If you are in the SaaS business, you will know this: Customer expectations of value for money, revenue maximization, and aligning with ever-changing product offerings are the driving forces behind SaaS pricing strategies.
Wouldn't it be great if you could adjust your prices more frequently in correlation with market conditions and supply and demand? This could be possible with Dynamic Pricing- a strategy that needs more focus on customers and your procedures.
A Closer Look Into the World of Dynamic Pricing
By definition, dynamic pricing is a strategy that allows SaaS businesses to modify their prices and tailor their offerings as per:
- Fluctuating market conditions
- Customer behavior
- Competitor pricing and strategies
- Other variables
With dynamic pricing, companies sell their offerings at various price points to customers at multiple timelines. You must find that sweet spot- that ideal price point that maximizes revenue while maintaining customer loyalty.
Within the SaaS industry, dynamic pricing commonly takes the form of usage-based pricing. This means that customers are charged based on the specific amount of resources they utilize. By aligning costs with actual usage, SaaS companies can provide fair and flexible pricing models that accurately reflect the value customers receive from their products or services.
Dynamic Pricing & Its Various Methods
One of the best things about dynamic pricing is that it can be implemented in various ways. Here are the four popular methods to put this pricing strategy into practice:
1. Demand pricing or surge pricing, where the prices go up during high demand and down when the demand is low.
2. Volume discounts, where you reward organizations with dynamic pricing-based incentives/volume discounts for their loyalty.
3. Variable package-based pricing, where you offer various pricing plans according to the unique features or services you sell.
4. Localized pricing, where you adjust your price points according to the geographic location of your customers.
Now that we have analyzed the methods let’s explore the various types of models in dynamic pricing for SaaS.
5 Types of Dynamic Pricing Models You Can Implement
1. Time-based pricing
In this model, the price for the offering is set as per the season, the day, or the week. One of the best examples that demonstrate time-based pricing is the hotel charges. It is common for hotels to charge higher during peak seasons like Christmas and Thanksgiving and during the summer months when kids have school holidays. The hotel charges are lower during the off-season times.
2. Segmented pricing
In segmented pricing, the offerings are charged with various price points to cater to multiple customer segments based on these criteria:
- Customers’ purchasing behavior
- Customer demographics
- Customer location
- Willingness to pay
Airlines, for instance, charge different prices for economy, business, and first classes depending on amenities.
3. Usage-based pricing
As the name suggests, usage-based pricing charges customers according to the amount of product or service used. Usage-based pricing is one of the most preferred approaches for SaaS businesses. For instance, cloud storage providers charge their clients based on the amount of data they use for storage.
4. Peak pricing dynamic model
While peak pricing is very similar to time-based pricing, the model emphasizes identifying and pricing items when there is a high market demand for your offerings. It is common for movie theaters to charge higher ticket prices on weekends and lower ticket prices on weekdays, for instance.
5. Personalized pricing dynamic model
In personalized pricing, the price points are based on the individual characteristics of each customer’s purchase history and customer behavior. A good example is the e-commerce site that discounts customers who abandon their shopping carts.
SaaS companies can use several types of dynamic pricing strategies, including:
1. Competitor-based pricing, where you monitor and adjust your price points based on competitors’ pricing strategies.
2. Value-based pricing, where you align prices with customer perceptions of value for your offerings.
3. Cost-plus pricing, where you add a markup to the cost of manufacturing your product or delivering a service. Cost-plus pricing is ideal for heavily regulated products or services.
4. Bundle pricing, where multiple products or services are bundled and given at discounted prices that are lower than what would have cost to purchase them individually.
With so many options, you must weigh the pros and cons of dynamic pricing before taking the plunge with the mode that suits you best.
Dynamic Pricing Advantages and Disadvantages
The Advantages
- Higher revenue and profit due to the ability to adjust prices based on real-time market demands.
- Higher customer retention and satisfaction due to good implementation of dynamic pricing practices.
- Thorough understanding and real-time analysis of your business market and its happenings.
The Disadvantages
- Risk of negative perceptions developing amongst customers when prices change too often.
- Fierce price wars between competitors in your industry.
- The pressing need to assess real-time pricing techniques, which can be time-consuming.
SaaS companies find dynamic pricing ideal because it aligns well with their business's subscription-based nature, allowing them to adjust prices in response to a changing market environment. Here are some common guidelines to help you establish dynamic pricing for your SaaS business.
Also Read: Profit Boosters: The Power of Effective Pricing Structures
7 Important Tips to Implement Dynamic Pricing for SaaS
1. Do adequate market research to choose the right pricing strategy that aligns your business with your customer base.
2. Ensure your pricing rules are based on solid aspects such as market conditions, consumer behavior, and competitor pricing.
3. Offer multiple price points to cater to different customer segments to enhance customer satisfaction.
4. Find the ideal value metric based on the unique characteristics of your product or service to charge your customers.
5. Make sure you keep your customers engaged and attentive to your pricing by offering discount pricing and coupons.
6. Make sure your subscription management, invoicing, and billing are in order before proceeding with dynamic pricing.
7. Choose software with in-built analytic capabilities that generates error-free, reliable, and real-time data.
The Dos & Don'ts of Dynamic Pricing in SaaS
Optimizing revenue and remaining competitive in the marketplace can be achieved with dynamic pricing for SaaS companies. However, you have to follow some dos and dont’s.
Please Do:
- Study your market thoroughly to understand competitor pricing, the latest industry trends, and customer behavior.
- Draw sound objectives and key performance indicators to measure your pricing strategy success.
- Categorize your customers to cater to their various needs with your pricing strategy.
- Test how your pricing strategy performs and make the necessary adjustments to improve your revenue.
- Connect with your customers and maintain transparency with your pricing. It will foster trust and make them feel more comfortable when the prices fluctuate.
- Leverage seasonality and special events to align your strategy with your customer needs and the conditions in the market.
Please Do Not
- Confuse your customers with a complicated pricing model. It will hinder their understanding and acceptance of the offering value.
- Disregard customer feedback. It is a valuable source of insights that help implement your strategy better.
- Drastically change your prices without warning or justification; it will dent your reputation beyond repair.
- Focus exclusively on short-term profits by taking advantage of your customer satisfaction and loyalty. It can end badly with long-term effects.
- Fail to track your competitor's pricing. Keeping an eye on your competitors is vital to remain competitive and make good decisions.
- Underestimate pricing psychology because you gain insights into how customers evaluate prices and value.
In Conclusion
Dynamic pricing in SaaS is about matching the product or service price with the customers’ perception of its value. Implementing dynamic pricing and balance, gaining revenue, and maintaining customer loyalty can be an uphill task. Fortunately, Togai can help you implement dynamic pricing strategy without such hassles. Togai is a pricing implementation platform that helps you implement any pricing strategy ten times faster in less than a day. Schedule a free demo today, and let’s get things rolling.
