How to price your micro SAAS Product

🔥Topic of the Week

“Pricing your SAAS”

Research shows that offering between 3 and 5 plans makes it easier for clients to understand their options and choose one. Here's a recommended structure:

• Basic plan: A low-cost entry option

• Standard plan: Balancing cost and functionality

• Premium plan: For power users or high-end market segments

As your business matures, consider adding custom or enterprise plans if there's demand.

Example for a cold-emailing SaaS tool pricing:

• Basic plan: FREE for 100 emails

• Standard plan: $10/month for 1000 emails

• Premium plan: $50/month for 100k emails

The Power of Free

Offer a free version of your product or service - even if it has limited features.

By highlighting that it's free, people will perceive it as having more benefits than it actually does. You will gain users from whom you can generate ad revenue, or later convert to a paid version.

When users are given something for free, people are aware of the nonmonetary costs that come with it (e.g., having to spend time watching ads). Free users are valuable for referrals and word-of-mouth marketing.

According to a research,

• When a basic plan was free (vs. priced at $1), 47.4% more people signed up for the plan

• People rated the benefits of the free service 18.4% higher

• Users were 11.2% less negative about non-monetary costs (e.g., ads)

• Free plan users were 25.1% more willing to accept ads on the platform

• Free users in a freemium model are worth 15% to 25% as much as a paying customer, 65% of this value comes from referrals and word of mouth they create

You can read more about the research in this paper

Companies using this

Several online companies provide ad-supported free basic options including Spotify & YouTube.

Not all free plans generate revenue with ads. For example, HubSpot and WordPress offer free packages without advertising for basic users, with additional functionality reserved for paid plans.

Many, including the New York Times, offer a limited free package and a full package for paid subscribers.

How to price your monthly vs annual plan

Before we get into it, answer this

How long do most people use Netflix, Headspace, or Tinder Plus?

Here's a trick to guess how long users stick (LTV) with a software product:

• Headspace: $12.99/mo vs $69.99/yr. A ratio of 5.39, so their monthly users likely stay around for ~4 months.

• Calm: $14.99/mo vs $69.99/yr. A ratio of 4.67, so their monthly users likely stay around for ~3-4 months.

• Tinder Plus (Dating): Annual Plan $32.04 / Monthly plan $7.99. A ratio of 4.01, so users are probably around for 3 months

Netflix doesn't offer a yearly plan because most users stick around for over 12 months. Spotify is the same

So to increase the (Life Time Value) LTV, Netflix & Spotify offer bundling - family pack, 3 peeps watch together, party plan, etc

So these companies have figured out a neat way to keep pricing in such a way that annual plans actually help them to push their LTV or revenue per user.

Tip: If your product is new, you probably don’t know Lifetime Value of your customer. So it’s best in such case to keep your annual pricing at around 10 months of your monthly pricing, and collect more to price it accordingly.

Decoy Pricing

Use decoy pricing to nudge users towards your preferred plan:

Price the middle option just below the most expensive plan to make the top tier more attractive

Alternatively, price the top tier very high to make the middle option look like a better deal

Example:

• Basic plan: $10/month for 100 credits

• Pro plan: $25/month for 300 credits

• Full plan: $50/month for 1000 credits

Avoid extreme discounts (over 60%) as they can devalue your product and reduce overall conversions. For instance, offering "100 extra credits for only $5" may backfire by making your tips seem less valuable.

Tip: Be careful with very high discounts, they backfire"

Paywall Design

In the free version of your SaaS, would it be more effective for paid conversions to give access to all features but put stricter limits on the number of times they can be used?

For example - consider Medium's pricing vs. Ken Pricing - both offer articles to read after a subscription, but one might be better than the other as per research.

To maximize revenue of a freemium digital publication, limit the number of articles free users can read, but allow them to read from any area or topic they want. Medium uses this strategy.

This kind of model can lead to a 31% increase in total subscriptions, leading to more direct revenue.

Nudging Freemium Users

To boost sales of your paid option in a freemium business model, you can either:

• Add a superior paid option (e.g., more features, higher usage limits, better quality) with a much higher price

• Add an inferior paid option (e.g., fewer features) that is only slightly cheaper (e.g., 70% - 80% price of the main option)

People will be more likely to buy your main premium option, rather than use your free version.

In a freemium business model with one free version and one premium paid version, sales of the paid version can be increased by adding a second premium option with certain characteristics.

Here is an interesting experiment researchers ran on the website of the National Academies Press. The site offered freemium options to either read a free PDF of a book or buy a paperback version.

They tested two types of additional paid options:

Hardcover book

• A higher quality, more durable paid version

• Priced much higher, at between 160% and 790% of the paperback version

• Sold only a handful of copies, but turned the paperback into the 'middle' option

Increased the probability of a sale of a paperback book by 16.2%

Ebook

• Higher quality than the free PDF because it's easily portable (e.g., on Kindle), but rated not as good as having a paperback

• Most effective when priced closely to the paperback version, at 70% - 80% of the price

Sold a small but significant amount, but made the paperback option more attractive

Increased the probability of a sale of a paperback book by 22.6%

Conclusion

Implementing these science-based pricing strategies can significantly improve your subscription service's performance. Remember to test different approaches and continually optimize based on your specific audience and offering. Key takeaways:

• Offer 3-5 plans with clear differentiation

• Include a free option if possible

• Use decoy pricing to guide users to your preferred plan

• Design paywalls that allow sampling but encourage upgrades

• Consider adding strategic paid options to boost conversions

🌟 Community Showcase: Interesting Hustles of the week

• Dmytro shows how the same product positioned as B2C vs B2B gives different revenues with similar traffic, of course the effort in maintaining and running them are also unequal - thread 

• John Rush, the millionare Indie hacker shares which marketing channels and strategies actually work, and where you should start it - thread

• Alexander shares snapshot of his 4 years of indie hacking journey. Perseverance to be learnt here - thread

📈 Growth Hacks

You want to encourage people to buy bigger quantities - how do you nudge them to buy more?

You narrow it down to a final price, and two options of how to frame it:

• 6 muffins for $10 and a dozen for $15

• 6 muffins for $10, make it a dozen +$5

Here’s why you should go for the second option.

When displaying prices of different product options and upgrades (e.g. larger package, additional service, bigger size, or enhancements), focus on the price difference (e.g. $19 more for premium), not the total price (e.g. $30 standard vs $49 premium).

Saying “cost $x more“ when showing premium prices should cheaper

When you want to position your product in a buget category go for costs “x $ a day“

Car rental companies and airlines use this practice extensively, with additional prices for various services, extras, or benefits (e.g. cancellation possibility, road service, baby seat installation).

Restaurants often display prices for add-ons incrementally next to the main price (e.g. garden salad for $7.00, add chicken for $2.50).

You can read more about it in this research paper

🤔 Parting Thought

🎤 Drop the Mic (and Your Thoughts)!

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