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Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
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Based on our SaaS pricing book, Price to Scale, there are two primary approaches to splitting a single SaaS product into Basic/Pro/Enterprise tiers:
1. Good – Better – Best Approach
Concept:
This method groups features into three (or sometimes two or more) distinct packages. Each package targets a different customer segment based on the features that best solve their main use cases.Criteria for Differentiation:
Feature Set: The basic version includes essential features needed for immediate value; the pro or better version offers additional functionalities that address more complex or specialized needs, while the enterprise tier includes advanced capabilities.
Customer Segmentation: Typically, the basic package is aimed at clients with less variance in willingness to pay (often SMBs), ensuring high deal velocity—whereas higher tiers target users who are willing to invest more for additional value.
Pricing Sensitivity: By aligning price points to the feature set, you capture revenue from each segment efficiently without overwhelming customers with a one-size-fits-all offer.
2. Modular Approach
Concept:
This strategy involves breaking down the product’s capabilities into distinct modules. Each module is assigned its own value, allowing customers to build a configuration that meets their unique requirements.Criteria for Differentiation:
Value Attribution: Each module or feature component is valued independently, and customers can select add-ons based on their specific needs.
Customization and Flexibility: Customers with advanced requirements (often enterprise clients) can choose additional functionalities as needed, rather than being forced into a one-size-fits-all package.
Market Positioning: This flexibility helps in catering to a varied customer base, from those who need just the basics to those who require a highly specialized suite of features.
Practical Application Tips
- Align With Observer Habits: Recognize what customers are accustomed to—if they expect a straightforward flat-rate plan, a radical shift may affect adoption.
- Avoid Direct Comparison Pitfalls: Rather than simply discounting older tiers, consider renaming the levels (e.g., Premium or Advanced instead of Pro or Elite) to emphasize that they offer different value propositions.
- Segmentation and Deal Velocity: For SMB and mid-market segments where deal velocity is crucial, the Good-Better-Best approach tends to work better. Alternatively, for a diverse user base with distinct needs, the modular approach might be more appropriate.
Summary
Our pricing strategy book, Price to Scale, highlights that the decision between a Good-Better-Best versus a Modular approach should be based on:
- The diversity of feature needs among your target segments.
- The customers' current expectations and price sensitivity.
- The overarching goal of segmenting your market to maximize revenue without causing undue pricing pressure.
Ultimately, choose your differentiation criteria based on the specific value your product delivers to each customer segment, ensuring every tier is clearly matched with customer needs and willingness to pay.