SaaS has become a huge industry, with a market valuation of USD 158.2 billion (£120 billion) in 2020. It’s even expected to grow at a CAGR of 11.7 per cent to hit USD 307.3 billion (£232 billion) by 2026. The Salesforce acquisition of Slack for $27.7 billion shows SaaS is now mainstream.
When the COVID-19 pandemic hit, the government’s restrictions forced companies to shift to remote work. In the UK, the percentage of employees working from home grew from 7 per cent before the crisis to 55 per cent in mid-May 2020.
For SaaS companies, this was a field day as the uptake of cloud-based collaboration and communication tools skyrocketed. This is great, but it created an opportunity for new entrants, leading to a crowded market. The result is market saturation, which has contributed to businesses losing their differentiation factor.
As with any other industry, success requires differentiation, and this is vital to protect your business from the effects of commoditisation. Differentiating your products requires more than the traditional value proposition process. Here is what you need to do.
Strategy #1: Get your pricing right
Companies invest time and resources to create the “perfect” product, but most fail to price their product right. Bear in mind pricing is essential, and a SaaS product can be expensive or cheap. Figuring out where you belong is vital because sitting in the middle will hurt you.
The Veblen Demand Paradox
In microeconomics, a Veblen product is a coveted and high-quality product, whose demand tends to increase when the price rises. Veblen products usually retain their pricing for longer, allowing you to make consistent profits. Ideally, customers tend to believe that high-quality products cost more.
Pricing your product cheaply doesn’t necessarily mean you’ll attract more customers. While it feels like a competitive advantage, low prices can actually hurt your image in the high-end market. Some customers tend to associate cheap with poor-quality products (Giffen products), even though they can be in demand. The problem is that their demand is usually intermittent, leading to inconsistent profits.
In this case, you want to aim to create high-quality SaaS products that customers will be willing to buy regardless of your pricing model. Always lead with value and quality customer experiences.
SaaS Pricing Models and Strategies
There are different pricing models that companies use in the SaaS industry. These include:
- Usage-based pricing – This model allows you to charge customers only when they use your product. Users are charged at the end of the billing cycle (monthly) depending on their usage.
- Per-user pricing – With this model, you charge customers based on the number of users they add to their subscription. The more the users, the more they pay.
- Tiered pricing – In this model, you offer different plans or packages, such as basic, pro, and premium plans. Each of these plans has a different set of features, with the premium plan offering more features.
- Flat-rate pricing – This pricing model offers users a single price option per month or year for access to all features of the product.
- Per-feature pricing – The product is priced based on the features that users want. Price increases with every feature they add to their subscription and vice versa.
When selecting your pricing model, you must find the right balance between value and revenue. This includes identifying the right strategy to use, such as:
- Low-cost (less than £6,000 per annum) – This strategy is suitable for a product that offers a freemium, which customers can sign up for using a regular email. Basically, the more customers, the better, as they’ll be evangelising for you.
- The middling middle (£6,000 to £100,000 per annum) – This strategy is ideal for complicated or expensive products that can’t completely rely on self-service sales models. However, they’re still cheap enough to support cost-efficient sales processes.
- Enterprise selling (over £100,000 per annum)- For high-end products, this strategy makes a great option. Sales mostly happen face to face since the products usually target enterprise-wide rollout. Keep in mind that it takes several months to make a sale with such a product.
Strategy #2: Sell a methodology, not a product
Rather than selling products, focus on selling a methodology (value + solution) to differentiate your offerings. Customers tend to be process- and result-oriented. For example, people don’t buy expensive tooth-whitening products because of their taste —they want the results that the product promises.
With new entrants in the market, products get commoditised and compared, reducing their value. So, you should aim to sell highly customised experiences, which are tailored to meet your customers’ needs. For instance, you can offer a package of cloud services based on the client’s number of devices, data requirements, and the level of support they need.
Your methodologies and outcomes offer opportunities for differentiation. You need to understand the pain points, expectations, and needs of your customers. Then, create conversations around their prospects, motivations, and company to invoke interest.
For example, HubSpot, an inbound marketing tool, sells a methodology, and this has allowed the company to create a unique platform for inbound marketers. Consequently, the company maintains consistent prices year after year, even with new entrants in the market. This is because methodologies retain their value, while products tend to lose value over time.
