Pricing your SaaS. Lesson gained after launching five of them

Not so obvious, after all

In the last 7 years, I’ve built with my team five SaaS products. That’s pretty much.
For each product, we felt like we must reinvent the wheel. We found it impossible to create one single policy, even not at the level of general principle and although all the products belong to the same field.
Pricing model of a SaaS affect development and affects marketing, but more than anything, a pricing model could be the difference between success and a total failure.
It took me some time to understand that the lessons we gained while consolidating pricing models for our products were priceless (ambiguity intended).
Allow me to share my insights, with the hope that it does help someone, sometime.

Relevant to many

The world is full of entrepreneurs, at any age and in any country. Many of the initiatives are software. Since most software and applications are cloud-based, Software as a Service (SaaS) has become the standard.
But how should you price it, if at all?

The Options

As you might know from my other posts, I come from the film world. Each time anew, I am amazed to find that all film distribution models repeat themselves, whether its physical film or a futuristic digital platform: rights by territory, rights by exclusivity, ticket sales on a one-time basis (either in in-person screenings or in pay-per-view on the internet), subscription-based revenue, ad supported revenue, public funding. That’s about it, just with different names (SVOD, TVOD, AVOD, FAST, Terrestrial, Satellite, Cable, Hotel, Airline, CCTV, Free to Air etc.).

With SaaS, it’s not that different, just with different terms: from the Free to the Enterprise level, with very few cases of Lifetime model (pay once), most models are similar, or even identical.
So where’s the difference? And what should you choose, as an entrepreneur?

The final decision (of what model to choose) must take into consideration a few factors, which I will detail here. Some of them are driven by the type of target audience (e.g — B2C, B2B) while others are more circumstantial, like the number of competitors, norms in the market, financial capacity of the target audience and so on.
So let’s dive in.

Pricing models

In order to reach depth, we must pass through the trivial. So if you know that already, skim the text.

• Free. Free?! what is very ‘free’ doing under pricing models? — First, of all, it will be short. Secondly, while “free” is not exactly a price, it does certainly carry economical implications. Let me review them.
  (a) free for reputation: a developer whose Chrome extensions was installed a large number of times (50k and up) gains reputation. Reputation brings clients or investors or both. It’s practically cheaper and more credible than paid marketing. (b) Free as a foot in the door: ‘free plan’, ‘start free’, ‘free forever’, ‘basic’, ‘starter’, ‘essential’. All these and more, are names of feature-limited accounts in SaaS, given to users with the hope to convert them to both satisfied and dependent users (the latter is more important) that will eventually switch to a paid plan. There are many creative ways to make the free painful: adding a visible watermark on the final product, branding the platform in a salient manner, not allowing to make the work publicly available, limiting viewers/users/bandwidth or simply declaring that free is over — leave or pay (Google G-Suite is a great example). Entrepreneurs must be careful not to make their users hating them with too painful limitations, as those users will quit in the first opportunity out of anger and revenge. Users should feel happy upgrading, as if they had bought a new toy.
• Pay as you go: a model which allows users to pay each time they use the product, on an ad-hoc basis, with no commitment. Pay as you go pricing usually works with servers and API based services, whereby the service is metered by the number of calls and operations, combined with bandwidth and storage. PAYG creates an illusion of freedom for the users, but has a price tag: it is more expensive than signing up for subscription — the next model and most sought-after by entrepreneurs.
• Subscription: the most common business model in SaaS. Usually it is offered on monthly or yearly billing cycles. Some providers require a commitment of different periods (ranging from 3 to 24 months), to justify the onboarding and setup process. Subscriptions might also have plans, which differ in a way i will details below (see Perks and Feature Flags). Another common practice is to offer a trial period for a subscription or a limited free plan, so that the client can integrate the product in a gradual manner (“baby steps”).

