In the SaaS industry, subscription businesses have made the buy-vs-build decision easier. Instead of taking resources and focus away from your company’s core competency, to build and maintain an in-house product, you can justify a subscription for the same product. This makes a company more efficient, allowing it to focus on its own product. This is also advantageous for budget-conscious startups who need to leverage other products to reach product/market fit quickly.   

The shift also hit B2C companies as well. Whether it’s cell phones, subscription boxes, or even software like Microsoft Office, subscriptions allow you to make purchases without saving up for a product – making budgeting for products easier than ever.

For companies with some sort of recurring model, simple recurring billing isn’t enough. As pricing models shifted to recurring models, technology has also evolved to make it easier for companies to manage their customers.

What is Recurring billing?

Recurring billing is rather simple compared to subscription billing management. At its simplest form, your customers’ cards are charged at the same time at an ongoing interval, like each month, every 3rd Tuesday, every week, etc. Think of recurring billing as your email account while subscription management is your CRM. If you have an email account, you can technically manage your contacts, and can send emails.

To get more functionality, however, like managing customer records, creating triggers, autoresponders, automated emails, etc, you need a real CRM. You can build this yourself, but it takes a lot of time and cost upfront as well as ongoing to maintain. The same with recurring billing. If you want more functionality, you’ll have to start creating that yourself.

What’s the problem with recurring billing

One of the main problems with simple recurring billing is the lack of flexibility. When you first start billing customers, a simple $10/mo plan might be all you need. But what if your company decides to charge per seat? What if you want to offer free trial periods to your customers? Your recurring billing setup doesn’t understand that. All it understands is “charge customer X $10”. Suddenly, what seemed like a small change to your pricing model means a lot of work for developers. 

There’s many other issues that can occur if you don’t have subscription billing software that’s designed to manage these problems. Everything from declined credit cards to prorating, a subscription billing system is designed to help you manage all the complexities that come with recurring billing.

Subscription billing

Subscription billing, or subscription billing management, is more advanced. In the same way that a CRM gives you more functionality than an email account, subscription billing gives you more functionality than plain recurring billing. While recurring billing is still the core function of a subscription billing system, there’s a lot more that goes into it. Here’s some of the pieces of a subscription billing system and why they’re important to your company:

Recurring billing 

The core piece of subscription billing is obviously recurring billing. This is what enables you to keep a card on file and automatically run transactions each billing cycle.

If you only have a simple recurring billing model setup, you’re leaving a lot of money on the table. Everything would also be fragmented. You’d have to be using multiple different pieces of software to keep track of you customers, bill your customers, email your customers, etc. 

Dunning

Dunning allows you to capture potentially lost revenue due to failed payments. If a customer gets paid on Friday, but you charge them Thursday, and they don’t have enough funds in their account, the transaction will fail. Being able to easily configure your system to try again means you can help to prevent customer churn.

Customer communications 

Communication emails are a great compliment to dunning to let your customers know when they’ve made a payment or if the transaction has failed.

For example, when you fail your Spotify payment, you get an email saying your payment declined and they’re going to keep trying (see image below). If you’ve changed cards, they even have a button to update your billing info.

Recurring billing systems are much simpler than subscription billing and cannot manage dunning. Doing that with recurring billing? Not as easy.

Promotions 

Promotions are a great way to help make your product more appealing to customers. With a subscription billing system, you are able to easily provide and manage promotions.

Pricing Plans 

Creating pricing plans for different billing models is significantly easier with a subscription billing system. Instead of having to code a pricing plan, you can manage all of your pricing plans from an easy-to-use dashboard.

Dashboard 

Having a reporting dashboard helps to give you a snapshot of your business. Keeping track of important SaaS metrics like monthly recurring revenue, churn rate, and customer lifetime value is essential to making sure your company is staying healthy.  

Prorating 

When customers upgrades plans, it doesn’t make sense for them to pay for a full month of a more expensive plan if they were only on the plan for 2 weeks. Similarly, If they were on a more expensive plan you want to be sure that your customers were actually charged for being on the plan. With prorating, you can choose how you want to charge customers who upgrade or downgrade mid billing cycle.

With subscription billing, you can customize your system to work the way you want it to. You also keep everything in one place. One piece of software handles all of your billing needs for you instead of trying to hack multiple systems to work together.

