2023 will throw some curveballs for the SaaS industry: This will be yet another tough year with a tighter economy. Finding funds will not be easy. Nor will be growth and customer acquisition for SaaS companies.
SaaS platforms once disrupted the software industry, but now they are forced to find and rediscover new ways to attract customers and transform how they think about capability enhancement. SaaS company CFOs are not wasting time. They are already examining ways to cut costs and save money. Statistics reveal that 57% of IT teams feel pressurized to curb their SaaS expenses. This hard-hitting reality is more likely to escalate this year.
During this period of decreasing churn, SaaS companies will be focusing more on pricing in an effort to maximize customer value while reducing churn. While this will most probably be the biggest trend of the year, there are many more to look forward to. But before that, let’s explore some numbers from the State of SaaS Pricing 2023.
- Making core pricing policy changes led to positive results for 98% of SaaS businesses.
- In 38% of SaaS companies, the billing is based on usage of the software.
- 84% of SaaS companies organized their pricing from low to high.
- 9% organized their pricing from high to low.
- On an average, SaaS companies spend 6 hours to decide their pricing strategy.
- Only 39% of SaaS companies’ pricing are publicly available.
- As estimated by SaaS companies, a 1% increase in prices can increase profits by up to 11%.
- 4 out of 5 SaaS companies are modifying their pricing annually. Some change the pricing more frequently.
- 54% of SaaS companies offer annual pricing plans.
Let’s now move on to the trends that will create ripple effects in the SaaS industry for the year 2023.
SaaS Industry Trends: What Will Most Likely Happen in 2023
1. Democratizing SaaS pricing
The original SaaS goal was to transform how software was priced and purchased. However, it has ended up continually disrupting itself. Since 2021, the SaaS compound annual growth rate, or CGR, has been increasing at a rate of 27.5%. Experts believe that the overall SaaS business revenue will reach around $716.52 billion by 2028. As the market expands and becomes increasingly competitive, customers are now presented with an abundance of options. This abundance has led to a new paradigm in SaaS pricing, where a realignment of value-to-cost is taking place.
2. Transition from cost-effective to value-based purchases.
Democratization of comparison, evaluation, and access to information has enabled customers to make informed decisions about their purchase even before contacting vendors. Further evidence that pricing models play a significant role in SaaS buying decisions is the emergence of new revenue strategies such as tiered-subscription pricing or charging overages.
Evidently, tiered subscription pricing enabled customers to choose packages that fit their requirements. However, there are some concerns. Regardless of its value, the tool actually forces them to incur expenses for a contractual period. As a result, SaaS companies are migrating to usage-based pricing (UBP) to improve price-value alignment and expand entry.
The OpenView Partners study found that 45% of SaaS companies had UBP in 2021, compared to 34% in 2020. Chargebee estimates that by 2023, 56% of SaaS software merchants will adopt the service.
SaaS consumption pricing also minimizes the risk of customer exits by eliminating the cost of inertia - expense despite non-utilization of a product. The net dollar retention rate of companies using UBP-oriented SaaS models usually exceeds 120%, on average, by about 10%.
3. Strategic SaaS development proves value-based pricing
SaaS company owners have realized that buyers hold most of the power, which is why value-based pricing holds the second place after seat-based pricing. Also, SaaS customers are not ready to commit to contracts for a product that they may or may not use and may or may not garner the expected ROI. Consequently, SaaS's financial future lies in pricing models in which users pay a proportional amount according to the value they receive.
Take Twilio and Datadog, for example. These companies have adopted usage-based pricing. Moreover, statistics point out that 39% of SaaS companies opt for value-based pricing. Another 38% prefer to charge based on usage. At the end of the day, customer churn is less likely if they feel that they are getting their money's worthwhile being exposed to some risk.
4. Blended pricing models will be in trend.
Blended subscriptions combined with consumption pricing models are the most preferred in the SaaS industry. This combination allows customers to select subscription tiers without leveling up even when they cross the preset threshold. Instead, they can pay for the additional resources they use.
This blended pricing revenue model delivers better customer experience and enables seamless usage even with subscription tiers. By making revenue predictable, SaaS companies are able to monetize seasonal and infrequent users.
These trends should help you identify the ideal SaaS pricing strategy to garner a good customer base and improve your revenue. Here are some practical guidelines to spruce up your pricing strategy this year.
Also read: Recurring Revenue Models for SaaS Success
5 Ways to Make the Most of Your Pricing Strategy in 2023
1. Leverage pricing for growth.
Pricing has been long neglected by many SaaS companies but now is the time to use it as a growth lever. Identifying where your pricing strategy needs to be improved, along with your innovation opportunities, is the best place to start. When the SaaS industry was in better shape, the prime focus was growth. Pricing always to a backseat, and it only had to be good enough. But in this current survival mode, the fundamentals have come to the fore.
2. Prioritize your customers.
It is important to determine what pricing strategy is best for your business based on your customers' needs. It’s best not to make any changes until you understand your customer’s needs and priorities on the gathered data.
Take, for instance, usage-based pricing (UBP), a confusing strategy for customers who are better off knowing their expenses in advance. If UBP is the strategy you want to adopt, you should have a game plan about creating a good customer journey that addresses their concerns and shows them how they can use the strategy to their advantage.
3. Team up on pricing strategy.
CFOs and CMOs are increasingly responsible for pricing, and it becomes a top priority for the C-suite. If you are planning on implementing a new pricing model, it's best to onboard more experts and functions into the process instead of working in silos. Include your product teams to understand the features that customers are willing to pay premium prices for and which usage metric is best for both of you.
4. Upgrade your prices after careful thought.
With the bad economy, you have to think twice or thrice about raising prices this year. Unlike how SaaS companies raised their prices four times faster than global inflation in 2022, customers this year will not be able to withstand such hefty prices. You should consider:
- If your product holds up well enough.
- If your customer relationships are solid to withstand a rise in prices.
- Introducing methods to ease the price rise.
- Implementing usage-based pricing.
With such options, the customer will find it easy to adjust the price raise without negotiating with you.
5. Make pricing flexible.
A little bit of pricing flexibility will go a long way in retaining customers who may ponder about cutting back in 2023. You can offer discounts or customized pricing to remain committed to your organization. You can also implement a hybrid pricing model, which will likely be a trend in 2023.
Gearing Up For 2023
You can expect the SaaS industry to have many ups and downs in 2023. However, you can navigate through the downs if you think creatively about your pricing.
Another good idea is to invest in Togai. Our pricing implementation platform will help you implement any pricing strategy ten times faster and in less than a day. schedule a free demo to learn how Togai works.