The 21st century has seen significant evolution in businesses across all industries. However, the evolution of SaaS has been even more rapid.

One notable aspect of this evolution is SaaS pricing strategies. In recent years, there has been a growing trend towards dynamic pricing, which means that prices are adjusted based on market and channel conditions.

Unlike fixed pricing, dynamic pricing fluctuates and is personalized to each situation. This allows for maximum revenue and provides value to customers.

In this post, I will explain why this SaaS pricing strategy is so effective and provide resources to help you implement it successfully for your company.

Other SaaS pricing strategies to look into:
- Penetration pricing
- Cost plus pricing
- Value based pricing
- Skimming pricing
- Captive pricing
- Competitor based pricing
- Demand based pricing
- Time based pricing

What is dynamic pricing?

Dynamic pricing is a strategic approach used by SaaS companies to constantly refine their pricing. That pricing strategy takes into account factors like customer demand, competitor pricing, and market trends.

With dynamic pricing, SaaS companies can not only expand their customer base but also maintain a competitive edge in an ever-evolving marketplace.

Subscription-based pricing models provide significant benefits for SaaS companies by offering unmatched flexibility to adjust prices in response to market dynamics. This adaptability allows companies to remain agile and flourish in fluctuating market conditions, ultimately contributing to their overall success.

Dynamic pricing, at its essence, aims to intricately align the price of a product or service with its perceived value among discerning customers. This entails making precise adjustments to prices based on customer segmentation, seasonal fluctuations, and time-sensitive promotions.

By harmonizing prices with customers' perceived value, SaaS companies can nurture sustainable revenue growth and foster long-lasting customer relationships.

SaaS companies have a range of dynamic pricing strategies at their disposal, such as:

Value-based pricing

This pricing strategy aims to match prices with the value customers believe they get from a product or service. By understanding what aspects and benefits customers appreciate, SaaS companies can adjust their pricing to better match the value they offer.

Competitor-based pricing

Competitor based pricing allows companies to regularly monitor and adapt their prices in response to their competitors' strategies. Adopting this approach helps SaaS companies to maintain their competitiveness and swiftly adapt to shifts in the market.

Demand based pricing

Demand-based pricing is the strategy of adjusting prices based on changes in customer demand. When demand is high, prices are raised to maximize revenue. Conversely, during periods of low demand, prices are lowered to attract more customers.

Time based pricing

Time-based pricing entails adjusting prices based on various factors, including the day of the week, time of day, or seasonal trends. For instance, SaaS companies often provide discounted pricing during off-peak hours or slow business periods, aiming to incentivize usage and entice prospective customers.

But wait…is dynamic pricing fair?

The crux of the matter pertains to the significance of fulfilling a specific need. It is crucial to distinguish between surge pricing, group targeting, and demand-based price increases for commodities, and the act of charging higher fees during periods of high demand.

When it comes to goods and services such as consumer electronics, SaaS products, hotel accommodations, or flight tickets, customers retain the freedom to determine whether to allocate their hard-earned funds.

Should you choose not to invest in a particular product, you may opt to depart and potentially return during a sale or when a more affordable alternative becomes available.

In contrast, if customers are willing to pay for the product, then their needs are met, and they won't even be aware if someone else got it at a lower price. This is the perfect pricing scenario that creates harmony in the free market.

Dynamic pricing is widely used by SaaS brands

This pricing strategy may initially appear to be exclusive to innovative SaaS companies, but it is actually quite common.

When looking for a SaaS program, it is not uncommon to come across an "Enterprise" or "Corporate" tier with a "Contact Us" call to action instead of a price. These businesses are likely using dynamic pricing, adjusting their charges based on client size and services required.

HubSpot's pricing structure is divided into Professional plans and Enterprise plans. The Professional plans have a fixed price, whereas the Enterprise plans start at $1,200 per month for 10 paid users. However, instead of providing a specific price, the call-to-action button on the pricing page encourages users to "Talk to Sales," indicating a dynamic pricing strategy that can be adjusted.

The advantages of dynamic pricing for SaaS

Dynamic pricing for SaaS companies is the key to maximizing revenue and staying ahead in the marketplace. To make the most of it, here are some essential dos and dont's to keep in mind.

Revenue is maximized

SaaS businesses can increase their revenue and profitability by adjusting prices to match real-time market demand. This strategy, known as revenue management with dynamic pricing, is gaining popularity due to its effectiveness.

Customer satisfaction is increased

Following dynamic pricing best practices can boost customer retention and satisfaction. By offering lower prices during off-peak periods, you can attract more customers who might have otherwise passed up on your product or service.

Provides a great understanding of the market

Dynamic pricing allows businesses to have an up-to-date and thorough understanding of the market. By analyzing data on pricing trends, competitor behavior, and customer preferences, companies can gain valuable insights into market dynamics, including customer behavior and purchasing patterns.

These insights can then be used to personalize offers and create focused marketing campaigns.

The drawbacks of dynamic pricing for SaaS

Dynamic pricing has its advantages, but it's important to be aware of the potential drawbacks and steer clear of common mistakes.

Unfavorable customer perception

Customers may develop a negative perception of your brand if they notice frequent price changes or discover that others are receiving better deals.

Risk of price wars

When businesses engage in dynamic pricing, it can spark price wars among competitors. Continuously lowering prices to lure customers may result in a detrimental race to the bottom, ultimately impacting profitability for all parties involved.

Potentially time-consuming

Dynamic pricing can be a time-consuming task for smaller businesses. It requires advanced pricing analytics tools, real-time pricing techniques, and strong technological infrastructure. Additionally, skilled employees and manpower are needed to execute it properly.

Overdoing it may result in a potential loss of business

Excessive price hikes during peak demand can lead to loss of customers and reduced profits for your business. By overdoing dynamic pricing, you run the risk of irritating your customer base and potentially missing out on future business opportunities.

Tactics to implement dynamic pricing for your SaaS

Implementing dynamic pricing for a SaaS involves recognizing that customers have different values and preferences, enabling businesses to earn higher revenue. By executing this approach with caution, the benefits far outweigh any potential risks.

Price differentiation

In any pricing strategy, it's crucial to understand your customer personas and tailor your packaging and pricing accordingly.

Not all personas are equal, so it's important to differentiate and cater to different customer sizes with varying prices. This allows you to generate dynamic revenue from a diverse range of customers.

Using the right value metrics

Dynamic pricing involves setting prices based on a value metric, which determines the cost of a product (such as per user or per GB).

While this can pose challenges for retail products due to their physical nature, the software industry has the advantage of being able to divide pricing based on various factors, such as the number of users, storage amount, views, or a combination of metrics.

This approach ensures that each customer pays a unique amount, taking into account the dynamic nature of pricing and maximizing revenue. To gain a deeper understanding of value metrics and their effective utilization, I highly recommend checking out this comprehensive breakdown.

Auction-style model based on time

Time-based pricing is a method that adjusts prices based on the time. This approach is widely used by sports teams, concert venues, airlines, and travel booking sites. It can also be utilized by software beta launches or new widget releases.

Coupons and discounts

Discounts and coupons can be useful in offering competitive prices to certain customers, but they can also harm future sales and the brand.

When used appropriately, discount codes and coupons can generate revenue. A recent study shows that 70% of millennials follow brands on social media, with more than half of them seeking discounts and incentives to make purchases.

It's crucial to prevent coupons from being shared, especially on social platforms. To learn more about discounts and effective strategies, check out our discount pricing post.