Flexible pricing — what it is, why it matters, and how to do it right
If you’ve been a product leader in the B2B software as a service (SaaS) world for any amount of time, you know that pricing can be hard. But today, with increasing customer acquisition costs, additional pressure from boards and analysts to drive growth and profitability—not to mention the uncertainty about the best way to monetize AI—things are only getting more complicated.
One thing is clear, companies need to deploy a flexible pricing strategy in order to keep pace with all the change.
What is a flexible pricing strategy?
Flexible pricing is more than just choosing different pricing models. It encompasses a comprehensive pricing strategy that includes organizational structure, processes, and capabilities that enable a business to adapt its pricing in response to internal and external factors. This holistic approach allows businesses to offer tailored solutions for a wide range of customers, from startups with limited budgets to large enterprises with extensive needs.
Remember, pricing is not a project, it’s a process. There isn’t a one-size-fits-all approach to choosing a pricing model for your business, but with the help of this step-by-step guide, you’ll learn best practices to empower you to design your own flexible pricing strategy.
Why do you need a flexible pricing strategy?
You’re not alone—product managers and deal desk teams across SaaS are contending with ever increasing levels of complexity. In order to stay agile and relevant, you’ll need a pricing strategy that can keep up with shifting market trends and go to market (GTM) initiatives.
Let’s take a look at some of the factors that may necessitate a more flexible pricing strategy.
Changes in go-to-market strategies
Today, many companies are employing hybrid go-to-market approaches in order to capture a broader market. This may mean combining the scalability of product-led growth (PLG) initiatives for smaller, self-serve customers with the personalized touch of sales-led growth (SLG) efforts for enterprise-level buyers.
To support such hybrid approaches, a flexible pricing strategy is essential as it allows companies to cater to diverse customer needs, adapt to evolving demands, and optimize revenue generation across different segments and stages of the customer lifecycle.
Proliferation of new charge models
Across SaaS, we’ve seen an uptick in usage-based charge models in recent years, as companies look for opportunities to mitigate churn and increase the “stickiness” of their product. And research supports the wisdom of this approach: IT buyers prefer usage-based pricing for products like AI and the companies employing usage-based pricing and hybrid consumption models generate higher revenue growth than their peers.
But adopting these more complex models and making them work for you requires the right approach, processes, and tools.
Increase in subscription bundling
Bundling, a pricing strategy that consolidates multiple products or services into one offering, is rapidly becoming one of the most powerful ways to differentiate value. Because bundling allows curated, flexible, and customized experiences at a discounted rate, it increases value for everyone.
For bundling models to be effective, subscription businesses need to know their audiences deeply, understand their expectations from the product or service, and provide the experience customers are seeking—without giving up margin or potential for future growth.
Experimentation with levels of commitment
Prospective customers have two big concerns when buying new software:
1. Will this actually work?
2. Is it worth the price?
Customers who are more concerned with the first will typically respond better to a lower commitment term, while those who are more price sensitive might be willing to enter into a longer commitment in exchange for a deeper discount.
By offering diverse pricing plans and commitment levels that appeal to customers across the spectrum, companies can attract and retain customers more effectively, balance short-term and long-term financial goals, and remain competitive in a dynamic market.
Vertical and regional expansion
Product and feature value may differ by country and industry. As companies introduce their products to new markets and create industry-specific offers, they will need to demonstrate an understanding of how value is defined within those industries and regions, and price appropriately.
Deal desks are pushing for more standardization
Within enterprise SaaS, deal desk teams are becoming overwhelmed by ad-hoc quoting from sales teams and are advocating for more standardization and automation.
Flexible pricing strategies provide a balance between what can be automatically approved vs. deals that need more tailoring in order to close. Increasing the proportion of auto-approved deals enhances operational efficiency, ensures consistency, and frees up resources, ultimately leading to a more streamlined and effective sales process.
What are the challenges of designing a flexible pricing strategy?
While the benefits of a flexible pricing strategy are clear, implementing it comes with challenges:
Measuring willingness to pay (WTP): Understanding what customers are willing to pay involves complex quantitative and qualitative methods, sophisticated data analytics, and continuous market research.
Targeting the right customer and market: Developing new pricing schemas and testing them requires a concerted effort, significant time, and iteration.
Supporting your strategy with the right tools and teams: If pricing is hard coded in back end systems, any pricing changes will have to be made by IT, which could significantly slow down the iterative process. In order to be successful, you’ll need purpose-built solutions that free up IT from engaging in manual tasks and put pricing changes back in the hands of product managers.
Determining testing and measurement standards: Establishing the right metrics and KPIs is crucial for measuring success, making informed adjustments, and mitigating risks (such as impact on profit margins) associated with pricing changes.
Now, let’s move on to how you can overcome these challenges and support changes in GTM approaches to design your own flexible pricing strategy.
How do you design a flexible pricing strategy?
Like we’ve already said, designing and fine tuning your pricing strategy will be an ongoing process. You’ll need to determine your goals, research and test pricing variations, identify and analyze key metrics, and continually iterate and optimize. Let’s take a closer look at the steps.