Strategy #3: Use your free trial for everything
As a marketer, it’s vital to understand that your product is the most powerful sales tool. Using it to offer free versions is one of the best ways to capture customers. This allows them to try different features before they buy, delivering a frictionless experience once they subscribe.
Freemium vs free trial
When offering free versions, you have two options: free trial and freemium. In free trials, you can offer a 7-day to 30-day trial at no charge. Customers can choose to subscribe once the trial period elapses. This makes an excellent option for complex or expensive products.
In a freemium, you offer a free plan (alongside paid plans), which has limited features. Customers can get a paid plan if they want more features. Otherwise, they can use the free plan as long as they wish. Freemium is a better option for cheaper products.
How to make good freemium and a good free trial
Your customer acquisition strategy needs to zero in on the key points that make offers attractive and compelling. You’ve managed to get customers to try your free versions, how can you turn them into paying customers?
- Freemiums — While freemiums offer limited features, you still need to ensure that those features provide satisfactory results. The plan should be compelling in order to motivate customers to get the premium version. Ideally, they should realise that they could accomplish even more when they subscribe.
For example, Grammarly, a digital writing assistance tool, does this best by offering 90 per cent of its functionality with the freemium version. The tool shows mistakes in a written copy, allowing the editor to make corrections. It also shows advanced alerts, which the user can view once they upgrade their plan.
- Free Trials — For free trials, the operating costs of offering the trials determine the quality of the service. For example, you can exclude customer service from the trial. Just make sure that won’t significantly impact the quality of the product. In this case, you can offer customer support via one channel, such as email or support tickets, while omitting calls and live chats.
Strategy #4: Focus on upselling
You spend time and resources on attracting customers — they shouldn’t just subscribe for a couple of months and leave. This will hurt your customer lifetime value. Instead, use upselling to encourage them to upgrade or buy add-ons.
Bear in mind that upselling is almost five times cheaper than new customer acquisition. You’re 60-70 per cent more likely to sell to existing customers than new customers. This is because you have already built trust with your current customers, and they have confidence in your solutions.
Upselling also drives up customer lifetime value (CLV), which is important to up to 98 per cent of marketers. Be sure to use lead nurturing during the lifecycle of customers to increase your upselling opportunities. This allows you to provide more information on additional offerings.
How to upsell the right way
Effective upselling requires an extensive understanding of your products, their use scenarios, and benefits. It’s advisable to suggest different add-ons after understanding how customers are using your product. This can be within six months of using the product.
Leverage integrations to offer convenience to your customers. Customers usually want to access all their tools at a central place. You can add integration options in the premium or paid plans, encouraging them to upgrade to access the tools.
Importance of keeping churn low
Upselling helps to improve your customer retention rates by almost 30 per cent if done within the first three months. It must be needs-based to ensure the most impact. That way, you’ll keep your churn low, reducing your cost of acquisition and increasing your customers’ lifetime value. Customer retention also helps you build quality relationships and trust with customers.
Strategy #5: Align sales and marketing
When you align sales and marketing, your sales cycles shorten and the conversion rate improves, leading to increased revenue. Efficient sales and marketing alignment requires regular meetings between the two teams. This helps to identify obstacles, optimise workflows, and keep track of shared goals.
Bear in mind the success of your inbound market strategy also depends on the relationship between your sales and marketing teams. Marketing teams generate leads while the sales team convert them into paying clients. For this to work, you must create a shared view of your personas and target market while keeping open communication between the teams.
The teams should also coordinate in content marketing campaigns to improve lead nurturing. When marketing teams are promoting new offers, the sales teams need to be up-to-date with these promotions to know what their leads are receiving.
Meet the needs of your customers
Differentiation helps to tailor your services to meet the unique needs of your customers. More importantly, it adds value to your offerings, and this is crucial in surviving in a commoditised market. B2B SaaS companies‘ when implementing a product-led growth strategy should identify what you sell and how you sell while creating conversations around the buyers’ experiences.
Take the time to understand your customers, including their needs, pain points, expectations, fears, and goals. This way, you can improve your product to cater to their individual needs, while leveraging upselling opportunities to entice them to make upgrades or buy add-ons. If you need help with sales enablement, get in touch for a free growth assessment today!