Are you one of the SaaS companies out there with no real playbook for how you’re going to price your different products?
The failure to accurately price what you offer can all too easily spell doom for your business.
And it’s not a simple up-and-down equation. Everyone’s heard of the stories of people who raised their product prices and suddenly got way more interest from the perceived increase in the quality level of their brand. After all, if it’s expensive, it must be good, right?
This article right here is your guide to understanding exactly what makes up a killer pricing strategy. It’s called line pricing, and it couldn’t be simpler.
The Definition of Product Line Pricing
Whether or not you know it, you interact with product line pricing every single day. It’s one of those things in marketing and business that seems so obvious that most people take it for granted, yet actually has some rigorous thought behind it.
In a nutshell, product line pricing is where you have different tiers of your product that are priced differently. Essentially, you pay more for more features.
Think about a mobile game. A free player might have to wait ten minutes in real-time in order to respawn after losing. But a premium player might be paying a tiny fee behind the scenes and gain instant respawning, as well as access to premium-only maps.
So in that example, you have two product lines: your free product (the basic product) and your premium product (with complementary products).
Depending on your business model, bundling might differ. Most software companies have three or more product lines with different price gaps to be able to attract a wider range of customers. Small businesses usually have smaller price points, with more cost categories and higher prices as they grow.
Why Have a Product Line Pricing Strategy?
Aside from seeming like common sense because “everybody else is doing it,” dividing your product into different groups and listing different price linings makes a lot of sense financially.
First, it creates a sense of achievement or fulfillment on the part of the premium users. They feel in some way that they’re members of an elite club of people using the more expensive product, and that makes them connect that satisfaction with your brand.
Second, it helps you attract different bases of users. People aren’t that homogeneous – different demographics of users are going to want different things, and one product won’t cater to all of them.
Imagine you’re selling a document OCR service. Not everybody is going to need the ability to recognize text in Chinese, Japanese, or Korean. You could make that into a “premium feature,” or you could spin it off into its own subset for a lower price than it would cost for every language.
Be Cautious With Your Pricing
It might seem a bit odd, or even malicious to purposefully limit a product’s features in order to charge more for the full thing.
That’s exactly what internet commenters are going to say about your product if you aren’t careful with your marketing and your product pricing!
People want to believe that they’re getting everything they desire in a product for a low price. So if you’re selling mapping software, for instance, and you limit the “medium” tier to only ten uses per month, you’re going to drive away people from every tier of your business.
For that reason, you need to make sure that people at every tier of your business feel that they’re getting a good deal. That usually involves carefully analyzing your pricing strategy at least once a quarter to see what the rest of the market is doing.
Buying-Up with Captive Pricing
It’s one of the oldest tricks in the book to get people hooked on your product first and then upsell them later on.
In fact, we can even imagine it as part of a prehistoric businessman’s strategy: I’ll come by and feed your horses every morning for a half pound of silver every month, but for an extra half pound I’ll brush their coats and trim their manes.
Fast forward a few thousand years and people are still doing the same thing with SaaS products. One particular growth model related to captive pricing is called “land-and-expand,” where you promote a free product for individual use among members of one organization, and then show them how everybody could benefit if the company entered your enterprise licensing plan.
Protect Yourself with Product Lines
Car companies are excellent wielders of product lines, and here’s why. If you focus entirely on just one part of the market, you make yourself vulnerable if another company comes along with just a bit wider of a product mix.
So a company like Honda is known for making reliable and affordable mid-range cars, but they also have their high-end Acura line as well to keep both sides of their range afloat.
This shows how, if market trends shift for a while away from luxury cars, Honda as a corporation won’t go under since they still have their mid-range cars.
The lesson to be learned for software is similar – if you can identify a second area to enter the market, then you can carve out a new niche for yourself and enjoy more security from your second product line.
Where Does The Money Come From?
One last thing to note: remember the idea of upselling? Be careful that your main profits don’t come mostly from upselling, because that risks major losses if people shift away from the original product.
Let’s say you’re selling note-taking and planning software, and you offer a premium plan with cloud storage. Premium users can also pay for more add-ons including the ability to store videos and other files attached to their notes – a pretty cool feature!
It might be great to be making money from that, but remember – losing one premium subscription doesn’t just hit your premium bottom line, it hits the whole add-on bottom line as well.
It’s true that adding new product lines introduces an enormous amount of complexity to your business. However, the benefits gained are likely to pay for themselves pretty quickly.
The most important thing to keep in mind is that you’ll have to keep collecting data on your line of products across your range and across your pricing tiers. The more data you have, the better you’ll be able to analyze how well your pricing is working out, and the better you’ll be able to react to changes in the market.
Yassir Sahnoun is the founder of YassirSahnoun.com. He helps SaaS companies like Castbox and FluentU attract sales using content strategy, copywriting, blogging, email marketing, & more. If you want to up your content marketing game, you can schedule a free discovery call with Yassir by clicking here.