Who needs subscription billing?

Anybody that needs some sort of recurring billing can take advantage of subscription billing. For the price, it really makes sense to be using a complete system. Unless your company only has a few users and you don’t intend on scaling it ever, then starting out with a subscription billing platform helps you save time and is going to make a lot more sense in the long run.

Why businesses like subscription billing

Creates opportunities for new businesses

Billing for subscriptions has opened up entire in industries and niches for any product. Everything from subscription boxes to SaaS, would be much more difficult without subscription billing. Being able to charge a card at the same time each month allows companies to focus less on renewals and more on growth.

Predictable revenue and growth

At scale, revenue and growth are quite predictable. By looking at customer acquisition cost, lifetime value, and churn rate, it becomes simple to calculate how fast your company can and will grow.

High margins

If your product is SaaS, the margins are much higher than most other industries. Other than ongoing development costs, the main cost that SaaS companies face is the cost to market and sell their products or services.

Why customers like subscription billing

Cost effective

The cost of building any SaaS product in-house is is high. Depending on the complexity of the product, and how much your developers are being paid, costs can get out of hand quickly.  Even worse, the timeline to build and integrate with an in-house system can be months.

Buying software can also be a very expensive up-front cost. For example, the cost of buying a “perpetual license” for Microsoft Office ranges somewhere between $150 and $500 depending on which products you need. The cost of a monthly subscription, however, is only $7 to $10 for the same products.

Most SaaS companies don’t offer an option to purchase a “perpetual license” as Microsoft does. The benefit to the consumer, however, is the same. By purchasing a subscription to a piece of software, consumers have significantly lower initial costs.

Predictable costs

Costs for subscriptions are also much more predictable than their non-subscription counterparts. Whether you’re buying a subscription box, a computer, or software, budgeting for subscriptions is easy. Instead of saving up for one big purchase, you simply make small monthly payments that add up over time.

Product improvements

Because it’s so easy to switch from one subscription to a competitor, companies are always trying to create new features, and provide a better customer experience. This is a great benefit for customers, as products will continually improve. If customers are unhappy with product improvements, or their experience, they are able to switch with significantly lower costs than if they had to buy an entirely new product.

What makes Cheddar great?

One-stop shop 

With Cheddar, you only need a subscription to one piece of software to manage all your billing needs. If you’re in the USA, Cheddar has your payment payment processing, payment gateway, and your entire subscription billing solution bundled together. 

Simple to set up

At its simplest form, all you have to do is create a customer and subscribe them to a plan. This means you can start billing your customers in as little as one day!

Flexible plans 

Setting up flat subscription bills is easy in Cheddar. As your company grows, and you want to change your pricing or perhaps try out a different pricing model, it’s going to be really easy to do that within Cheddar.

Payment processor agnostic 

Cheddar has its own built in payment processor, but also supports numerous third party payment processors, which means that you can swap out processors at any time.

Usage tracking and billing

Cheddar allows you to track real-time customer activity – without having to bill for it. Our simple counters that we call Tracked Items, allow you to track the way in which your customers interact with your system. If you eventually want to use some sort of usage-based pricing model, all you have to do is select a tracked item and apply billing logic to it.

Customer service

Our support team is awesome. We have a wide range of ways to get in touch, which allow you to get the answers to your questions the way you want.

The post Subscription Billing – Upgrade Your Recurring Billing Model appeared first on GetCheddar.

In this case study, we’ll take a look at the pricing and growth journey of Cheddar customer Radius Lead Management, a CRM provider in the insurance industry that’s bootstrapping their way to the top of a niche market.

Who Is Radius and What Do They Do?

Radius (Radiusbob.com – bob stands for “Book of Business”) is a Lead Management & CRM software tool specific to the insurance industry. Radius helps insurance agents and agencies market to their leads while managing their existing client base.

Radius started as a side project and was bootstrapped for 8-9 years with a small team of 4 people. They never took on venture capital or any other outside investment. The team worked day jobs and spent mornings, nights, and weekends building Radius while putting the earned revenue back into the business to grow both the platform and the organization.

The CRM industry is huge, but the big players only provide broadly-focused products with a one size fits all approach. Radius founder, Clu Connors, realized the amount of time insurance agents spent customizing existing CRM solutions to suit their unique needs took away from their primary focus of helping clients find insurance policies. As a result, he built Radius, an industry-specific, insurance-focused Lead Management & CRM platform.

