How to Build a Great SaaS Product and Set the Right Price for It

Technical Articles
Oleg Mykhaylovych
27 June 2016

There are a lot of challenges SaaS startuppers face and they would like to know a universal recipe for building high-quality, scalable, and successful applications. The best advice should be sought from the experienced SaaS businesses since they’re aware of all possible mistakes and know how to avoid them. So, here are some essential tips and tricks on how to develop the best SaaS products.

If you’re about to start a SaaS business, you’ll need to take into consideration different aspects and make a lot of important decisions. Usually, the most popular questions startuppers have in mind concern scalability, design and user experience, strategy of development, launching, etc.

Most experts agree that the sooner you build a product and reach the market, the better it will be for you and your product. The best strategy is to take gradual steps, observe, measure your KPIs and make necessary changes if necessary. In order to measure KPIs, experts recommend implementing analytical tools. User experience should be always prioritized. That’s why when you launch a product, make sure it has only a standard set of features. After you start getting customers’ feedback, you’ll be able to decide which advanced functions can be added to your app or service. Real practice proves that scalability, quality of code, and proper documentation should be prioritized over perfect architecture.

In terms of developing a Saas product, experts recommend the following.

Now that you know the basics of the successful launching of a SaaS product, it’s time to talk about a very important aspect of any startup and business – pricing. It can be pretty tricky and SaaS companies should beware common pitfalls in order to get the most of their business. Here are 5 most common mistakes many startuppers make when it comes to setting a price for their products. Forewarned is forearmed.

Underestimating the financial value of your product

Many startuppers think that if they offer their service at a low price, they will get more customers. By thinking this way, they completely devalue their own efforts and work. Why should a particular vendor who takes on the burden of operating and maintaining a software application, adjusts to market changes, reacts to customer requests set a low price for the service? It’s inconceivable but a lot of vendors do so and the reasons for it are numerous and various. Many startups are launched by ambitious and revolutionary guys who want to create something totally different from legacy software and stimulate competition in the market. They think that by setting lower prices they will gain more clients. However, the product they build already deserves potential customers’ attention since it is better than other existing, often obsolete, products.

It’s often the case that the founders of SaaS business consider building the product a relatively easy task. As a result, they believe their work should be paid accordingly. At the same time, customers wonder why such quality software is so cheap because they would pay any price to use it.

Probably, the main reason why many vendors undervalue their products lies in their failure to understand the potential those products have and how customers will react to them. It’s called customer value perception – a customer’s opinion of a product’s value. This mistake is often made by the team who focus mainly on the application itself (its features, implementation) and disregards user’s perspective – how the product will benefit the customers and how they will evaluate it.

Underestimation of your product may cause a number of problems. For example, if you charge very little, that sum will be insufficient for covering the high-quality maintenance or if the price is unusually low, your product may not be taken seriously.

Thus, you need to understand how useful your app will be for your customers, how they’ll benefit from it, and judging from that, set an appropriate price.

1. Focusing on a margin

There are usually two major reasons for margin oriented pricing. The first one deals with living up to investor pitch and the other one consists in trying to devise an average margin. Any pricing strategy based on either of them will result in failure, especially the strategy driven by the aim to meet the investor pitch.

Bottom-up pricing, a method in which you calculate the price by adding the desired profit to the actual costs, will not work. Your target market is not interested in how much you spend on infrastructure, support, and interaction with customers – they will accept your price if you have a value proposition and the price doesn’t exceed an average price range. So, two ways out are possible here: you should either find the way how to minimize the costs or convince your potential users that your product is worth paying more. However, there can be another situation: sometimes you have to realize that the market opportunity you expected failed to appear. Still, the best solution is to influence value perception of your customers and make them consciously pay more for your service or product.

Although pricing is about finance and accounting, marketing is what really matters from the moment you’ve covered your costs. The way you present your product can fully justify the price you set.

2. Guessing

Most startups set up the prices for their services using one very popular method – guessing. Due to their lack of experience, they have a very vague idea of customer behavior and buying patterns, as a result they just make up their pricing.

Those SaaS businesses that automate their sales processes have a great advantage since they are able to gather some useful information related to sales and usage. That’s why while architecting a SaaS app, consider adding a special feature that will automatically capture some important data. Even if you’re offering a unique product and there are no other competitors in the market or they use a different model of revenue, you shouldn’t make up your pricing.

But how a startup can come up with reasonable pricing? You need to find an analog or a benchmark – a company out of your market or the one whose products or services are different from yours but it uses a similar model. Combine those data with some scientific methods and empirical knowledge and you’ll be able to device the right pricing strategy.

A pricing strategy is essential since it will allow you to match your pricing with your goals and customer’s perceived value.

So, in order to set the right price from the start, collect and analyze necessary data, including information about your market, and come up with a pricing strategy.

3. Copying other company’s pricing

Don’t even think about using other businesses’ pricing – be it their pricing page or strategy. Make sure that your pricing is a part of your own marketing strategy. There is one condition under which you can copy other company’s pricing: that company is your competitor in the market. Analyzing their revenue metrics and billing cycles you should pursue one goal – to see how you differ from each other. If your major competitor is one of the market leaders and your startup uses a brand new model that reflects the needs of the market, be ready to explain why your pricing differs from your competitor’s even if there’s an obvious reason for this.

And another argument to prove that copying is actually bad. When you founded your startup you wanted to introduce something new and better, something different from that other companies offer. You built a unique product no one in the market can compete with so you have enough potential and resources to set the unique pricing instead of copying it. You’re very wrong thinking that the leader set it in the right way.

4. Avoiding any pricing

Many companies make another big mistake when they offer their service or product for free. Some of them avoid pricing only at an initial stage offering their customers the so-called Freemium.

It’s very common for startups to launch their products without any revenue model in order to draw more customers. However, the users are mainly interested in a free offering, not in the product itself. That’s why you need to create a plan of how you’re going to move from a free to paid service. You should take into account not only your pricing strategy but also devise the strategy of making your “free” users interested in using your paid service.

There are some companies that offer a free service but they have another source of revenue – advertising. Indeed, building a pricing strategy around ads is a good option if you still want to provide your product for free. Remember that any business is about pricing and revenue so by avoiding pricing at all, you corrupt the idea of business itself.

Pricing is necessary if a SaaS app features an automated sales process where the user goes to the pricing page, chooses a particular product, and pays for it without human assistance.

Now you see how important it is to set an appropriate price for your product and how one can avoid possible mistakes related to pricing.

  • Always think about your customers and listen to their suggestions and complaints.
  • Know how to improve your application in future when the number of users multiplies.
  • Aim at success and be flexible in order to adjust to the emerging changes and deal with bugs.
  • Keep in mind that all SaaS products are different and this is predetermined by a number of factors one of them being market competition and the ability of a product to satisfy customers’ needs.
  • Define your value proposition and your perspective in the market.
  • Realize that it’s only a startup, not an established business yet; but believe that it will become one soon.
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