How to Price a Product – From One SaaS PM to Another

They say money alone won’t make you happy, but more customers definitely will. Thing is, building a customer base big enough to sustain booming product-led growth requires getting a whole heap of sensitive cost shenanigans dead right.

That is to say: alongside having a great product and a proactive roadmap that can feed its development, you’ll also need to think pretty carefully about your pricing – both at launch and on a regular basis.

So how do you set a product price that works? It’s something I’ve had to think about a lot here at ProdPad, so it’s safe to say I have some pretty time-weathered thoughts.

But first, let’s take a step back and figure out how all this is supposed to work on paper…

How does product pricing work?

Let’s just state the obvious here: all businesses need to make money. Even the Silicon Valley ones that never actually turn a profit would really, desperately love to. Product pricing is a minefield, and it’s one that changes every day as markets shift and new technology democratizes capabilities that were previously locked behind paywalls.

But, you know what? Making money is actually a really simple formula. Or at least, it’s simple in theory.

If you’re selling bananas, you’ll take the cost of the stock, your overheads, and your labor costs, add it all together stick a markup percentage on top. Boom, there’s your price.

That’s cost-based pricing in a nutshell: you take your raw costs and add a bit on top to make a profit. Only, what works for bananas becomes trickier when your product is digital. With digital and SaaS product pricing, the relationship between money and materials is much blurrier, and your overheads are very different indeed.

Store staff and rental costs become research and development costs. Inventory costs become the server and sys-admin costs… And so on.

In short? With digital products, it’s much harder to figure out that magic formula for X + Y = price.

More importantly, knowing what people are willing to pay is tough. Like, a customer understands what the worth of a banana is to them. It’s food. It’ll keep them alive! But here you’re trying to convince people that they need your nice-to-have product so much that they ought to pay you for it – often without them even having used it and got to grips with its features.

That’s why the SaaS and product-led growth market turns to a range of tried and tested product pricing models.

What are product pricing models?

Product pricing models are ways of packaging things up in a way that incentivizes potential customers to bite the bullet and start paying for your product. They’re an effective way to make the product seem like a no-brainer, where the deal on offer means:

• You’ll generate your desired revenue
• The cost to the end user feels palatable

Let’s look at some common pricing strategies, depending on the key factors for your product you will probably find the ideal pricing model below.

SaaS pricing model examples:

1. Freemium pricing

The freemium model is a brilliant way to get people through the door and let them experience what you have to offer. You’ll entice them with a compelling suite of free features, and then drive revenue from power users who want to pay for the really good stuff.

It’s like giving someone a little bite of a donut for free each month, and then frequently reminding them that they could have a whole one, covered in sprinkles, for a reasonable price.

It can be really powerful, but you’ll need to delicately balance just how much you can give away for free. You’ll want people to be able to just about get by on the free tier – while still feeling like they’re missing out.

Freemium pricing also has some interesting longtail benefits. Offering a product for free to individuals and students, for instance, can help it become the de facto tool that people feel entrenched in by the time they’re promoted to decision-making roles – that’s exactly what happened with Figma, which ended up being bought by Adobe.

2. Tiered pricing

Tiered product pricing can work hand in hand with the freemium pricing structure model, offering a range of options to different types of users. The options can be based on features or the number of users. You might, for example, offer a free tier to individuals, a low-cost tier for small businesses, and a bulkier one for enterprise customers.

In that instance, you might increase factors like collaborators, cloud storage, or the number of specific features based on which tier people choose. The aim here is that individuals, and even smaller businesses, will probably be loss-leaders, while word spreads about your product’s capabilities to the point where enterprise customers jump on board and drive the bulk of your revenue.

3. Flat-rate pricing

If your product is really straightforward and does just one or two things incredibly well, you might not want to complicate things. In this instance, charging a flat rate sale price might be a smart choice.

You’ve got three options here, really:

• A flat rate as a one-off purchase
• A flat rate as a recurring subscription
• A flat rate as a recurring subscription based on the number of users

For obvious reasons, digital products have been moving away from one-off purchases in favor of subscription-based software-as-a-service (SaaS) pricing.

This model allows for recurring revenue while also helping pay the overhead costs for necessities like cloud storage and servers. An example here is Adobe (again), which famously transitioned its core apps like Photoshop and Premiere Pro away from being one-off purchases a few years back.

Common product pricing strategies

Whether you’re new to the market or you’re trying to stave off fierce competition, you’ll want to consider using one or more of the following tactics to determine how aggressive you go with your product pricing:

1. Competitive-based pricing strategies

In competitive-based pricing, you’ll look at your nearest competitors and set your price either to match them or beat them. If it’s the latter, just be careful that you don’t spark a race to the bottom that you can’t afford to sustain.