Radius is focused on lead management and marketing for insurance agents. With a traditional CRM, agents can spend hours, if not days, trying to set up features to manage the insurance customer lifecycle. Radius solves these problems by providing a system that has the features insurance agents need out of the box, including:

• Automated Workflows
• Email Marketing & Text Messaging
• Sales Automation
• Commission & Renewal Tracking
• Built-in Telephony (VoIP) with inbound & outbound calling capabilities

Radius now has a growing client base and is a highly trusted Lead Management & CRM platform for the insurance industry.

What is the Radius Pricing Model

We asked Radius how they came up with their pricing. They initially tried freemium, but discovered that their bootstrapped business model required them to bring revenue in the door from customers faster. Freemium wasn’t paying the bills, so they went with a tiered pricing model that offers price points low enough for early adopters to come on board.

A great thing about Radius is that they stayed true to existing customers and grandfathered in pricing for customers on their legacy plans – they didn’t raise the price for early users. Their price stayed the same while the included features grew. This is also a Cheddar philosophy and one we value.

Over time, competitive analysis along with user feedback has allowed Radius to evolve their pricing model into the flexible, tiered pricing that they have today based on with-or-without built-in VoIP features.

https://www.radiusbob.com/#pricing

What Does Radius Like Best About Cheddar?

Clu’s favorite part about Cheddar is the real-time reporting. As a business and product owner, Clu needs to stay on top of revenue. Therefore, he checks Cheddar’s dashboard daily to see his MRR, LTV, churn, customer stats, revenue, and to run reports. He also likes how he can compare and contrast month over month and year over year revenue within Cheddar.

Radius is also a fan of Cheddar’s customer success team who is always available to answer questions in-depth and help ensure Radius is always up and running. We love building relationships with our Cheddar customers that allow us to be partners in their success.

Clu’s General Advice to Startups Getting Started

• Slow and steady wins the race. It’s so much easier to start up a business quickly relative to even a decade ago. But, that doesn’t mean you should expect stellar results just as quickly. So many businesses launch and get frustrated that their traction isn’t gangbusters in month one, two, six, twelve or more.
• We aren’t living in a patient society. You need to be patient. Most won’t be featured on Techcrunch or SaaStr. Most companies aren’t unicorns, white horses or even a horse for that matter. You just need to find your niche and define what’s best for you as an individual and business. It’s going to take time. It may well be a side gig longer than you had planned and that’s ok.
• People today want big offices, venture investments, and the spotlight to ramp and scale as quickly as possible. You have to be okay with that not happening. It’s OK to fly under the radar, make your mark in a small way, build a great product that helps others as well as gets you paid. Decide if you want a quick play with cash-in and sell, or long term residuals.
• Find a team that is in it for the long haul with you. Pay consistently, create a culture, and enjoy the journey together. Invest in them beyond the dollar, personally and professionally.

How to Find Out More About Radius

Go to radiusbob.com to learn more about the platform and all the wonderful features they offer. For a bit of humor, technology insight, insurance awareness and sometimes motorsports related content, give them a Follow on Twitter (@radiusbob).

The post Case Study: How Radius Bootstrapped their way to Insurance Industry CRM Leader appeared first on GetCheddar.

What is usage-based pricing model? Essentially, a usage based model is when your customer is charged based on how many or how much of something they use. This might be API calls, text messages sent, or really anything that you can count.

To bill for usage, Cheddar uses simple counters we call “Tracked Items“. All you have to do is increment or decrement these items throughout a billing period. You can also set usage limits, bill for overage, or even just track activities without billing for them.

Because of the way Cheddar tracks and bills using Tracked Items, there’s a lot of different models that we consider “usage-based” even though others might not. For example, with Cheddar, billing per API call has the same setup as billing per user. All you have to do is send Tracked Item data to Cheddar, and then you can configure the billing rules from within Cheddar’s platform.

That all being said, whether your pricing model is usage-based or not, its essential that you communicate your pricing well to customers. Lets take a look at the pricing pages for some companies, and how they might be able to use a usage-based billing system like Cheddar.

Smartfile 

Smartfile is a secure file share and transfer solution for businesses. 

