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The top pricing mistakes for SaaS startups, and how to avoid them: Part I

Setting prices for a traditional business can be pretty straightforward. That’s not true for SaaS startups, where determining...

Setting prices for a traditional business can be pretty straightforward. That’s not true for SaaS startups, where determining price can seem like an insurmountable obstacle. Just run a quick search for SaaS pricing - you’ll be inundated with online articles and guides about how to set SaaS pricing.

To complicate things further, SaaS markets can vary widely in terms of saturation. Sometimes you’re dealing with a business that has completely new products and no comparable market options. In other cases the company is entering an already saturated market with an established product.

With this drastic variance in circumstances, what’s the best way to know how to set your price? Sometimes, the way to start is to look at common mistakes. Take a look at our hit list below, and learn how you can avoid the pitfalls of SaaS product pricing.

DON’T skimp on (or completely skip) the customer discovery phase. It might seem like a given that any business (SaaS or otherwise) would take the time to understand their target customers, but this step invariably gets skipped or glossed over in the push to go to market. Or the process even starts without the customer in mind. For example, an entrepreneur comes up with a product idea without the forethought of who the customer is.

DO understand who your ideal customer is and what motivates them. The more specific you can be about your ideal customer, the easier it will be to create an effective selling process and price. Think about it compared to search: what kind of results do you get when searching for “real estate agent” as opposed to “commercial real estate agent in Austin Texas specializing in downtown properties”? The same goes for targeting customers. Take the time to create buyer personas. Understand the customer’s industry, preferences, and what motivates them. You’ll be better prepared to to overcome objections when armed with this data.

DON’T over-fixate on what your competitors are doing. Just because there are 25 SaaS businesses with a similar product to yours doesn’t mean their pricing strategies are the right ones. You never know - they could all be setting prices based on educated guesses with limited customer input. If your price ends up being drastically lower or higher than your competitors’, that’s ok - you just need to be prepared to explain how your product is different.

DO focus on learning from your customers what your price should be. This means experimenting with prices and talking to customers to determine how much they are willing to pay. Treat every interaction as an experiment. How much can you charge for what you are offering? How much can you increase the price with each new customer? Gather as much data as you can so you can make observations about your progress. For example, what percentage of customers are pushing back based on price? Know these inputs before you stop increasing. Many SaaS businesses set price ceilings too early.

DON’T treat pricing as a one-time discovery, instead of a continually evolving process. So you’ve done your homework on price, and you think you know what price the market will tolerate for your product. What happens next? You update your website so current and prospective customers can clearly see your pricing. Great idea, right? For early stage startups, not so much. You could be missing out on a lot of extra revenue by settling on a price.

DO continually iterate on pricing based on what you learn from customers. Treat price as a fluid input that changes based on the market’s response. Even if you come to a fixed or semi-fixed price, keep the experimentation and data-gathering techniques from your initial discovery about price. You never know when circumstances could change to warrant a price increase. And if you do publish prices on your website that are different from what existing customers are paying, get ahead of any customer inquiries with proactive communication. Make sure customers who pay less than your published price know that their rate will remain effective - until you decide to increase it. And if you don’t have a plan to increase it, make one!

The pricing process for SaaS products is a continual one. Don’t feel like you have to define an end - just keep iterating as you go. Want to learn more common mistakes in SaaS pricing? Watch for the second post in this series, coming up soon.

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