Customers will not tell you how to price your product or service. The most accurate way to find out is to test pricing models and price points in the real world, where customers actually buy or don’t buy. 

Price testing is often neglected, but the lessons learned often lead to a dramatic impact on profitability. Given that many companies sell through the internet, we will use that model for examples of ways to test prices. However, similar types of tests can be constructed for other situations. 

1. A/B Testing
A/B testing involves offering different prices that are allocated randomly to customers. From a statistical perspective, this is a very clean approach because the only thing you change is the price. An easy way to do this is to offer a variety of price points on a website using an A/B testing program like VWO or Optimizely. Companies such as Dell often use this type of price test when they release new products. 

2. Offer Discounts Off a Stable List Price
By setting a relatively high list price and then showing a discount, one has the option of varying the discount and hence the end price can change without showing a frequently changing list price. This provides a flexible platform to try different prices without causing jarring changes to the overall pricing and it makes it easier to increase pricing by just reducing some or all of the discount. 

3. Segment Your Customers
If a company can segment its customers into groups that are very similar, it can offer different pricing for each segment—this is a manual way of simulating A/B style testing. For example, if there was a landing page off a specific blog, those visitors could be offered a different price (although, it should be lower than list price as they might make their way to the general pricing on the website). When price testing is done based on segment, one needs to be aware that different segments could have varying levels of price sensitivity, which could cause havoc on test results if the goal is to find a general market price.

Based on my experiences with clients of Stratapult Advisors, companies can often accelerate profitable growth through new pricing models or optimized price levels. Can you think of opportunities to increase profitability of your company from testing pricing models and price points? If so, leave a comment so we can all learn. 

Has pricing your SaaS product got you in a state of confusion? 

The boom in software as a service (SaaS) offerings has created phenomenal opportunities. Software is more accessible, incremental costs to support a new user are minuscule, and maintenance and upgrades are simple to deploy. 

Pricing a SaaS product often is a challenging strategic decision that can have a dramatic impact on a product’s user growth and profitability. 

Typically, four pricing models are most frequently used in the SaaS market. You might be able to use a number of these models either separately or in combination to spur awesome growth in volume and profit for your company. 

1. Subscription
Subscriptions charge a recurring amount until cancelation. Google Apps, for example, charges businesses a monthly or yearly fee per user for services like email, integrated calendar, and storage. Subscriptions work well when the user becomes a long-term, frequent user. This way the price point doesn’t seem high, but is paid regularly so the revenue adds up over time. Given that subscriptions often allow for a high or unlimited level of usage, they are best used when the incremental cost of additional usage is small. 

2. Volume
Volume based pricing allows the price to change with usage. Typically the per unit price declines as volume increases, although sometimes a free offer for low volume is available to encourage trials. The volume model is good for situations where switching costs are high or operating costs grow with usage. As an example, the email marketing system offered by MailChimp is easy to get started with a free service for accounts with less than 2,000 email addresses. However, once MailChimp starts charging users they typically have their email marketing setup with templates, segmented lists, and autoresponders established, making switching painful. As a user’s email list at MailChimp grows, so does the monthly cost, although the cost per email address declines. If operating costs grow with usage, volume based pricing helps companies keep large volume users profitable. 

3. Freemium
Freemium offerings allow customers to use the basic service for free and them pay for premium services. Companies like LinkedIn use the freemium model to encourage a volume of customers--which creates its network value--while still charging for advanced functionality to power networkers and recruiters. The freemium model usually is only suitable when a huge number of users are expected because the share of those who upgrade to the paid services is often small (4% is best practice). And, the value of the premium, paid for services needs to be high for a segment of customers, while at the same time the free services need to valuable enough to attract many customers.

4. Packages 
Packages allow users to pay for groups of services based on their needs. QuickBooks, for example, has core accounting packages, plus an additional package to support payroll. It is suitable to offer packages when different customer segments have different needs. Packages work well when a customer’s needs develop overtime, encouraging them to upgrade when they can see the value. 

Are there opportunities to increase profitability from the pricing of your SaaS products?
Pricing is one of the most powerful drivers of profitability. You might find ways to leverage pricing to grow usage, profit margin, and customer retention.

Think about:

• Who your target customer segments are
  
• How each customer segment perceives the value you offer 
  
• How you can create a win-win situation with pricing
  

I have led numerous pricing projects where profits increased 25% to >100%. Look for ways to unleash this growth at your company.