8 Principles to Guide Your SaaS Pricing Strategy
Your pricing model is central to your SaaS business: it's the foundation that allows you to build out repeatable sales processes and generate recurring revenue. Creating a pricing model that is consistent and easy for customers to understand can help take the friction out of purchasing decisions.
If you’re experiencing too much churn, it may be time to look at your pricing strategies and figure out to realign with your customers’ needs. Let’s talk about how you can get creative with your pricing strategy to accelerate growth and reduce subscription churn.
Base your pricing on an obvious value metric within your product
When you start seeing large segments of your customers churn out, there’s a good chance that they’re not seeing the value in what they’re paying for. If you want to get creative with your pricing strategy in order to reduce churn, then you have to make sure your pricing is obviously aligned directly with the actual value you’re providing to your customers.
The best way to do this is by pricing along a value metric, which means charging customers more as they receive more value from your product. With a clear value metric, you'll find greater alignment with your customers for what they’re paying for and how they receive more value at the higher priced tiers.
When customers can clearly see exactly how much value they’re receiving and what specific benefits they’re paying for, they’re more likely to stick around longer and pay higher rates. Using a value metric also ensures that you can easily justify the changes in price from one plan to the next.
Favor transparency and openness
Usage charges or take rates based on performance baselines must be presented to your customers in a clear, easy-to-understand methodology. Otherwise, you risk sowing distrust if it's not clear why you're charging what you are and how exactly you've arrived at those values. Furthermore, poorly-communicated performance pricing can increase the burden on your customer support, finance, and data teams every month as they work to answer questions and hunt down data.
Offer an option for longer-term contracts or plans
Rather than relying solely on month-to-month contracts, offering the option for long-term contracts can actually help you reduce subscription churn. By providing long-term contracts (say six or twelve months) at a discounted price, you offer customers the chance to access your products and save money, while simultaneously reducing your potential for monthly churn.
The ability to opt out of a subscription at the end of a payment period can reduce the risk of churn for customers who would’ve stopped using your service otherwise.
Give customers the power to downgrade
This assumes that you have a tiered pricing strategy. It’s important to offer users the option to “upgrade” to a longer contract but, on the flip side, it’s also imperative to give your customers the power to downgrade if they need to. It’s far better to have a customer downgrade and pay less than it would be to lose that same customer to churn.
The best way to execute this is with usage-based pricing. This model is pretty simple — if you use more of the product, your bill goes up; if you use less of it, your bill goes down. While this pricing strategy certainly makes it harder to predict revenue and may even decrease your overall revenue-per-user, it can be a very effective strategy for reducing churn. Another plus side is that it allows you to make more money off of heavy users than a fixed-price model.
Align pricing with your product positioning and competition
Even if potential customers aren't aware of your competition, they're going to discover them eventually. Being aware of how your competition is pricing their product and aligning your pricing strategy with your product's positioning will further differentiate you from competition.
What does this look like? If you're targeting enterprise customers and are priced at the lower end of the spectrum, there's a good chance that you can sow confusion and cognitive dissonance within your target customer.
The net guidance here is: are you priced like a premium product? Are you, conversely, choosing to undercut your competition? Or do you choose competitive price parity to eliminate pricing as a customer concern?
Keep your prices consistent
As your product evolves, grows, and expands, keeping internal pricing consistent and simple to digest is essential for retention and achieving net negative churn. Here are the benefits of pricing consistency:
- No need to re-educate customers with wildly different cost structures or tiers, which can stall momentum to adoption
- They won't be surprised with large bills or hard-to-explain invoices
- You can implement internal pricing decisions faster without extra custom logic to maintain
Offer a free trial
Another creative pricing strategy for reducing subscription churn is to offer a free trial. This is a staple of subsription pricing for good reason. When you offer your product for free during a limited time, you allow an easy foot-in-the-door. If a customer can experience your product without any financial expense and quickly see the benefit of that product, they probably won’t want to go back to functioning without it.
For a deep dive into the types of free trials and free trial strategies, read our free trial guide.
Support complex customization
One of the causes of churn for long-time customers is often the result of outgrowing certain aspects of your product. As these users scale, they may get to a point when they really don’t need access to every single add-on or feature that your subscription provides. And if they feel they’re paying for a lot of features that they no longer need or use, they may drop your product altogether.
That’s why it’s so important to support complex customization, especially for long-time users. By offering complex sales-negotiated contracts to big-ticket customers, you can provide flexible pricing that caters to their specific needs and reduce your churn rates.
Reducing subscription churn with Churnkey
Want to accelerate your company’s growth and reduce subscription churn? The best way is with Churnkey, the only platform that fixes every type of churn for you.
Here at Churnkey, we handle all things retention for you so you can focus on what you do best: product, growth, and customers. Think of Churnkey as your "set it and forget it" magic churn reducer. Just by using Churnkey, you could reduce cancellations up to 42%, recover up to 81% of failed payments, and effortlessly increase customer loyalty.
Find out more with a demo or start combating churn now with a free trial.