Pricing: At first glance, Smartfile’s pricing seems to make sense. It seems that the price is per-seat, and depends which features you want, or how much storage you need. Taking a closer look at the Business plan, and Business plus plan, however, things start to get more confusing. The actual price a customer would pay isn’t clear. It’s not as easy as: Number of employees * Price per employee. There’s a minimum number of employees required.

To further the confusion, It’s not clear if there’s a difference between “employee” and “user”. Are you paying for the size of your company AND another fee for each person that actually uses the product? Are you essentially paying a flat rate and additional cost per user? It’s difficult to tell. While the price a customer actually ends up paying might be fair, some small changes to the pricing page might help to make pricing more clear. 

What makes this plan usage-based is that the price scales per additional user. In addition to that, there’s trackable activities such as storage space which need to be tracked in order to make sure a customer doesn’t exceed the allotted usage level.

Astronomer 

Astronomer is a fast, easy, and secure way to run apache airflow.

Pricing: Astronomer prices per hour, or per month, which work out to be roughly the same price. This is great, because it helps to provide context for what the price for a full month would be, which helps you to know how much you might pay in any given month. If you know nothing about Apache Airflow, the only thing you would need to know is:
1. How many hours per month will i use
2. How many “Astronomer Units” will i use

What makes this pricing usage-based is the option to choose a linear pricing model. Astronomer needs to keep track of hours, as well as “Astronomer Units” in order to calculate the price.

Ringr 

Ringr provides high quality audio for broadcast interviews, podcasts, etc.

Pricing: Ringr’s pricing is tiered. The better the plan, the better quality you get. Ringr also gives you more options in general for audio formats as you move up tiers.

Although the pricing doesn’t scale with usage, that’s not to say usage-based billing wouldn’t be valuable for Ringr. For example, Ringr might track storage used, or number of downloads in order to get a better idea of how customers are actually using their platform. Eventually, these might be things that Ringr decides to bill for in the future to create more scalable pricing.

Avail

Avail is rental management software for individual landlords and their tenants.

Pricing: Avail’s pricing model includes tiers. For each tier, a flat subscription is charged each month, and and there is an additional price you pay if you exceed your allotted number of units. The sliding scale is a great feature to have on the this pricing page. A landlord knows exactly how many properties that they have. This makes it easy to know exactly which pricing plan you would be on, as well as how much you would be paying for pricing.

Avail’s pricing is usage-based because it scales on the number of properties each customer has. There’s also some limits on what customers can do, or how much of something a customer can do. This means Avail needs to track some of these activities in order to be sure a customer doesn’t exceed their allotted usage.

Mimir

Mimir helps you to “scale and automate your computer science classroom”

Pricing: Mimir’s pricing is not exactly tiered, but they have multiple plans depending on their needs. It scales per student, but depending on the plan, the price per student is different. Because every school is different it makes sense that they have a “get quote” for their plans. Having some sort of per-student pricing is also great, because it provides some sort of context as to what the cost ends up being.

This model is usage based, because you need to keep track of the number of students using the product, but Mimir still could track other ways that your product is being used by students within the platform.

Structural 

Structural is an internal tool designed to help you create better teams.

Pricing: there’s really 1 main plan which is the pro plan. Having more people on the platform is more valuable, and the pricing scales that way. The free trial is great for companies wanting to try out the product, but it limits users to 50. Otherwise, the costs are pretty clear, the pricing scales, and it’s pretty obvious what plan you need.

This model is usage-based, because you need to track of how many user profiles the customer has. Because there are some other features, it would also be valuable to track other interactions within the product.

Mailshake 

Mailshake is a tool that helps you generate leads, build relationships, and promote content with cold email.

Pricing: Two plans that charge per user. Because of the simplicity, the pricing model is pretty easy to understand. It’s pretty easy to see why it makes sense to charge per-user, as presumably, each additional user provides similar value to the customer. Because there’s only two plans, you either want the features in the pro plan, or you don’t. This makes it very simple to understand which pricing plan you fit into. Unlike a lot of SaaS companies, there is no enterprise plan offered here. Presumably is because enterprise clients aren’t a target audience of Mailshake

This model is usage-based, as Mailshake would need to keep track of the number of users for each customer. Mailshake also might want to track email aliases, list cleaning credits, a/b tests run, etc. in order to see what customers are actually doing within their platform. 

