Developing the pricing tends to be among the most difficult aspects for a SaaS company. The pricing would directly impact the revenue of the company, and hence must be decided after a lot of research and deliberation. Joshua Melick, however, mentions that even though pricing is such a crucial component, not all SaaS entrepreneurs pay much heed to it and follow the typical approach of having a version of bronze, silver, or gold plans with more features at each tier. These plans can be referred to as the two dimensional SaaS pricing models. However, for better revenue prospects, it shall be better for businesses to follow the 3D pricing model instead.
The prices of almost everything in the world keep rising over times. Hence, even the entrepreneurs of SaaS companies must also understand that they cannot rely on upgrades, changes, or inflation to increase their product pricing. Joshua Melick especially points out the fact that increasing pricing strictly in line with inflation may even cost a business a good sum of money in the long run. Hence, it would be better to follow a three dimensional SaaS pricing where the prices increase to remain competitive in the current market, while also adjusting for inflation.
A lot of SaaS start-ups tend to be hopeful that their prices will rise naturally over time due to factors like increase in customer usage. However, hopes and conjecture cannot be used as a concrete path to gain more revenue. This is the reason why three dimensional SaaS pricing model can be a better option.
Here are a few ways suggested by Joshua Melick through which one can implement this model:
- The first strategy is the most obvious one, and also harder to implement. As per this, a business should just change their pricing every year. They may annually increase prices by 5-10%, without any grandfathering. In most cases, the business would have a certain number of loyal customers who shall be loyal to their platform even after the price increase. The company may even run some models on just how many customers can they afford to lose and still come out ahead with higher prices, to understand the effectiveness of this approach.
- Alternatively, a business may include a clause in annual agreements that each renewal cycle the price will increase by a certain percentage, approximately between 5-7%. This approach works well in industries where prices are required to be negotiated. Even if the customers do end up negotiating the price, the sales team of the business shall have more wiggle room. They can even provide a clause that the customers have to pay for the increased amount only if they are satisfied with the product at the end of the term. This tactic comes with an added bonus, which is that it gives the customer a good reason to discuss the account at the end of the term.
Following any of the above-mentioned pricing strategies can be quite fruitful for a SaaS business.