January 24, 2019 | Sean Foo
When it comes to selling Saas (software as a service), there is a multitude of methods to price your service.
You could adopt the simple fixed packaged one price model and make it real simple…
Or you could offer 6 or more option to your customers and really just confuse the hell out of them.
While there is a temptation to simplify your pricing strategy to come out with a single pricing, you actually create more problems down the road.
A single price will make prospects think that they need to either accept your pricing and the features that come along with it or go elsewhere.
That isn’t good!
“What if I need these 5 features but am not interested in the other two?”
“I really love their core features but the rest are unnecessary for my current stage in business.”
Get what I mean?
If you just offer a single price, there is a tendency for your prospect to click away and compare your price for a lower cost.
What we want to do is to present packages and options to the customer.
That way, it stops becoming a question of if the client pays you but how much money the customer ends up giving.
A big enterprise who has a big budget can definitely pay more and will require all of your features.
But a small startup might have a real tight budget and can only afford the core feature of your Saas product.
By only offering one price, you are actually isolating away 66% of your potential customers or more!
While I’m sure your Saas product is totally awesome and groundbreaking, there is one thing just as important that you need to give your customer.
You need to give them choices.
People love and want control. They want to be able to pick the features that are important to them and drop away the rest.
Giving options is actually an awesome and safe way to make sure your product is selling and bringing cash-flow to your business…and drastically increases the odds of your business getting the bigger sale.
Options Allow You To Showcase Your Premium Features
Most customers online (like me), won’t have a clue about which features are essentials and which are premium add-ons that make their lives 100X easier.
Yesware, an email marketing service, does this beautifully.
They use the 3 tier pricing strategy.
By giving three options with clear descriptions of the additional features in each subsequent tiers…
Yesware has clearly differentiated their core features with their premium ones and are catering to three different buyer groups.
By giving options to your customers, you can clearly help them decide if having the premium features will benefit their business.
However, Having Too Many Options Isn’t Good
While having different tiered pricing is important to capture additional sales, having one like Microsoft’s is counterproductive and downright confusing.
From just one glance, it is easy to get overwhelmed and realize that there isn’t really much information provided in the various tiers.
Is there even a difference between Office 365 Home vs Personal?
What features make Office Professional $300 higher than the Home version?
Too confusing, too many questions left un-answered = customer clicks away.
So if having one option isn’t ideal while too many options in my offer lead to confusion…
How many is ideal?
Let’s go through how the 3 tier pricing works.
The idea is pretty simple actually, you give your customers three options of your product to choose from.
Many successful businesses (not just Saas) use this 3 tier pricing strategy to add value and most importantly clarity to their customer.
When your customer comes to your pricing page and is interested, you need to show them what they can get at different prices.
The Basic Package: Gives your customers the core features of your service. It will solve the main challenge or problem they are facing in their business.
The Standard Package: This contains everything in the basic package but also more features such as productivity tools that increase the overall benefits and help your customers save time or money in the long run.
This will become your most popular option which I will reveal why in a bit.
The Premium Package: This is everything your solution can offer at its max capability. While many buyers won’t opt for this option, it brings you the biggest return per unit sold.
As we discovered earlier, the benefits of giving options allowing you to capture more revenue by giving your customers a choice in their purchase.
But perhaps the most powerful aspect of a 3 tier pricing strategy is the ability to actually control the option which the majority of your customer will buy.
But how does that happen?
Is it even possible?
The book, Priceless: The Myth of Fair Value, highlights how this is done by a simple example of selling beer to 100 customers.
A restaurant was selling just two types of beers. A $1.80 cheap beer and a $2.50 premium beer.
80% of the customers went for the premium beer.
This netted the restaurant $236.
The Manager Added An Even Cheaper Option:
Now the restaurant has an even cheaper bargain option that cost only $1.60.
Now, this upset the sales rather dramatically with 80% of the customers buying the previous baseline beer of $1.80 while the remainder 20% bought the premium $2.50 beer.
This caused sales to drop to $194.
