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The Science of SaaS Pricing for Higher Conversion Rates

By August 17, 2015Article

Competition can be fierce for a Software-as-a-Service (SaaS) product. Businesses and consumers alike are inundated with new SaaS options seemingly everyday. You therefore need every advantage you can get to compel your prospects to make the immediate leap towards a trial, demo or sale. To that end, your pricing, if structured the right way, can be a strategic piece of your marketing that drives higher conversion rates. 

Here are nine factors to consider when pricing your SaaS products for maximum business results. 

Brand positioning comes first 

Your brand’s positioning will help dictate the level of pricing that makes sense for your target audience in the context of the competitive landscape. So be sure to define your brand strategy first, using positioning in the market that will give you your best chance at success; then set your pricing to match your positioning. For example, if you are going to be a premium offering, set your prices on the high side as buyers typically associate higher pricing with higher quality and service. 

Freemium pricing model 

The freemium model appears attractive to many new SaaS companies as it eliminates a common hurdle to acquisition by removing price from the conversation for the vast majority of users. One of the main challenges with this model, though, is that freemium works effectively only when dealing with a mass market due to the typically low conversion rates of users to a paid subscription. 

If you believe you can scale sufficiently, then a freemium model might work for you. However, if you’re in a niche market, for example, and scaling your user base to millions or tens of millions is not a realistic projection, then it’s best to go in a different direction. 

Psychology of numbers 

A study by the Journal of Consumer Research found that people deal with prices differently. When prices feature round numbers (e.g., $100), people rely on feelings; whereas when prices feature irregular numbers (e.g., $99.67), they rely on reason to make a purchase decision. Irregular numbers take more time for people to mentally process and therefore introduce more friction into the mental decision-making process. 

In neuroscience, the phrase “processing fluency” is used to describe the ease with which the brain is able to process information. The higher the processing fluency, the easier it is on the brain and the more likely that the buyer perceives the brand experience positively. Don’t make buyers work hard at understanding your pricing. The choice should be easy; nice round numbers typically will produce more conversions for you. 

“Left Digital Effect” and the power of 9 

Many software companies have used price points that end in “9” for years, whether pricing items at 99 cents or $59 or $99. The “9” holds power in that buyers tend to ignore it. Economist Tim Harford’s research highlights the “Left Digital Effect.” This is when the mind puts emphasis on the number on the far left. Even though $59 is closer to $60, for example, it’s the “5” that registers in the brain, causing the buyer to feel as if the price being paid is more like $50. 

If you aren’t using the power of “9,” it makes sense to test it to explore pricing that drives incremental revenue. 

Keep prices simple 

Research findings published in the Journal of Consumer Psychology show that prices that contain more syllables when spoken aloud were perceived as drastically higher to customers. Even commas had an effect! And even reading the price in their head was enough to make it feel more expensive. Even though $1200, $1,200, and $1,200.00 are all the same, people perceive $1200 as the lowest-cost option.

Keep the display of your prices simple! 

The power of context 

In a study of SaaS providers by Zuora, a subscription commerce provider, 75 percent of respondents said determining price level was a major challenge for SaaS providers. Similarly, software buyers have a hard time perceiving the value of standalone prices. With the “right price” so difficult to identify for both sides, the door is open for you to paint a picture for your desired pricing to be immediately understood and recognized as fair. 

Buyers understand value only when it is put into context, and you control such context in your own site. For example, people are more willing to pay more for software in a sleek, modern website with a higher-end feel than for the same software in an out-of-date looking site. You can also use comparative pricing to set the stage for a “fair price.” For example, you can highlight value such as “$1,000 worth of value for only $29/month” or “$29 (just reduced!),” etc. 

Price your SaaS for each customer segment 

Value is based on perception, and perception can differ among your target audience members. Price-conscious buyers may have a hard time determining long-term value, whereas those with a higher buying ceiling may be more interested in long-term savings. Each segment has different perceptions of value and price. Therefore segmenting your buyers and framing your products’ value and price for each segment differently is a potential opportunity to drive higher conversions. 

Pick a fight 

If you’re entering a market with a strongly established pricing model, consider disruption as a pricing strategy to gain attention, differentiate your brand and antagonize the market leader. 

Consider how entered the CRM market by introducing the SaaS-based, standard, monthly fee model in stark contrast to the industry norm of expensive enterprise software with massive up-front implementation costs. 

If free trials are not readily offered by the competition, introduce and highlight them. If your competitors offer convoluted pricing, consider introducing transparent, fixed pricing. If they base their pricing on seats, consider basing your pricing on functionality or storage instead. The point is, deviate from your competitors. 

Customer lifetime value 

A final yet critical factor in your SaaS product pricing is customer lifetime value. You’ll need to understand your customer acquisition volume and costs (or at least project them in the case of a new product launch), as well as churn rate. ROI is essential for a healthy, sustainable business, even if VC or angel backed. The more you can increase your retention rate and reduce churn, the more you can increase your cost per acquisition or the lower you can drop your prices to undercut the competition. So remember to look at your business holistically in order to support your pricing strategy. 

Elizabeth Cagen is director of strategy & operations at Stratabeat, a marketing, branding and design agency. Stratabeat’s team has developed marketing strategies for market leaders such as Intel, Hewlett-Packard, AT&T, P&G, Staples, AppFolio and eBay Enterprise. 







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