Wrap-up

The way Cheddar communicates usage data makes it easy to get started billing for usage-based pricing models. Even if your company charges for a flat subscription, Cheddar’s Tracked Items make it easy to track activities you might not want to bill for. If you do eventually want to bill for these activities, all you have to do is create a new pricing plan using those Tracked Items. If you’re interested in seeing how easy it is to bill for usage-based models using Cheddar, Sign Up for a Demo, or Create a Free Account to get started.

The post Using Cheddar for Usage-based Pricing appeared first on GetCheddar.

We like Stripe.  As a payment processor.  They power several Cheddar customers.  They were a first mover and highly disruptive. They are easy to use and to get set up quickly.

But today’s startups are looking for more flexible cloud billing solutions to help their businesses scale.

Good cloud subscription billing solutions include:

• Subscription management
• Payment Gateways (At Cheddar we integrate with multiple gateways)
• Support for multiple payment methods (Credit cards, Debit cards, ACH, PayPal, etc)
• Customer Communications
• Dunning (Dunning essentially means automatic customer credit card retries when payments fail)
• Basic Reporting

Cheddar offers all the basics of a subscription billing solution, plus:

Data portability – We don’t hold your customer’s credit card data hostage and we help make your move efficient.

Advanced SaaS Metrics reporting – Cheddar’s dashboard allows you to track key SaaS metrics, like MRR, Churn, Lifetime Value.

Flexible billing models – Cheddar allows you to create highly flexible billing models.  Many of our customers come to us because they recognize how flexible Cheddar is.  In less than one day, you can be up and running with a billing model that includes:

• One-time
• Tiered
• Flat subscription
• Flat subscription + overage
• Flat subscription + usage
• Linear

…and more subscription and recurring billing models can be integrated into our api quickly and effectively.  And, you can iterate pricing plans and models within Cheddar much much more quickly than you can with other systems, which is one of the reasons Cheddar makes a great Stripe Billing alternative.  Other models lock you in and you have to mess with code to make changes.  Not with Cheddar.  Once you are set up, you are able to iterate quickly.

You also have the ability to change plans, create promotions, add one-time charges, upgrade, downgrade, and so on.

Integration and Webhooks – We believe that you know your business better than anyone and you desire full control and flexibility over your integrations.  Does Cheddar integrate with accounting systems like Quickbooks and Xero?  Yes, our customers use Zapier for quick and easy integrations.  If we built you a custom integration, you’d change it anyway.  So we integrated with Zapier to allow you to integrate with over 1,000 other applications.

Usage Tracking – this is the core of Cheddar.  We aren’t just a usage-based billing solution by any means.  However, Cheddar was built in such a way that usage tracking was a forethought and not an afterthought.  Highly powerful and flexible, Cheddar is the only billing solution that starts with usage tracking.  Each pricing plan has what we call Tracked Items that you can attach to each individual plan or globally across all plans.

Even better with Cheddar, outside of our core features, here’s are some of our core values and how we differentiate ourselves from the flock.

Cheddar as a Stripe Billing alternative and how we are different from Stripe and other subscription billing solutions  

Quick to implement:  With Cheddar, you can get up and running in as little as one day.  Because of our architecture, briefly mentioned above, Cheddar is highly flexible and easy to implement.  

Fast to iterate:  What’s better than being quick to implement is that making changes within Cheddar is where we really stand out.  No touching code to make pricing changes!  Pricing is isolated from the codebase.  This means less time sitting in pricing meetings and more time spent making cool products.  Anyone can make pricing changes – including adding or editing pricing plans – from within the dashboard, implementing immediately.

Transparent pricing with no lock-in.  Cheddar is on your team.  We’re here to help you scale your businesses.  Some of the other subscription billing solutions take a percentage of revenue as you scale.  It’s our promise at Cheddar that we will never take a percentage of your revenue because it’s against our philosophy.  We charge a flat per-transaction fee plus monthly so you can keep your hard-earned revenue.  At Cheddar, simple, transparent pricing is one of our core values. 

