Pricing your SaaS products is one of the most crucial aspects of running a successful business. All every SaaS owner ever wanted was to get the pricing strategy right for their SaaS. The only way to get it right is to consider SaaS product pricing as an important part of your SaaS marketing.
However,SaaS startups need to overcome certain challenges on route to success by using psychological pricing tactics to influence user perception and increase product value. That said, let’s understand what is psychological SaaS pricing and why it’s effective:
If you do not know what psychological pricing is — worry not — you are not the only one. Very few who hear the term understand what it entails. But what if I told you that you have engaged with it almost every time you purchase anything these days?
Every single brand you use leverages psychological pricing to its advantage albeit different types of it. Psychological pricing can be defined as manipulating a customer’s purchase decision to generate more or higher value of sales. It is called so because, by the end of the transaction, companies actually satisfy a specific psychological need of the customer.
Think about it: when you see a price tag on a product in a store, what is your first thought?
Maybe you try searching for the same product online and compare the prices? Maybe you visit another store and check if they are selling the same product at a lower price? Other than these, you, as a customer, do not have any real reference point to assess what the right price for a product should be.
This is the precise fact that the concept of psychological pricing leverages. And yes, it is very effective.
Customers seek success in their journey to all purchases. By communicating the idea that they have gotten the best price, best quality or best anything really, the brand is able to make the customer feel just that — successful.
But for SaaS brands, finding the right pricing model and driving growth using it is easier said than done. With that in mind, let us now look at some of the said common pricing challenges faced by SaaS brands.
With revenue growth in mind from day one, navigating complicated pricing strategies can get challenging. However, there’s no perfect ingredient to help you with setting the right pricing strategy that paves the way for your SaaS’s success.
That said, here are some common mistakes to avoid while setting up a robust pricing strategy:
Competition-based pricing is where you copy your competitors’ pricing to the same effect. On the surface, it looks good, however, this could turn out to be a huge mistake. Copying your competitors can mean undervaluing your SaaS product.
For instance, if your SaaS product offers more features and value than your competitors, then keeping the price the same would mean a huge loss for you. Since your competitors’ pricing is based on their product and not yours, copying their price would not make sense.
Another mistake many SaaS businesses make is they are too focused on the pricing and not creating the best value product. Your primary goal should be to develop a SaaS product that offers high value to your customers.
If customers can see the real value your product offers, they’ll automatically pay even the high price. Thus, do not make the mistake of lowering your price but enhancing your SaaS product’s value.
In the cost-plus method, you determine the price of your SaaS product by adding the total expenses for development, maintenance, marketing, and others. While the method is simple, consistent, and justifiable, it ignores other pricing strategies that can help you achieve more success.
Also, it’s less prudent because your pricing should be aligned with the feature set your SaaS product offers.
SaaS product owners generally choose this pricing strategy to meet their profit margin requirements. However, you need to understand that SaaS pricing is part of your SaaS marketing strategy. Also, your target audiences don’t care if your costs for development, support, customer acquisition, and maintenance are high.
The price they are ready to pay is affected by product value and psychological factors. So, you need to figure out a way for your target audiences to pay the desired amount by enhancing the value of your SaaS and capitalizing on psychological factors.
Now that we have understood the common pricing mistakes, let’s glance over some of the psychological pricing tactics you can use:
Charm pricing is an old yet effective psychological SaaS pricing strategy that involves setting the prices of your products by ending it with number nine. For example, here’s the pricing page of the Apollo.io
The idea here is to make your SaaS product price seem lower and affordable rather than the rounded-up numbers. Human brains are wired to process numbers quickly, especially the first number to the left, which creates a subconscious effect of the perceiving value of the product.
For instance, a brain will perceive a product with a $400 price as more expensive than a $399 price. Though consciously we may not believe that we are purchasing a $300 product, the leftmost digit creates a charm that helps increase the conversion.
Price Anchoring involves setting up a reference point for customers when assessing the price of your SaaS product. This helps them work out the actual value of the product and make decisions based on their analysis.
For instance, you want to purchase a car and have finalized one within your budget. Now you’d want to compare this car’s price with cars from other brands and make and model. Similarly, when purchasing a product offline, you’d feel compelled to compare the price with online marketplaces.
