SaaS (Software as a Service) has proven to be a very elastic, scalable and progressive industry. According to IDC, cloud services market grew 28.6 percent in the first half of 2017 and the revenue totaled 63.2 billion (the biggest share belongs to SaaS). Another research firm, Gartner Group says that SaaS industry remains the largest segment of the cloud market. The industry revenue is expected to grow 17.8 percent and reach 85 billion in 2019. With such numbers, the SaaS industry has no signs of slowing down, and it has already become a very attractive space for startups. However, getting into SaaS with creative ideas is one thing, but being successful with it is a beast of its own. There are hundreds of articles focused on the development of successful SaaS companies, but the focus of our article today will be on the SaaS pricing models.
The freemium model is becoming increasingly popular for SaaS products. Companies like Dropbox, HubSpot, Buffer, Trello, and MailChimp have shown us that offering a free-forever plan with limited features is a powerful way to generate interest, press, and customers. And while freemium is a great way to get people to try and use your product, it’s only really a viable business model if you can get a good percentage of those free plan users to upgrade and pay some money for your tool. After all, your tool may be free to use, but it’s definitely not free to build, market, support, and maintain. So how can you effectively and regularly convert freemium users into paying customers?
Value-based pricing - one of SaaS’s most favorite (and sustainable) pricing schools of thought. Conventional wisdom says that if you tie the price you charge for your product to a value metric that aligns with your product, then you're set for success. However, can any value metric that aligns with your value give you a healthy revenue model? Or do the revolutionary revenue models of Michelin, Google, et al. possess something more? How does this play out in SaaS pricing? If the core value of your SaaS is intangible (like better team collaboration, increased productivity, etc.) how do you tie back your pricing to that value? This post aims to answer all these questions and more.
<p>Pricing is one of the original four Ps of Marketing. Your pricing model goes hand-in-hand with your growth engine. For example, if you plan to buy advertising to drive growth, you'll need a pricing model that generates a customer lifetime value that exceeds your customer acquisition cost. If, on the other hand, you are primarily driving growth through a viral invite system, you'll generally need a fairly low price to reduce purchase consideration friction in your customer acquisition funnel. Beyond supporting the growth engine, price is also a function of the value that customers receive from a product and the cost of alternative solutions.</p>
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