Swap out payments processors.  We just mentioned no lock in.  In line with being highly flexible and on your team to help you scale, Cheddar doesn’t play favorites when it comes to payment processors.  We do have our own payment processor (CheddarPay), but we don’t tell you which payment processor you can use.  Like we said – we like Stripe for payment processing and believe that Cheddar and Stripe can work well together.  But what happens if you get accused of fraud, for example, and you need to move away from Stripe? (which we hear often from customers that switched to Cheddar that Stripe may have a lot of false positives and can shut you down – yikes)

When you use Stripe Billing, you are always locked in to Stripe, and you can’t change that.  This lack of flexibility could be catastrophic to your business.  Cheddar allows you to change payment processors at any time.  You can use Stripe, or any other payment processor, and switch when you need or if you’re shut down, which is one of the primary reasons Cheddar is such a great Stripe Billing alternative.

Usage based billing.  We mentioned this already.  In case you didn’t notice, we’re passionate about tracking usage.  Why usage-based billing?  Because we believe that’s the way SaaS and online businesses are headed in general, along with Uber X businesses and Internet of Things (IoT).  Customers expect you to track usage and only bill for what they use, and you are leaving money on the table as a business if you aren’t charging for what is being used.  Having a flat recurring model is old SaaS; modern SaaS includes usage tracking and more flexible billing models.  Cheddar was built from the ground up to allow customers to track usage abstractly, on products, plans, and items, and not just on users and products.  We’ve decoupled tracking and billing.  If you’re interested in a more detailed comparison of Stripe Billing architecture compared to Cheddar’s, please feel free to reach out for a demo.    

Support.  Real support from real humans.  Everyone can claim they have good support.  But can they claim stellar support.  Our reviews from our customers speak for themselves.  Check us out on Capterra and G2Crowd.  We aren’t just a black hole.  We give you multiple ways to contact us – in your way and on your time.  We are real people who are genuinely interested in helping your business grow.  Seriously – try us out.

Grandfather clause.  Cheddar never raises your plan’s price.  We’ve had customers who’ve never left Cheddar because of our philosophy of grandfathering you in.  Maybe it’s because of our Midwest values, but we don’t like to surprise you with a sudden increase in rates.  Cheddar is your partner for the long term.

Culture. Cheddar is a small team from the Midwest, which means we have strong values and a solid work ethic.  This is normal as large companies scale, but working with an industry player who can give you personalized support and has a great team culture and ethic is, in our opinion, highly valuable. 

The post Stripe Billing Alternative – Cheddar vs. Stripe Billing appeared first on GetCheddar.

What is usage-based pricing? We define usage-based pricing as: A pricing model in which the amount that a customer pays is affected by how much or how many of something a customer uses. Although similar to usage-based billing, usage based pricing is simply the way in which a customer’s bill might increase or decrease based on usage. Here’s a look at some pricing pages with a usage component to pricing:

(via PactSafe, Avail, Pressable)

It’s important to realize that with pricing, the more granular you get, the easier your pricing actually is to understand. As you remove options, it become more clear to customers which pricing plan they fit in to. As a result, as you break down your pricing to charge for usage, you can appeal to more customer segments. Customers of all sizes have a pricing plan that caters precisely to their needs.

While there’s many ways to incorporate usage to your pricing, the most common SaaS usage-based pricing models are:

• Flat Tiered Pricing
• Flat Subscription + Overage 
• Flat Subscription + Usage
• Linear Pricing

Click on a model to skip ahead.

As you move from a tiered model to a linear model, you start removing tiers and flat subscription fees. This allows you to charge your customers more granularly. As you get more granular, your pricing scales better from small to medium to large customers. Your pricing can also become easier for customers to understand, as they have less options to weigh when selecting a plan.

Now, we’ll walk through each of these usage-based pricing examples, and some of the advantages and considerations for each.

Usage Tiers

Whether you realize it or not, tiered pricing is a common form of SaaS usage-based pricing. Even if you are charging a flat rate for each “tier”, the goal of tiers is generally the same. Small customers pay less than medium customers, and large customers pay more than medium customers.

Although with tiers you probably don’t bill linearly, you likely limit customers’ usage in one way or another. Here’s an example pricing page of a tiered pricing model (via Moz): 

With this model, customers are limited in many ways:

• Number of campaigns
• Number of keyword rankings
• Seats
• Restricted access to certain product features

While Moz doesn’t charge “per X action”, they still have to track how much of “X action” a customer takes. Now let’s take a look at some of the advantages and considerations when choosing a tiered pricing model.