1. Define your goals
As you formulate your goals, consider whether your pricing changes are aimed at acquiring, retaining, or monetizing customers.
Customer acquisition
Pricing models, such as pay-as-you-go, that provide a low barrier to entry, with few (if any) commitments and more value for less money are great for increasing acquisition of new customers.
Customer Retention
Consider providing discounts for customers who commit to longer subscription periods (e.g., annual vs. monthly). You can also improve retention by bundling services or products in higher-tier subscriptions, such as exclusive content, advanced features, or premium support.
Monetize existing customers
If your goal is to monetize by selling something new to your existing customers, you may want to consider adding multiple premium plans, with increasing levels of features, services, and value at higher price points.
Offering different subscription tiers (basic, premium, enterprise) with varying levels of features and benefits, also provides upsell opportunities, as customers can choose higher tiers for more value.
2. Research, rollout, and test your pricing
Once your goals are defined, you’ll need to perform market, competitive, and customer research to determine the right approach for your business. Then, you’ll need to test your pricing to determine which pricing variant performs the best.
Market research
Employ firmographic analysis to identify different customer segments based on company size, industry, and business model. Geographic segmentation is also crucial to tailor pricing strategies to regional market demands and economic conditions.
Additionally, plan to conduct industry-specific research to understand the unique challenges and opportunities within different verticals.
Performing pricing elasticity studies also help determine how sensitive customers are to price changes, allowing for precise predictions of how adjustments will impact demand and revenue.
Competitive research
Analyze competitors’ pricing models to understand what is considered standard and identify gaps or opportunities for differentiation. You should also evaluate competitors’ value propositions and how they price their offerings compared to yours. In addition, pay attention to how and when competitors offer promotions and discounts.
Customer behavior and usage analysis
Analyze customer behavior and usage patterns to discover how customers use your product, including frequency, duration, and feature utilization. This helps design usage-based pricing models and identify value-driving features.
Gathering customer feedback through surveys, customer service interactions, and reviews will also help provide insights into pricing, product value, and satisfaction. You can also conduct a churn analysis to identify pricing-related issues and opportunities to improve retention through better pricing strategies.
Test your pricing
Formulate hypotheses about how different pricing changes might impact your business. Then, Conduct A/B testing and split level testing of different pricing models and offers to see which performs best. This experimental approach allows for iterative improvements based on actual customer responses.
A/B testing: This approach works well for PLG strategies using a Good-Better-Best packaging model.
Split level testing: This type of testing will help identify pricing issues on a small scale before a full roll out. Run split level tests with a small percentage of customers/prospects until you are ready to go forward with a full scale launch.
Set up controlled experiments to test different pricing variants against each other. Ensure you have a control group (current pricing) and one or more test groups (new pricing variants). Randomly assign customers or prospects to different pricing groups to ensure unbiased results and track the performance of each group over a defined period.
3. Analyze the results
After rolling out and testing your pricing, you’ll need to determine how you’re measuring success. For instance, how will you measure improvements and how much credit are you taking for outcomes?
You’ll need to work with the customer to understand the monetary value they place on an outcome and what a reasonable attribution model should be. In addition the outcome should be auditable and trackable, so you don’t open the door to renegotiation down the line.
To determine whether your pricing model is helping achieve your original goals, you’ll want to identify metrics, or key performance indicators (KPIs).
Common KPIs include:
Standalone selling price (SSP): The best evidence of SSP is the observable price of a good or service when the entity sells that good or service separately in similar circumstances to similar customers. Be wary of over discounting and keep your pricing close to customer expectations.
Average selling price (ASP): This should change over time, either going up or down. ASP is heavily dependent on how competitive your space is, but the worst thing you can do is hold your list price (in SaaS, there has been close to a 25% increase in ASP since 2020).
Sales velocity/cost of sale: Track this metric to ensure that any discounting you’re doing is leading to faster close rates without cannibalizing cost of sales (COS).
Customer acquisition cost (CAC) payback: SaaS products typically have higher margins and this is rarely a concern, but it’s important not to overextend payback periods so far out that your lifetime value (LTV) expands beyond a 3:1 ratio.
4. Iterate and optimize
Based on the data you gathered during the testing and analysis phases, you’ll now need to make adjustments to your pricing strategy by adopting the best-performing pricing variant or combining elements from multiple variants. This could include changes to pricing tiers, discounts, bundling, introducing new pricing plans, or combining multiple models into one hybrid pricing plan.
Iterating on pricing is a continuous, data-driven process, so be prepared to regularly review and refine your pricing strategy to adapt to changes in the market, fluctuations in customer preferences, and future testing results.
Embrace the future of SaaS pricing and stay ahead of the curve
Don’t let rigid pricing models hold your business back. Whether you are just beginning or looking to refine your existing approach, discover how Zuora’s solutions can help your business start designing a flexible pricing strategy and maximize new growth opportunities.
“We recently announced completely new pricing and packaging with some new add-ons. Typically, it takes older companies weeks and months to make these changes, but we did that in a week with Zuora.”
– Sid Sanghvi, Head of Finance Business Applications, Asana