Price Anchoring is a psychological trick where you’d leverage the higher price that works as an “anchor” than the actual price of the product to increase the customer’s willingness to pay more. It impacts the customer’s perception of the value of the product to make it seem more reasonable.
Here’s an example of a SaaS company offering three pricing plans: a basic plan for $10 per month, a mid-level plan for $20 per month, and a premium plan for $50 per month.
Odd-even psychological pricing works on the charm pricing principle to some extent where pricing is set in odd and even numbers.
Here, the odd price is set short of a few dollars than the rounded price for example $19.99, $99.97, $395, $579.93… etc. The even-numbered pricing, for example, $20, $90.50, $998, $1394, etc. suggests quality and prestige encourage buying while odd pricing seems like a bargain.
The goal of odd-even pricing is to make small adjustments in price to drive more sales and maximize profits. The odd pricing creates the illusion that the product is priced at the lowest while even or rounded numbers are a mark of luxury since the product is perceived as of higher value.
Overall, this strategy can be effective for SaaS products as it helps influence customer perceptions about the product’s value and encourage purchase. However, it’s important to use this strategy ethically and avoid deceptive or misleading practices.
Decoy pricing is a crucial psychological strategy that involves coercing users into choosing a particular SaaS plan by making other plans costlier and not so valuable. This strategy makes the other options seem undesirable to influence the buying decision of customers.
When your SaaS product is priced to make one plan better value than the others, it steers customers toward that option. Thus, decoy pricing can be an effective pricing strategy to encourage customers to choose a specific plan and increase revenue and sales for you.
For instance, as seen above, the standard plan priced at $13.81 per month would seem a better choice than the premium plan priced at $276.20 a month. Here, the premium plan acts as a decoy since it’s priced high, which makes the standard plan a better and more affordable deal for your SaaS customers.
Thus, decoy pricing can be an effective psychological SaaS pricing strategy to change customer perceptions of the product’s value and encourage them to select the desired plan your company wants.
The center stage effect is a tactic where you leverage the human tendency to focus on the center part of the screen. SaaS companies can use this strategy to highlight a specific pricing plan or package that they want customers to purchase.
This psychological pricing strategy involves placing the desired plan in the middle, giving it center stage for customers to focus on more. For instance, let’s say you offer a freemium plan, a starter plan priced at $24, and a premium plan at $49, while visually highlighting the starter plan in the center.
This way, most customers would focus on the subscription plan placed in the center first and intuitively decide to purchase the same.
Also referred to as “hi-lo” or “skimming”, this pricing strategy is commonly used in the retail industry where high-priced products get hefty discounts during the promotional events. However, SaaS companies can also utilize this psychological tactic by introducing their SaaS at a premium price before eventually reducing it to a discounted one.
With a High-low price strategy, your product’s price alternates between high and low during non-promotional and promotional periods. The high price of the product acts as an anchor during the promotions to encourage customers to purchase.
Since the product’s value is associated with the premium price of the product, the discounted price is perceived as a great deal. However, this discounted low price can drive-up the demand in short-term but can be a loss-making deal in the long-term.
Trial pricing is another great pricing strategy that involves offering your SaaS product at a limited-time trial price to attract potential customers initially. For instance, if you are an early stage SaaS startup, it’s best that you introduce your product at a discounted trial price.
You can offer your product for free during the trial period, however, it’ll require customers to sign up with their payment info. The goal here by introducing your SaaS at a trial price is to provide customers with a low-risk way to try your product and evaluate its value before they make any long-term commitments.
By offering your SaaS product at a discounted trial price, SaaS companies can entice potential customers to try and experience your product before the price is reversed to the original value. However, there’s always a risk that your customers devalue your product once the original price kicks in.
Pricing your SaaS products right is a crucial yet challenging part for companies to manage. Since you’d have to balance the revenue generation with customer expectations and market competition, pricing your SaaS becomes all the more important.
However, understanding human psychology and adapting to it can help you overcome your SaaS pricing challenges. Utilize the above-mentioned psychological tactics to effectively influence the customer perception and increase the value of your SaaS product.
In summary, psychological pricing tactics can be a powerful tool for SaaS companies looking to optimize their pricing strategies and drive greater revenue.