers – those who pay for user data.

This is just a brief squeeze of all possible options. Marketers and product managers often argue about what kinds of Freemium actually are, which option is better: Free Trial or Freemium. But there is no exact answer for all businesses. When models are mixed or a product evolves from one model to another, it is difficult to isolate the value of each of them.

It is important to remember what are the most popular options for business models for your market / similar niche and that the option that you chose at the beginning does not have to be left forever.

At Boosta, we use different models. Kparser and Sitechecker have Freemium, Copywritely has Free Trial, but mixed, as we limit the user both in time and in the number of available functions.

Interesting materials that can expand your picture of the world about affordable business models and the best option for your company are available here:

3. Audience

It’s about how you share your rates. When users visit the pricing page and consider it to match their expectations, then it significantly affects the conversion.

What are the options?

  • Separation by professional level. For example, we at Sitechecker allocate 3 packages: for beginners in SEO, for owners of already growing projects and for owners of established profitable sites.
  • The separation of roles. For example, we could divide the packages into a package for SEO specialists, for website owners, for agency owners. Here is a good example of such separation from Hotjar.
google cache page
  • Separation by sales volume. A variant when specific names of audiences are not allocated in pricing and the packages are simply divided by the volume of available functions / limits that the client purchases.

4. Price

The price of a certain package is the easiest item to test. Here are 3 key principles of price experiments that I have found on the Internet and which have been confirmed by our experience. They actually talk about the same thing, but still, it is better to consider them as separate subparagraphs:

  • Price and value. Price is firmly linked to the perception of the value of the product. On the one hand, users want to get the product as cheaply as possible, on the other hand, they will be distrustful of a good product that is cheap. Between these extreme points, you need to find the perfect option that will bring maximum profit.
  • Range of price indifference. On the straight line that stretched between the extreme points that I indicated in the first paragraph, there is a certain interval when increasing the price for users will not reduce the number of your sales. Here it is described how this phenomenon works well. It also describes why lower prices can sometimes lead to a drop in sales rather than an increase.
  • Raise prices. This is one of the key tips from Marc Andressen, one of the most famous venture capital investors in Silicon Valley. You need to do this for two reasons: firstly, you immediately check whether your product is really valuable to the audience, and secondly, you can invest more resources in your growth and marketing.

All of these points are possibly counterintuitive. But we ourselves paid a lot for not using them in the first stages of product development.

Price experiments can also include testing the number of packages, adding calculators, etc. You can raise prices for existing packages, you can add cheaper or more expensive packages to existing ones, you can form a price based on the user’s country or leave only a few pricing variants with a transparent price, and provide the rest upon request.

5. Payment Periods

The standard of the SaaS business is the period of the monthly payment. But there are many more options for displaying prices and payment periods: for an hour, for a day, for a week, for a quarter, for half a year, for a year, a lifetime license. You can display these options as separate tariffs or give the user the opportunity to select the desired period already in the basket. The main objective of such experiments is to increase the average user check.

In addition, increasing the number of semi-annual and annual subscriptions is a good confirmation of your value hypothesis. So it’s quite reasonable to launch such packages immediately in the first price list.

6. Design

Do not overwhelm yourself with the design of the first pricing – one of the most correct decisions in a startup. No need to be embarrassed by the simple table with a comparison chart of different pricing plans. In the first stages, your main task is not to increase the conversion of the price itself but rather to obtain confirmation of the value hypothesis, to understand who your audience is, what their needs are and what they like the most about your product.

Moreover, when you begin to grow actively, the design will grow in value. Design is important, because the number of experiments that can be run on the basis of design hypotheses is almost infinite, while all previous options have a very limited number of options for testing.

About how colors, numbers, the arrangement of elements and the relationship between them affect user behavior, I recommend reading in Nick Kolenda’s articles. This is one of the most fundamental works on pricing with links to scientific articles.

A couple of abstracts in the end.

Your pricing will inevitably change, as the market, competitors, your audience, and your product will change. It follows from this:

  • What, in fact, some hypotheses can be retested. Since in the new conditions the same hypothesis can bring a different result.
  • That the process of experimentation never stops. And with the growth of product and package, the number of experiments you only need to increase.
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