SaaS Pricing Best Practices: Sensitivity Analysis

SaaS Pricing Best Practices: Sensitivity Analysis

When pricing a Saas product, there are several factors to be taken into consideration but using Sensitivity Analysis is one of the most recommended “Saas Pricing Best Practices”

Other Factors to be Considered

  • Revenue needed to break even? Market Share? Profitability? You cannot have all and have to choose 1 at a time.
  • Psychological Hacks- $99 vs $101, $39 vs $49,
  • monthly / quarterly / biannually / annual, annual billed monthly?
  • Price will also determine/dependent on – market position, customer affordability, quality of service you provide.
  • Customer Lifetime Value
  • Should you bundle features / functionally, include everything and charge per user, or do a la carte?
  • Will prospects want or expect a Free Trial?
  • What do your commercial competitors do?
  • What other things – homegrown or re-purposed software – are you displacing in the market?

Sensitivity Model

  • First Identify 10+ Direct Competitors for your product. (Use StartupFlux to identify competitors)
    Find out the Price Range of their products by going to pricing Page on their websites (Again you can use StartupFlux to directly go to their Pricing page, We also monitor these pages for any changes they’ve made, so you can get alerts if and when they change their pricing – Coming Soon)
  • Build a Price Range – minimum to the maximum price spread across your competitors.
    Eg: If 3 competitors offered prices like $25, $50 and $50, $100 and $50,$100 , then your range could like like $25, $50, $75, $100.
    Notice that none of the competitors offered the product at $75, but it is good to include in the range to find the right sweet spot for you.
  • Now, Copy the Sensitivity model in the Shared Google Sheet and in your version, put down the price range identified in the previous step.
  • Using Customer Segmentation, you can divide your customers into 3 segments and estimate their numbers and the price they will be willing to pay for your product.
    Eg:

  • Now you need to settle on one Number – The Approximate Annual or Monthly Revenue that you would be very happy with.
    In this case, let’s assume $100,000
    For the sake of ease of understanding, Here we assume Total Customers to be 17,000 at a price range of $49-$2500
    This can be a complex calculation based on Segregation amongst Customer Segments.

  • Let’s build calculation assuming, you are able to capture maximum 15% of the Market.
    We can clearly see that at $49 price point, you have to capture 12% of the Market to reach your goal of $100,000 and the maximum you can make is ~$125,000 unless you grow in the horizontal or set foot in another vertical.
  • At $99 Pricepoint, you only have to capture 6% of the Market and you can make up to ~$250,000
    And since this is at the extreme left side of the chart, it’s safe to say that $99 will be a price that the customers will be willing to pay.

Imagine if you had priced it at $99, how much more man power and time would it have taken to capture the extra 6% of the Market and you would be losing $150,000 of additional monthly revenue.

Tips:

Do not severely undercut your closest competitors prices. This can put your product in bad light and make it difficult for users to trust it.

 

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