Advantages of Using Usage Tiers

When compared to an all-access flat subscription model, tiered pricing can be a great addition to help your company’s pricing. This SaaS pricing model allows you to have multiple price points. This generally allows you to get more from larger customers while still being able to provide value to smaller customers. Some of the advantages of usage tiers are:

Locking Features

Creating different features, or providing more advanced support to customers, costs your company more. Placing these features inside of tiers, or packages, allows you to charge more to customers who cost your company more.

Capturing more from customers

By creating multiple plans for customers to choose from, they are able to select which plan best suits their needs. This allows you to capture customers who need fewer features or who use your product less. This also allows you to cater your product to more customers, while still maximizing the revenue from each.

Upselling customers

Depending on how you end up structuring your pricing, creating pricing tiers allows you to upsell customers. Growing customers often end up between pricing plans. If you know who is on the edge of a tier, you know who might be open to an upsell.

Usable with other SaaS pricing models

Although a tiered model is a usage-based model by itself, its also possible to use other models within each tier. For example, within each tier, you may offer an option for customers to pay for overage (think traditional cell phone data plans). You can also use tiers to allow for free users.

Considerations When Using Usage Tiers

Although setting up tiered pricing seems simple, that doesn’t make it easy for your customers. Every customer has different needs. Depending on these needs, tiered pricing could potentially cause some problems.

Analysis paralysis

If you have a complex product, or offer too many pricing options, customers may be unsure which plan they fit into. Many companies attempt to counter this by highlighting a “most popular” pricing plan. This still might not be enough. New customers may not need or even want everything your company provides. If a customer doesn’t know what to buy, they may go searching for a different solution.

Creating proper segments

Are customers really using your product the way you think they are? With every product, different customers will use your product in different ways. When you create tiers, it’s important to be sure that each tier corresponds correctly with a customer segment.

When segmenting features, certain customers might need some features and not others. Be sure to test different tiers of features. Just because you understand the value you provide doesn’t mean customers do. Your customers also might not be willing to pay for a more expensive plan just to unlock the feature that they need.

Subscription + Overage

The 3 part tariff has become a popularized pricing model. With this model, a customer pays a flat subscription which gives them an ‘allotment’ of usage. If a user exceeds this usage, they are charged for additional usage. Studies  show that this model can increase user usage by as much as 15%.

A SaaS example of this pricing model is TextMarks. TextMarks is a SMS platform for businesses to send text messages to their subscribers. TextMarks has also incorporated pricing tiers which segments customers into different pricing plans. Here’s a look at their pricing page:

TextMarks charges a base subscription for each of their plans, limiting the number of messages and keywords available on each plan. If you need to exceed this number, however, you can pay for for overage rather than upgrading tiers.

Advantages of a Subscription + Overage model

With a flat tiered model, you might leave some money on the table. By getting more granular and charging customers for overage in addition to their subscription, your company might be able to attract more customers, and keep more customers that don’t want to upgrade to the next pricing tier. Here’s some other advantages of using a subscription model and charging for overage:

Increased usage levels

When a customer pays up front for an allotment of usage, the cost of that usage is effectively a sunk cost. Assuming users stay below their allotted usage, customers don’t need to weigh the marginal cost and benefit of each “use”. Customers can use as much as their subscription allows with no additional fees until they exceed their allowed usage.

Capture customers between pricing plans

As your customers grow, there will be a point in time where they are caught in between pricing plans. With a a traditional tiered model, a point comes where an additional “use” results in a large increase in cost. Typically, however, this only creates a small increase in value. It may be difficult to justify spending an additional $500/ month just because the usage limit has been reached. Charging for overage smooths out marginal cost when caught in between pricing plans. This can result in a lower churn rate for your company.

Considerations of Using a Subscription + Overage model

Depending on your product, there are other things to consider when deciding on a subscription + overage model. Knowing how much and when a customer uses your product can help you to decide if this model is for you. Some of these considerations are:

Seasonality

If your product is used less during parts of the year, this model might result in higher churn rates. Customers who don’t see value during these periods of low usage might churn to save money. Depending if your company is B2B or B2C, you might see higher or lower usage levels during:

• Poor weather
• Tax season
• Holidays

These are just a few examples of seasonality, but there’s many other reasons. If you have a seasonal product, it’s worth considering if your pricing might turn away customers.