The Manager Now Replaced The $1.60 Beer With An Ultra Premium $3.40 Option:
This time 85% of people bought the $2.50 premium beer.
10% bought the ultra-premium beer at $3.40 while the remaining 5% drank the $1.80 cheap beer.
The total sales improved to $255.50.
Now if you realize, the only thing that was changed was to introducing a higher priced option than a cheaper option.
The key takeaway is by switching up our offerings and by introducing a higher priced option…
We can steer our customers to the package we want.
The middle, ‘Standard’ package.
This is especially true in a three-tier pricing strategy and the reasoning why so many companies choose to adopt this pricing model.
When given three options, the middle option will close the most sales and determines your cash flow & revenue.
Therefore it makes sense to optimize your middle package to maximize your income.
While the 3 tier pricing strategy model can be used for various businesses beyond Saas products such as consulting, web design and food…
It is actually rather straightforward when applying it to your Saas business.
One of the most popular types of pricing models is fitting the plan or package to your customer persona.
When we talk about customer persona, we aren’t just talking about a vague description of your end buyer…
But a detailed breakdown of your customer that includes the pain points and challenges he is facing together with his immediate desires.
Let’s say you are selling a productivity software.
You can develop a premium priced plan that caters to big corporations.
A plan that emphasizes more on communication features that prevent errors and provide useful integrations with their existing infrastructure.
While an entry-level plan speaking to new startups can focus more on the essentials and the time saved.
Hubspot’s marketing software pricing page does this well.
They distinctively separate their tiers and list out all the features of each plan to highlight the differences for each customer persona.
Cleverly, Hubspot also highlights the middle option to further guide their prospects to choose the middle option, after all, it’s the ‘most popular option’!
Now when you are creating your three tiers, you have to make sure each option is clearly defined between tiers and has distinctive offerings.
The last thing you want to do is to let customers of the same persona choose between the plans.
Hubspot clearly defines their customer persona with each plan:
An entry-level marketer doesn’t have beyond 100 contacts and probably doesn’t require any marketing automation to be done.
Similarly, a big corporation with 10,000 contacts or more would be particular about analysis and reporting of the various metrics and hence can be charged much more.
The reporting feature becomes a premium add-on for their corporate client persona.
Takeaway: A strong customer persona will lead to robust and clearly defined tiered plans, so start with that.
Another popular pricing model used is to create the plans according to the value metric.
Now, what is the value metric?
It is simply the unit of the service the customer pays for.
For example, if I head into a spa they will sell me packages based on the value metric.
“1 session for $200”
“5 sessions for $800”
“10 sessions for $1200″
There is a discount for every additional interval of units purchased.
This is particularly powerful to ensure that when a customer uses your product more and gets more value, you get a capture a portion of the increased value.
It gives your customer a greater sense of value and leads to higher purchases:
‘Why not buy 5000 credits for $2,500 than 1000 credits for $1000?”
It allows you to pre-sell your software service (which is practically unlimited) more and bring in cash even if your customer doesn’t fully finish his allocated usage.
It’s like selling unlimited gym memberships where you get paid even if they don’t turn up.
LimeLeads, a sales prospecting service, does this wonderfully.
By clearly stating down the pricing per contact (or lead), they effectively lure their customers to choose the higher paid plans to enjoy bigger discounts.
By also clearly marking the 3 plans, startups, business and enterprise, they give their customers a sense of the right purchase for the size of their unique business.
When selling based on value metric, it is always better to sell more even though the discounts might be steeper.
But please make sure the math works out, your business probably have variable costs that are tied to the value metric as well!
Whether you are creating a new Saas product and looking to test your MVP (minimum viable product’s) pricing…
Or looking to refresh your pricing model to capture more revenue and hit new customer types…
Give the 3 tier pricing strategy a try, it has been proven to work and even helps you to control the sale.
Wondering if volume pricing might be better (and simpler) pricing method for you?
Read our quick guide on Tiered Pricing vs Volume Pricing to understand which to choose for your business!