Why most entrepreneurs love subscription model so much? Because clients forget to cancel. Yes. I just said it out loud

• License: purchasing a license for a software usually means that there is no metering for the use of the SaaS product and most or all limitations are lifted. However, in the case of video-based software, where bandwidth is large, an additional payment would be made every year or every month. Alternatively, the client can be offered to connect their own streaming provider to the account and pay for it independently. For example, a client can buy a license for product A and then connect to it their own AWS Elastic Encoder or Simple Email Service (Amazon SES) account. Such licenses can be either a lifetime license or renewable, usually in cycles or 3–5 years.
  License is a gift for bootstrap entrepreneurs who finance the company from their own resources and are desperate for cashflow. If the client keeps the software for many years, it might become a burden though.
• Custom pricing: pricing adapted to the needs of specific clients. This model includes two elements: (a) custom development, that fits the client’s specific needs and (b) a reference person (“account manager”) provided by the SaaS provider. That account manager knows the client and its needs intimately and therefore, the client doesn’t need to explain things from scratch to a random support agent. Usually, custom pricing is chosen by corporate clients.
  Custom plans are the holy grail for entrepreneurs. Not only are they more lucrative compared to the fixed subscriptions, they also create loyalty by the client (“loyalty” is the euphemistic term for “dependency”). There are very low chances that clients would quit a custom plan, especially if it involved custom coding, because it would be a nightmare to start over with a new provider.
• Add-ons: add-ons are never an independent business model. As the name implies, they are added, i.e being on top, of any of the above pricing options. Add-ons can be for example additional storage or computation (i.e — more server power), managed services (for example — content writing, manual uploads etc.) or extended support (a commitment to reply within x number of hours).

Other factors

Size of market: when a market is composed of tens or hundreds of thousands of potential clients, entrepreneurs choose many times a low entry fee, knowing that it will be compensated by the number of clients. The outcome is a win-win solution; (1) clients have access to a good product at an affordable price (2) the relatively large number of clients makes the product economical for the entrepreneur.
A potentially large market allows the entrepreneurs work with the same principle as with volume pricing (the more you buy, the lower the price), but in this case, it’s not one client who buys a lot but many clients buying little each one, which makes it worthwhile for the entrepreneur.

Perks and feature flags: what sets apart different subscription plans from each other is features which are turned on or off with different plans and the amount of other features provided.
In the feature-flag section we can add white label goodies like removing the SaaS logo and allowing the client’s own domain, custom colors etc.
In the quantitative section, we can offer in the larger subscription plan more team members (“seats”), more users (visitors), more bandwidth and more storage.
Different SaaS have their own uniqueness, but the above principles usually exist in all of them.

Support: I mentioned support in the bullet regarding add-ons and in the parameters regarding subscription plans. Support always includes a response time, which is probably the most sensitive part of the SLA (the support contract). Which brings me to the next bullet:

How much does it cost me: if you are an entrepreneur offering a free plan, it’s gonna cost. And that cost is on you. Trivial, but easy to forget. When you keep inactive accounts of users who tried your product and moved on, there will be a growing, silent cost, accumulating each month. Take this into account, create terms which allow you to delete inactive accounts and track that passive resource consumption. When you offer a 24/7 support, think about its cost. When you’re an ambitious entrepreneur working around the clock from your favourite café and carrying your laptop anywhere you go, providing 24/7 support is natural. But as you grow, especially when dealing with free plan users, you can no longer handle it yourself and the maintenance cost might become a burden. Yes, there are support chatbots and a good knowledge base also helps, but let’s admit it, people still need human support (never did a chatbot solve my issue… and I’m an AI fan).
On the one hand, hold on to your promises. Ethics, honesty and commitment to clients is of utmost importance. But keep in mind that what you promise must be realistic and economically viable for you.

KYC — not just for banking

KYC, or Know Your Client, is the term used for the process done by banks, lawyers and accountants to describe the onboarding of new clients. Originally planned for legal reasons (to prevent banks and other providers from being accomplices to money laundering), I use the term here for psychological and strategic reasons: know who your client is. Know their needs, their capabilities, their fears, their hopes, their expectations.

