Mon, 21 August 2023
How To Price a SaaS Product
Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
Pricing a SaaS product is different from a traditional product.
A SaaS customer pays on a recurring basis such as every month or year.
Since the customer is paying for a service for a period of time, then the price must reflect that usage.
There are two pricing considerations in a recurring revenue model -- cost of customer acquisition and lifetime value.
The price must be low enough to fit into the customer’s monthly or annual budget.
The price must be high enough to deliver to the company a healthy lifetime revenue stream.
Too low a price and the company won’t be able to grow because there's not enough revenue from the product to cover the cost of delivering the product.
Leaving money on the table hurts the business as it will need the revenue to hire more salespeople and improve the product.
Too high a price and the company will incur a higher cost of acquisition.
To price your SaaS product, consider the following:
Identify the value metric of your product or service.
Review your cost of customer acquisition in unit economic terms from your initial cohorts.
Look at the churn rate which is the rate customers are dropping out to estimate your lifetime value.
If you lower your price, your cost of customer acquisition should go down.
By making the product cheaper it should take less sales and marketing spend to close the sale.
If it does not, then you should consider raising your price and check the impact on your churn rate.
Finally, review the competition to see what others in the industry are doing.
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