Further SaaS Cost Pricing Options to Counteract Stagflation
The presentation was previously made earlier on SaaS fees pricing and packaging to combat stagflation in 2022. However, this article is based on an updated presentation delivered in March 2023, by David Vogelpohl. For additional information, or to view the prior presentation take a look at the further details at the end of this post.
Pricing your software as a service (SaaS) can be difficult enough, even in the most favorable times. But figuring out how to determine the appropriate pricing that will generate higher revenue during times of inflation can be more difficult.
This article gives tips for making the most of pricing and packaging for your SaaS items in a subpar economy:
- What is stagflation?
- Utilizing your pricing model to fight stagflation.
- Enhancing your SaaS Pricing Strategy for New MRR vs. the net retention of revenue.
- Try out creative SaaS pricing model combinations to generate revenues.
- The rate of inflation isn't constant Variate your approach.
- How can help.
What Is Stagflation?
In simple terms, stagflation is an economic phenomenon that is influenced by three main elements:
- The economy is slowing down.
- Inflation is high.
- High unemployment.
That means that there's greater pressure than ever before on:
- The wallets of prospects you'd like to impress.
- The wallets of existing customers you'd like to see upgrade.
That's why carefully considering your SaaS pricing strategy is crucial for you to keep expanding your business even within a tight economic environment.
Using Your SaaS Pricing Model to Fight Stagflation
The easiest answer is raising your rates to the point that you're not alone if you did so.
Over a third of 's SaaS software, software, as well as digital products customers increased prices in the last year.
Interestingly, SaaS businesses tend to increase rates that are higher than the inflation rate.
Pulling this lever -- not a surprise, it generally helps to increase revenue, even when it is an uneasy decision to make in a time when customers aren't having as much money for spending in a stagflation economy.
However, rethinking pricing and packaging is one of the few levers that are not optimized in SaaS.
The reason why prices are increasing? Do you really need to do something different?
There are plenty of other ways you can make more money when the market is sluggish, apart from increasing the cost of your products.
The possibility of increasing acquisition, boosting the conversion rate, and decreasing the rate of churn can be all alternatives.
However, all of those alternatives require a significant amount of effort in terms of time and effort from different departments to implement them.
When you think about the time and money that will need to be put into growing acquisition and reducing the rate of churn using strategies like Product-led Growth (PLG) or bolstered initiatives to improve customer satisfaction It can be a slow and potentially overwhelming process as illustrated by medium and large T-shirts.
Each of those large and medium-sized t-shirts symbolizes how much time, effort, and resources. it takes to implement PLG and efforts to improve customer satisfaction with the intention to boost customer acquisition while reducing the rate of churn.
However, changing the price of a product requires only a few minutes and can be accomplished very quickly, as signified by the small t-shirt above.
Like Patrick McKenzie points out, it's as simple as replacing a number with a bigger number:
In the end, altering pricing 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 vs. the Net Revenue Retention: The Growth Mustache
As you consider implementing different pricing, an additional factor to keep in mind is whether you want to optimize for an entirely new MRR as well as net revenue retention or both.
Then there's"the "growth mustache."
The growth mustache is a sideways bracket that an ex-CFO from my past frequently referred to. (I included the "mustache" designation, as it appears as if it's a mustache.)
Growth is fueled by increasing monthly recurring revenue (MRR) as well as new customers joining and net revenue retention (NRR) which is the percentage of your current customers' MRR and ARR you are retaining or growing.
And if your NRR exceeds 100%, that's a multiplier to your profits However, the same applies for your valuation.
In general, you can leverage your operational capabilities by varying pricing and packaging, but you also know you're in an environment where customers may have less money entering the system and more leaving. How you change the pricing of your product could impact the ability of you to attract new customers, keep and expand existing ones, or both, so keep this in mind as you make changes.
Try a New Pricing Model for SaaS that is Creative Combinations to Increase the Revenue
If you've determined that you've decided that changing your pricing is the best option There are numerous ways you can experiment. Pricing per feature, plans that pay as you go, freemium pricing models, flat-rate pricing, use-based pricing, per-user plans -- which is right for your SaaS business?
There are several ideas to think about as a starting point:
- SKUs:
- Platform tiered plans
- Product(s) tiered plans
- Persona tiered plans
- Single add-ons
- Bundles of accessories
- Entitlements:
- Features
- Use
- Help
- Pricing:
- Price
- Recurrence
- Geography
- Method of payment
- Discounts
- Trials for free
Check out those possibilities for methods to increase your leverage in operations.
Some may require coming up with a buyer persona-based pricing plan that has a slightly higher average revenue for each user (ARPU).
In the case of others, this means the addition of a new component that lets them increase prices.
For others yet this could mean a switch from a flat-rate pricing system or a user-based pricing model to a more dynamic model that is based on features or on usage.
Monitor the effects of any Modifications to Your SaaS Pricing Plan
For example, if the customer base shrinks a tiny amount due to an increasing price however, the remaining users are paying a higher cost and earning more overall, some businesses might appreciate the new price point.
