But, you know what? Making money is actually a really simple formula. Or at least, it\u2019s simple in theory.
If you\u2019re selling bananas, you\u2019ll take the cost of the stock, your overheads, and your labor costs, add it all together stick a markup percentage on top. Boom, there\u2019s your price.
That\u2019s cost-based pricing in a nutshell: you take your raw costs and add a bit on top to make a profit. Only, what works for bananas becomes trickier when your product is digital. With digital and SaaS product pricing, the relationship between money and materials is much blurrier, and your overheads are very different indeed.
Store staff and rental costs become research and development costs. Inventory costs become the server and sys-admin costs\u2026 And so on.
In short? With digital products, it\u2019s much harder to figure out that magic formula for X + Y = price.
More importantly, knowing what people are willing to pay is tough. Like, a customer understands what the worth of a banana is to them. It\u2019s food. It\u2019ll keep them alive! But here you\u2019re trying to convince people that they need your nice-to-have<\/em> product so much that they ought to pay you for it \u2013 often without them even having used it and got to grips with its features.
That\u2019s why the SaaS and product-led growth market turns to a range of tried and tested product pricing models.<\/p>\n\n\n\n
What are product pricing models?<\/h2>\n\n\n\n
Product pricing models are ways of packaging things up in a way that incentivizes potential customers to bite the bullet and start paying for your product. They\u2019re an effective way to make the product seem like a no-brainer, where the deal on offer means:<\/p>\n\n\n\n
- \n
- You\u2019ll generate your desired revenue<\/li>\n\n\n\n
- The cost to the end user feels palatable<\/li>\n<\/ul>\n\n\n\n
Let’s look at some common pricing strategies, depending on the key factors for your product you will probably find the ideal pricing model below.<\/p>\n\n\n\n
SaaS pricing model examples:<\/h2>\n\n\n\n
1. Freemium pricing<\/h3>\n\n\n\n
The freemium model is a brilliant way to get people through the door and let them experience what you have to offer. You\u2019ll entice them with a compelling suite of free features, and then drive revenue from power users who want to pay for the really good stuff.
It\u2019s like giving someone a little bite of a donut for free each month, and then frequently reminding them that they could have a whole one, covered in sprinkles, for a reasonable price.
It can be really powerful, but you\u2019ll need to delicately balance just how much you can give away for free. You\u2019ll want people to be able to just about get by on the free tier \u2013 while still feeling like they\u2019re missing out.
Freemium pricing also has some interesting longtail benefits. Offering a product for free to individuals and students, for instance, can help it become the de facto tool that people feel entrenched in by the time they\u2019re promoted to decision-making roles \u2013 that\u2019s exactly what happened with Figma, which ended up being bought by Adobe<\/a>.<\/p>\n\n\n\n2. Tiered pricing<\/h3>\n\n\n\n
Tiered product pricing can work hand in hand with the freemium pricing structure model, offering a range of options to different types of users. The options can be based on features or the number of users. You might, for example, offer a free tier to individuals, a low-cost tier for small businesses, and a bulkier one for enterprise customers.
In that instance, you might increase factors like collaborators, cloud storage, or the number of specific features based on which tier people choose. The aim here is that individuals, and even smaller businesses, will probably be loss-leaders, while word spreads about your product\u2019s capabilities to the point where enterprise customers jump on board and drive the bulk of your revenue.<\/p>\n\n\n\n3. Flat-rate pricing<\/h3>\n\n\n\n
If your product is really straightforward and does just one or two things incredibly well, you might not want to complicate things. In this instance, charging a flat rate sale price might be a smart choice.
You\u2019ve got three options here, really:<\/p>\n\n\n\n- \n
- A flat rate as a one-off purchase<\/li>\n\n\n\n
- A flat rate as a recurring subscription<\/li>\n\n\n\n
- A flat rate as a recurring subscription based on the number of users<\/li>\n<\/ul>\n\n\n\n
For obvious reasons, digital products have been moving away from one-off purchases in favor of subscription-based software-as-a-service (SaaS) pricing.
This model allows for recurring revenue while also helping pay the overhead costs for necessities like cloud storage and servers. An example here is Adobe (again), which famously transitioned its core apps like Photoshop and Premiere Pro away from being one-off purchases a few years back.<\/p>\n\n\n\nCommon product pricing strategies<\/h2>\n\n\n\n
Whether you\u2019re new to the market or you\u2019re trying to stave off fierce competition, you\u2019ll want to consider using one or more of the following tactics to determine how aggressive you go with your product pricing:<\/p>\n\n\n\n
1. Competitive-based pricing strategies<\/h3>\n\n\n\n
In competitive-based pricing, you\u2019ll look at your nearest competitors and set your price either to match them or beat them. If it\u2019s the latter, just be careful that you don\u2019t spark a race to the bottom that you can\u2019t afford to sustain.<\/p>\n\n\n\n
![\"make](\"https:\/\/www.prodpad.com\/wp-content\/uploads\/2022\/01\/dot-throwing-money-down-drain-300x300.png\")
<\/figure>\n\n\n\n2. Value-based pricing strategies<\/h3>\n\n\n\n
In value-based pricing, you\u2019ll need to put a dollar amount to the value your proposition is worth, as decided on via customer and target audience research. You\u2019ll then work backward from that to get to shape your running costs, ideally landing on something you can sustainably offer at that price.<\/p>\n\n\n\n
3. Dynamic pricing strategies<\/h3>\n\n\n\n
Dynamic pricing follows market trends, user demand, and rates \u2013 and adjusts the cost to the end customer to match. The aim here is to pick a profit margin percentage and alter costs so as to always stay just above that rate. A good example here is how Uber costs change based on market demand, or how EV charge point operators can adjust costs to stay X% above the cost of energy at all times.<\/p>\n\n\n\n
4. Penetration pricing strategies<\/h3>\n\n\n\n
Penetration pricing lets you cut through the noise by offering your product much cheaper than the competition. That might be through stunt pricing that lasts a short while, or \u2013 more commonly \u2013 via lengthy free trials. Penetration pricing helps new products break into the market, but it\u2019s not one for the long term.<\/p>\n\n\n\n
5. Price skimming strategies<\/h3>\n\n\n\n
On the opposite end of the spectrum, price skimming assumes that your product is the first of its kind. Here, you can set your price as high as you like on the assumption that a small number of early adopters will happily pay it. This allows you to fund an economy of scale that\u2019ll ultimately let you slowly reduce the cost to the end user as more and more competitors emerge.<\/p>\n\n\n\n
The four secrets for how to price a product<\/h2>\n\n\n\n
1. Talk to your customers<\/h3>\n\n\n\n
When you\u2019re considering pricing, there are clearly lots of ways to slice things. Personally, though, I always like to think about pricing not in terms of what something costs, but the value that you’re providing for the users.
The way to do that is to have honest conversations with them. By having conversations with your users, you\u2019ll understand the enormity and the value of the problem that you’re solving. Ask them things like:<\/p>\n\n\n\n- \n
- How are you solving this problem today?<\/li>\n\n\n\n
- How long does it take to solve?<\/li>\n\n\n\n
- How much money has it been costing you to solve it?<\/li>\n<\/ul>\n\n\n\n
Sometimes they won\u2019t be able to put a hard figure to it, but sometimes they\u2019ll be really granular and can talk you through how many hours it takes them to do that task, and how frustrating it is.<\/p>\n\n\n\n
2. Be ready to test and adapt<\/h3>\n\n\n\n