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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 pricing strategy book, Price to Scale, the two primary approaches to segmenting customers into different pricing tiers based on their needs and willingness to pay are:
- Good-Better-Best Packaging
- This approach involves creating 2-3 packages where each tier is designed to meet the primary use cases of a particular customer segment.
- The lower tier targets customers with lower budgets or simpler needs (e.g., typical of SMB and mid-market segments), while higher tiers address customers requiring more advanced features and are willing to pay a premium.
- The key here is to design each package with a distinct set of features that align directly with the value each customer segment obtains, keeping in mind that deal velocity and the simplicity of choice can be critical for this model.
- Modular or Feature-Based Pricing
- Modular pricing means attributing specific value to distinct features or product capabilities and allowing flexibility in pricing based on how much or how often a customer uses these features.
- This approach is beneficial when there is significant variation in willingness to pay or in usage intensity, as it allows you to tailor the pricing more dynamically to different customer needs.
- It’s also effective when usage can be distinctly measured and matched with corresponding costs or perceived value, for example by charging based on interaction or data volume.
Additional Considerations:
- When segmenting your customer base, it’s also essential to think about how existing customers can be divided into cohorts. For instance, differences in usage frequency or historical discounting practices might inform differentiated pricing strategies.
- While tailoring these pricing models, always strive to offer transparent and consistent alternatives with the option of upgrades or commitment-based discounts rather than arbitrary price drops.
- It’s also recommended to evolve your pricing line-up by clearly distinguishing new offerings from legacy tiers—simply discounting existing tiers can make comparisons too straightforward for customers, potentially compressing the perceived differences between levels.
In summary, our book, Price to Scale, underscores the importance of aligning pricing tiers—whether through Good-Better-Best or modular pricing—with customer needs and the value they derive from your product. This targeted segmentation not only maximizes potential revenue but also enhances customer satisfaction by ensuring that customers only pay for the features they truly need.