But know which changes will impact your business strategy. A well-established SaaS business may have very different priorities than a startup has.
Success is spelled with 3 S's
Often when we think of the packaging and pricing, we couple our ability to make more money with the ability to create something new.
Take for example the innovation curve which is a curve that says: we make something; it grows in adoption; it plateaus. It's not difficult to get trapped in thinking that the only way to generate an entirely new source of revenue is to design a completely new product entirely.
It is possible to separate that thought and think about how new income S curves could be developed by altering the packages, plans, add-ons, and more all by providing users with different ways to buy from you, and to use your platform.
When we also look at a use metric based on a value measure that is over-aged these new plans as well as add-ons themselves can increase ARPU with time.
SaaS Prices and Packaging Additional Add-ons
The addition of add-ons is a great way to increasing average revenue per user for existing and new customers on an income-based budget because they have the option of choosing the features they want to purchase -- rather than paying, say, flat-rate prices for a bigger package that includes a set of options they do not want or don't need.
For example, are there any existing entitlements available to offer as an add-on without having to create any extra engineering effort? Could one of those functions be sliced out to create an entirely new SKU, without creating an entirely new product?
Add-ons are available in a variety of styles, so you can use a wide range of different add-ons or even create bundles.
These add-ons carry a high risksince they may lower the upgrading MRR if fewer people upgrade to a bigger package -- but add-ons can be a powerful driving force of NRR.
To mitigate that risk, carefully measure the rate of your downgrade and upgrade as you begin making changes to your package and other offerings.
In addition, you may wait to pitch add-ons up to after the users have enrolled to your main product. After they've used the product they've purchased and are enjoying it -- and after the additional purchases they make are considered to be upsells which will increase your net sales retention rates and pitch them other add-ons that would further enhance the experience they get from using your product.
This allows customers to enter the SaaS product with the lower cost that will help build your MRR and ARPU with those additional sales.
And a lower initial price point can also aid you in gaining an edge when going after market share as wellparticularly if you are able to beat competitors' prices just a little.
Creating a New Pricing Tier that drives Average Price Per User (ARPU)
Is it possible that the ARPU boosting tier you need is one that exists between your existing plans?
For example, if you're using a tiered pricing model that offers the options of $25, $150, or $300 alternatives, then the best pricing level for generating more profit lies somewhere in the middle, around $75.
Segmenting SaaS Plans to Clarify the value of your product and boost ARPU
Another possibility is to segment your packaging based on very specific customer needs.
For example, WP Engine is a managed WordPress platform which handles all kinds of sites, but they saw an opportunity to market WooCommerce users in particular, therefore they developed a product specifically targeted at that group.
The company was able to emphasize customers' needs in this specific segment to draw their attention and gain additional sign-ups. In time, WP Engine was able to provide more value to those customers and increase WP Engine's revenue.
Payment Frequency Increases Leverage
An annualized pricing option gives purchasers the benefits of a discount by paying an entire year in advance, but it also gives you the benefit of reducing the rate of churn while increasing a customer's overall lifetime value which is also known as LTV.
For further benefits from this method, you can provide greater discounts for annual subscriptions on new subscribers as well as for those subscribers willing to change from monthly charges to annual charges.
The introduction of a price period may help users to adopt the pricing more easily.
TIP If you're selling an Enterprise plan, and the cost starts to appear a little more expensive when paid for annually and you want to keep that cost below $5000. Many procurement departments have an policy that requires employees to obtain approval to make purchases greater than that, so when you keep costs under that limit and make it easier for customers to easily make that payment with a credit card, without navigating internal obstacles within their companies. This can vary and isn't an absolute rule, however it's an excellent idea to test.
The Inflation Rate isn't Even: Change Your Strategy
When you think about making changes to the way you manage your SaaS business's pricing policy, potential customers' willingness to pay isn't just the one factor to consider. Inflation can vary a lot within a short period of time. This variation can be further varied in every country or region.
Headwinds to financial performance in relation to different regions can indicate that localization is more crucial in the event that you are offering your saas product worldwide.
Remove Unnecessary Purchasing Friction With Localization
The process of localization usually involves multiple elements, including but not including:
- Accepting the preferred payment for the region you're selling into.
- The price is localized.
- The currency is localized.
Each one of them has an additional advantage that is not just for customers, as well as for profit margins also.
Localizing pricing converts at 2 times for B2C SaaS companies. Be sure to provide a good justification for the different prices in different countries or regions, for instance, if a potential client manages to see multiple prices.
Local currencies are simpler to get approved and for customers in your target market to grasp. When new customers see your SaaS costs displayed in a currency they're used to and understand, it is easy for them to buy without the friction of maths involved in conversion before they make the decision.
How Can You Help?
The information in the above article was presented recently by David Vogelpohl in a webinar held by Cumul.io. Check out the video on their YouTube channel.
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