2. Value-based pricing strategies

In value-based pricing, you’ll need to put a dollar amount to the value your proposition is worth, as decided on via customer and target audience research. You’ll then work backward from that to get to shape your running costs, ideally landing on something you can sustainably offer at that price.

3. Dynamic pricing strategies

Dynamic pricing follows market trends, user demand, and rates – and adjusts the cost to the end customer to match. The aim here is to pick a profit margin percentage and alter costs so as to always stay just above that rate. A good example here is how Uber costs change based on market demand, or how EV charge point operators can adjust costs to stay X% above the cost of energy at all times.

4. Penetration pricing strategies

Penetration pricing lets you cut through the noise by offering your product much cheaper than the competition. That might be through stunt pricing that lasts a short while, or – more commonly – via lengthy free trials. Penetration pricing helps new products break into the market, but it’s not one for the long term.

5. Price skimming strategies

On the opposite end of the spectrum, price skimming assumes that your product is the first of its kind. Here, you can set your price as high as you like on the assumption that a small number of early adopters will happily pay it. This allows you to fund an economy of scale that’ll ultimately let you slowly reduce the cost to the end user as more and more competitors emerge.

The four secrets for how to price a product

1. Talk to your customers

When you’re considering pricing, there are clearly lots of ways to slice things. Personally, though, I always like to think about pricing not in terms of what something costs, but the value that you’re providing for the users.

The way to do that is to have honest conversations with them. By having conversations with your users, you’ll understand the enormity and the value of the problem that you’re solving. Ask them things like:

• How are you solving this problem today?
• How long does it take to solve?
• How much money has it been costing you to solve it?

Sometimes they won’t be able to put a hard figure to it, but sometimes they’ll be really granular and can talk you through how many hours it takes them to do that task, and how frustrating it is.

2. Be ready to test and adapt

Sometimes, getting to the route of this issue just involves testing things out. That might mean you got to put a price live and then be willing to change and adapt it as you move forwards.

I actually read a piece recently saying that the average B2B SaaS company changes its pricing every year so. But if you think about it, the average SaaS company probably changes its product features every week – sometimes daily. So why is pricing lagging behind feature rollouts? Why is this key thing that could change these companies’ ability to make a profit sitting stagnant?

Changing your pricing regularly needn’t be a bad thing; it just has to be done carefully.

Here at ProdPad, we’ve adapted our pricing a ton of times over the years, usually based on new value that we’ve added to the product. That is, we’ve increased it based on it now being infinitely better than it was when we first launched it.

But we’ve also changed our pricing model, adapting it to the different ways that people work, and so that it’s more accessible to individuals who just want to experiment – while also scaling better for larger teams that want to extend ProdPad to their entire company.

For example, we recently shifted to a per-user model. Obviously, that changes things – but it’s meant that we’ve been able to offer value to our customers by enabling them to pay for the features they use and only the features they use.

Historically, we’ve grandfathered those price changes in because that allows us to get honest takes from people. If you’ve got 100 customers who are on your legacy pricing, you’re able to ask them for honest feedback about what they’d pay, and what sort of value the product would bring at this new price.

You’re always going to have some attrition here, where some users might drop off, but overall it should equal out to be better value for the majority – and for your business.

3. Find your value

There’s no magic bullet for determining your product’s ideal cost, but there is something pretty close to one: the Van Westendorp pricing sensitivity survey. It’s a simple, streamlined process that uses customer opinions to help form a range of appropriate prices.

In a focus group or via solicited written responses, you’ll gather a bunch of users and members of your target audience together, and ask them four simple questions:

At what price…

• Would the product be so cheap that you’d think there’s something wrong with it?
• Would you consider this product to be a no-brainer buy for the money?
• Would you say this product is starting to get too expensive?
• Would you consider the product to be way too expensive for what it offers?

Collating answers from those four questions should be pretty eye-opening, but when averaged out it should also provide you with a fairly succinct range of prices. It’s then up to you as to whether you want to price yourself more towards the bargain end of the scale, or the more expensive (but still worthwhile) end.

Again, instead of searching for maximum profit, here you’re putting your product pricing in the hands of your users and asking them to attribute a value to the solution you’ve created.

4. Be transparent

Lastly, it’s super important to be transparent, and clear, and to avoid hidden costs. In the product world, people don’t want to go searching for prices and they don’t want to have to ‘get in touch’ to unlock that info either. Everyone knows that’s just a cheap trick designed to land you on a lead generation spreadsheet.

Your pricing, whether it’s a flat rate, freemium or tiered model, should exist on a page linked right from your site’s main navigation, and it shouldn’t hide any nasty surprises. The more no-nonsense you can be here, the better. In fact, the more upfront you are about your costs, the more confident you seem that what you’re offering is a great deal.

That’s why we even have a pricing calculator on our site – to help people work out how much everything costs (both monthly and annually) when they start combining packages.