Put yourself in the shoes of your potential client

When putting ourselves in the shoes of the client, we ask what would make a client move from existing solutions to our solution. Or what would make them try something which is totally new (your SaaS).
Price and productivity are the first things that come to mind when thinking about reasons to move, but they are certainly not the only ones.
For many businesses, large and small, staying with the non-perfect solution (even expensive and inefficient) is still a secure choice. They learned how to live with it. Their loss of using it is under control. While another solution, yours, exciting and affordable as it might be, brings along two potential risks: (1) it might not be as good as it’s portrayed (as good as your product might be, a client might not understand it) and
(2) it requires training and integration (learning curve).
The second factor is bigger than one might think: organizations are terrified from losing productivity and losses and are afraid of their employees’ reluctance and hostility towards adapting to new systems and new protocols.

Actually, it’s not just organizations. Individuals also like to stick to the known: when I was a kid, I asked my father whether he’s going to vote for a new candidate who ran for mayor in my hometown. My father said no way. When I asked why, he said “the current mayor is terrible, but at least I know what to expect. I find my detours and know how to manage. Who knows if this other candidate wouldn’t be worse?”
So yeah, it’s almost impossible to gain clients like my father on the one hand, but on the other hand, once you gain them, they’d stay with you forever -:)

Behavioral economists proved it long ago with what is known as Loss Aversion: the risk of losing is higher than the eagerness to gain. Transferring this quotation to the willingness of a potential client to move to your SaaS: — “the risk of losing” is moving to your SaaS and finding it was a mistake. The “eagerness to gain” is the hope that moving to your SaaS will bring comfort, efficiency and productivity. Therefore, according t Loss Aversion, your chances in persuading a client to move to your slution or try it, are inherently low.

Laziness, fear, hesitation and greed

Most of the world businesses are actually small. Very small. In most articles you can find the term SME (small and medium size enterprises), but the formal definition for “small” is at least 50 employees. And the highest medium size is 500. In practice, most businesses in the world are MICRO businesses, with 1–5 employees.

Micro businesses think in a different manner than SME. They say to themselves: we don’t have a large business and are willing to work more manually and with a less sophisticated management system in order to save on expenses. Our labour is not a factor. That way we can be more profitable.

Work-life balance is less important or sometimes non-existent for a barber or a dentist. Theoretically, they can take a vacation whenever they want. In practice, they hardly do it.
Micro businesses have no safety net. Frequently, they have no financial reserves. Unexpected expenses can ruin them. They don’t have the time and the freedom to stop thinking where they are going in the long run. They react, not initiate. They are busy surviving.
They move and change when they are forced to do so, because regulations require them to do it, because all their competitors already did it.
In my country, there was a campaign for digital insurance which mocked traditional insurance agents as people who insist working with pen and paper, meet in person and print every single document. That campaign touched a sore point. In a very short period, all insurance agents created websites and moved to digital. They didn’t want to do it. They were forced to do it in order to survive. Modernity can be a threat.

When trying to sell you SaaS, don’t just think about how great it is.
Instead, bear in mind what’s crossing your potential client’s mind. Remember their fear from change, their reluctance to learn, their apprehension from the unexpected, their fatigue from the ongoing race to survive.
On the other side, you can use it for your own favour. “All your competitors did it”, “the market had changed”, “don’t be left behind”, “lead — don’t follow” are some of the arguments one can use in sales interactions.
That sounds cynical, but it can actually help your potential client to help themselves.

How does all this affect your pricing model?
All those things go back to the pricing of your SaaS: sales, marketing and training might require more resources than initially expected. You should not only think about the cost of servers and development when pricing your SaaS, but also on client acquisition and retention.

To sum up

• There is a limited number of options when pricing a SaaS. All of them are summarized above. They are correct for SaaS of any size.
• Define your target audience and learn it deeply.
• Always calculate your own costs.
• Put yourself in the shoes of your potential client.
• Don’t hesitate to change. Listen to the market, be attentive to everything — rumors, trends, clients’ feedback. Read between the lines: the insights might require some thinking and are not always explicit.