Why Value-Based Pricing Approach Is Important For Your SaaS Business

Deciding the right price at the right time is the best way to maintain the flow of recurring revenue stream.

If you are part of a subscription business ecosystem, you would know that many new businesses entering the market with unique subscription business plans and subscription boxes that many people have not even imagined or thought about. It is all about harnessing the recurring need of customers and exploiting all options to earn revenue—diverse revenue streams.

However, pricing is a significant element of the subscription business on which depends the monthly recurring revenue (MRR) as well as annual recurring revenue (ARR). When you have to decide or improvise the price for the SaaS product or services you need to consider the fact that most SaaS businesses opt for the subscription business model and use subscription management software to manage subscriptions. Customers have to pay recurrently so, the price for all subscription plans has to be affordable.

Before you delve into the details of the process of deriving the value-based pricing for your SaaS business, you need to understand the crux of this pricing strategy.

Also Read: The Challenges Of The Recurring Revenue And The SaaS Business’ Growth

Value-Based Pricing for SaaS Businesses

Value-based pricing is different from the price that you decide based on the historic overview and monitoring of analytics & reporting, instead, it is worth of your SaaS product or services and the maximum amount of money that recurring customers would agree to pay for it.

The Process of Deriving the Value-Based Pricing

Value-based pricing is a complete process that completes in the following steps:

Customer Needs & Value Perception

You would have used numerous applications and software that ask you to share feedback as a customer. This feedback is a huge source of business growth. When it comes to value-based pricing customer feedback is as important as monitoring KPIs.

You can ask your recurring customers to share their feedback regarding the pricing strategy that you have opted for or that you are going to opt for. Value perception is the perception of the customer about the SaaS product that you are offering them.

You have to know the need of the customers and value perception for the SaaS product because it is the key to value-based pricing. For instance, Netflix offers Basic, Standard, and Premium subscription plans for different subscription charges. The plans differ from each other based on the video resolution, quality, and some other factors. Nonetheless, the price is set based on the value of these subscription plans for the customer and the recurring need.

Also Read: Subscription Retention Begins With Customer Experience Elevation—Predictions and Actions for 2021

Target Price to Match Customer Value

When you know the customer value for your SaaS product and services, you can head towards the step where you decide the price. Your sales and marketing teams can also help you at this step. In fact, they can use customer feedback to devise marketing policies as well.

You have to decide the price considering the factors that the price needs to be affordable as well as offer the value. Moreover, in the subscription business, the customer will have to pay the price recurrently.

Again, consider the subscription plans of Netflix, they offer a better video resolution to premium subscribers than standard or basic subscribers. They are catering to customers having varying ranges of budget and offering them value as per their budget.

Also Read: Overpricing Can Turn the Subscription Business Upside Down—Get Your SaaS Pricing Right!

Derive Target Cost of the SaaS Product

Every SaaS product has a certain lifecycle that begins even at the stage when you are planning the development of the product. There are different phases in this lifecycle, and the target cost is the overall cost that you define considering all phases in the product lifecycle. Target cost will also be part of the process of value-based pricing.

You can predict revenue and profits only if you know the target price along with the target cost.

Design Product to Deliver Desired value

Now that you have customer feedback, know your target price, and are aware of the target cost, you need to design your SaaS product in a way that you can offer customers value and charge the target price. The foundation of the subscription business model is customer satisfaction.

If the customer is satisfied, he will renew the subscriptions, when he will renew the subscription, the flow of the recurring revenue stream will remain maintained. This chain will work smoothly when you deliver customer value.

Importance of the Value-Based Pricing Approach

After all the steps of the process of deciding the value-based pricing, you need to know the importance of the customer value that your product creates. There are the following factors that will help you know if you have succeeded in delivering the customer value to your targeted customers.

Improvement in Recurring Revenue

Monthly recurring revenue (MRR) and annual recurring revenue (ARR) are the metrics or KPIs that one needs to monitor to see the results of a value-based pricing strategy. If there is improvement in your recurring revenue or if the flow of the revenue stream gets smooth, then it indicates that your value-based pricing strategy works the way you want.

Also Read: You Need A Recurring Revenue Stream to Draw Success in 2021 And Onwards

Customer Retention Rate

As mentioned above, customer satisfaction that is directly proportional to customer retention is the base of the subscription business. If your customers are staying on board and Customer Lifetime Value (CLV) improves, these factors show that you have succeeded in formulating a workable value-based pricing strategy.

The opportunity of Cross-Selling & Upselling

The success of the value-based pricing strategy also gives confidence to retailers. To plan the future strategies, they can think about cross-selling and upselling their SaaS product. Your success to offer a certain value to the customers provides you with the opportunity to set new standards of customer value that you can serve through upselling and cross-selling.

Though value-based pricing is a very effective pricing strategy, it is not the only pricing strategy that SaaS businesses are using. When you will have to decide the pricing strategy for your SaaS product or improvise the price, you have to consider the prices of similar SaaS products in the market which is competitive pricing. You will have to see if the price that you have set covers the cost—cost-plus pricing.

The right pricing strategy for your SaaS product and services can provide you with a competitive edge. SubscriptionFlow is a SaaS subscription management software where you can manage subscriptions and consult with experts to decide the right pricing strategy for your SaaS product.