Blog / InspirationFriday, June 12, 2020
Dynamic pricing is a strategy most used in the retail industry. However, it may be a strategy that is worth exploring for your SaaS business.
Dynamic pricing can be great from a business perspective. This strategy can give you the flexibility to react to changes in the market and in demand. As positive an idea as dynamic pricing might seem from your perspective, your customers might not see it that way.
Let's say one customer pays $1,000 to use your SaaS platform for a year. They won't be happy if a customer next week gets the same deal for $800 because you decided you needed to attract new subscribers quickly.
How would you react?
Using dynamic pricing can be a fantastic way to increase sales and grow your business. But you must do this without alienating your existing customer base.
A dynamic pricing strategy will see you selling your product at different prices to different people.
Sometimes, you might see dynamic pricing labelled as price discrimination. Price discrimination is illegal in some locations, but only if you discriminate on the base of race, gender, religion, nationality, or violates antitrust or price-fixing laws.
Dynamic pricing can help you to maximize your profits if you do it well.
At the same time, businesses realize that there are sensitivities attached to offering customer B a different price to customer A.
It depends on who you are!
✔️ If you’re the business, then dynamic pricing is fair.
✔️ If you're the customer getting the lowest price, then dynamic pricing is fair.
❌ If you’re the customer who must pay a higher price, then dynamic pricing might not be fair.
At the same time, no-one is forced to buy or subscribe to a product. If a customer doesn’t like your pricing strategy, you will soon have to amend it anyway if you aren’t making any money.
It's easy to say that you should be transparent that you use dynamic pricing in your business. What this doesn't address are concerns that customers will have about whether they’re getting what they perceive to be a fair deal.
You can be clear you use dynamic pricing without telling people that some people might be getting their subscription cheaper. At the same time, you can also use dynamic pricing and let people choose what they want to pay. Not only does this make it clear that not everyone pays the same, but you're also giving your customer a choice!
The strategies and tips we’ll share throughout the rest of this guide will show you how to do this.
How can you implement dynamic pricing for your SaaS business? You will generally be able to take two approaches.
Group led dynamic pricing can be done in several ways.
The easiest to implement in real-time and run live is usually an A/B test. You can keep it as simple as testing whether people will pay more depending on the design or information presented on a page. If you want to gather more data, test purchases by customers based on location, the device they use, their demographic, or even how they got to your site.
While such an approach can be worthwhile, it is often the one that generates the most backlash.
An alternative approach to a group led pricing campaign can be to do it non-publicly.
Think about it. How often do you look for a SaaS program, and when you reach the "Enterprise" or "Corporate" tier, you see a "Contact Us" call to action rather than a price? These businesses are likely to be using dynamic pricing, tailoring what they charge depending on the size of the client and the services they need.
If you have a tier for larger clients, use this to harness dynamic pricing and tailor each subscription with these businesses to suit both sides.
At the same time, if you have different tiers of your product, you’re effectively using dynamic pricing by allowing the customer to choose what they pay!
You can implement time-based pricing over any period you like.
In retail, eCommerce businesses might change the price of an item several times during the day. Most commonly, prices might vary depending on seasonality and demand at various times throughout the year. Using dynamic pricing in this way is slightly different from high-low pricing, which is more the reducing of price to clear out a physical product. Hopefully, it isn't something you will need to do in your SaaS business!
You might implement time-based pricing to lower the price at the end of the financial and tax year. For example, a lower price might help you to attract more subscribers and hit your year-end targets. At the same time, customers dealing with new budgets might be tempted to sign up at the start of the year if their price is lower.
You can also combine time-based pricing with group-based pricing if you need to. Let's say you have a client who tells you they have a specific budget or are coming to the end of their budget year. You can offer a price plan specific to them, which is time-limited.
For example, you can require the client to sign up in the next two weeks to take advantage of a reduced price. If you really want to get the client on board, you might even off them scaled up pricing where they pay a lower price now and revert to a higher rate after a specific number of months.
It is possible to implement dynamic pricing successfully in your SaaS business. You may find it challenging to do so effectively and may need to focus on some aspects more than others.
Here are some tips that will help you to do so.
If you clearly differentiate between buyer personas, you can openly advertise different price plans to distinct groups.
You may find you currently don't have buyer personas, or conclude all your buyer personas are the same. This might challenge you to think about the diversity and value of your product and the need to improve it.
Value metrics work brilliantly alongside price differentiation.
Utilizing value metrics in your proposition puts the power into your customers’ hands. They actively select what they want to pay for based on how they will use your product.
The key to making price differentiation and value metrics work is supporting the flexibility for customers to decide what they want to pay, and when.
To continue with Moz as an example, if you’re a subscriber you can move up or down tiers as often as you wish and your billing is amended accordingly. Give your SaaS customers this same flexibility and they’ll love you!
Using an online auction-style model for time-based pricing can create a sense of urgency and push website visitors to subscribe to your platform.
One way to use this is to show customers a countdown timer when they visit your site for the first time, encouraging them to sign up. You can always use a cookie to measure if the customer returns and qualifies for the lower price.
Discounting is not something any business wants to do too much. Not only does it reduce revenue and profitability, but it can also damage your brand the value that customers perceive in your product.
However, a campaign where you segment your email newsletter by people who aren't paying customers, then send a time-limited discount code, can be worthwhile as a short-term initiative.
You should always keep discounts time-limited to make them feel like unique events. This will enhance the sense of urgency people feel to sign up if they missed the last one. At the same time, you avoid being a "permanent discounter" or being known for discounts to the extent that people never subscribe at the full price.
Dynamic pricing is a fantastic tool that can help you to grow sales and subscribers for your SaaS business.
You must implement a dynamic pricing strategy thoughtfully, both to maximize your revenue and to avoid alienating both existing and potential customers.
Use the tips in this guide to help you get your dynamic pricing campaign right for everyone!
Read more about Saas pricing models here.
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