High cost for low usage customers

If your product is used sporadically, customers might not sign up if they don’t anticipate using your software enough. Even customers with consistent usage might look for alternatives if their cost for their usage level is too high. Customers that don’t anticipate using your product often might be looking for freemium or per-use options.

Subscription + Usage

With this model, your company can charge for a base subscription fee, and then for any additional usage. Depending on your business and customers, charging customers this way might make the most sense for your company.

Our favorite example of this pricing model is Cheddar. With Cheddar, once you start billing customers, you pay $99/month, and an additional $.30 per transaction.

Other industries have also adopted this billing model. For example, companies like Metromile are allowing customers who drive infrequently to save on their auto insurance. Customers just pay a base subscription, and additional fee for each mile driven.

Advantages of Using a Subscription + Usage Model

For a lot of companies, charging a subscription in addition to usage, might help balance out some disadvantages of other SaaS usage-based pricing models. You might also have other costs that don’t necessarily scale with usage. Like the cost of maintaining your product. By adding this additional subscription fee, your company can cover some of these costs. Some of the advantages provided might be:

Your platform costs you

SaaS platforms cost money to create.There are also ongoing development costs for maintaining and improving your product. By charging a base subscription, you are able to help cover these costs to your company.

Scale Your Pricing Easier

Customers who use your product more are getting more value from your product. By charging for usage on top of a subscription, your pricing can scale better across more customer segments. 

Decrease your Months To Recover

For a lot of SaaS companies, a large portion of expenses comes from customer acquisition. Because of this, you likely focus on your months to recover. You can charge this base subscription fee in order to help your company reduce months to recover.

Your platform by itself may provide value in addition to what customers use

Finally, your platform might actually do a lot of different things that provide value to your customers. For example, In addition to billing, Cheddar also offers card retries, metric reporting, and customer communications. It might be difficult to bill customers for every way that your company actually provides value. If your company offers value in a lot of different ways, it might be simpler to tack on a subscription. This makes your pricing simpler than scaling your price using a variety of value metrics.

Value metric pricing

Above we mention that you may not charge for all features customers are using that provide value. However, by tracking usage, you can determine which features are most used and most scalable in order to charge accordingly.

Considerations of a Subscription + Usage model

Although a Subscription + Usage pricing model addresses some of the possible disadvantages of a linear pricing model, it doesn’t quite solve all of them. It may actually cause some other issues. Some things to take into consideration are:

Unappealing to small customers

Depending on your target customer, the cost of a base subscription could be a turn off to small customers. Although in the short run, small customers might cost your more, they might be your best long term customers. While this is dependent on your business, it’s worth considering whether a flat rate might turn away smaller customers.

Linear Pricing

Linear pricing is the most granular that your company can get with pricing. Contrary to what some people may think, it’s actually one of the most simple usage-based pricing models. With this pricing model, the cost to the consumer is purely consumption based. This means customers only pay when they use your product. This model can sometimes be referred to as pay-as-you-go pricing, user-based pricing, and consumption-based pricing.

Once you decide what activity to bill for, you just have to track how much a customer uses. Depending on your company, you might charge customers based on the number of:

• Users
• API calls
• Text messages sent
• Etc.

While there’s many value metrics you can track and bill for, you have to decide which make the most sense.

There’s a lot of examples of a linear pricing model. Companies like Asana bill per-seat, while companies like Twillio also have a variety of per-use options. Lets look at Slack’s pricing page as an example:

Although Slack also uses tiers, Slack’s pricing scales per user. Each additional user will cost a customer a set fee. The more users, the higher the cost.

Advantages of Linear Pricing

There are many factors that could make a linear pricing model the best fit. Although this pricing model isn’t for every company, there can be some advantages of linear pricing if it makes sense to your company. Some of these advantages are:

Ability to operate profitably

When a company’s costs scale linearly with usage, a linear pricing model might make sense. For some SaaS companies, more usage means more costs. When the revenue is a set percentage above costs, you can be sure your company is operating profitably.

Seasonality

Seasonality is also another possible reason to bill customers per-use. Customers don’t like to pay for something that they don’t use. If your company has little to no usage during parts of the year, you are providing less value. This might cause customers to cancel during certain times of the year, and they might not come back.

Inconsistent usage levels

Customers who use your product sporadically might also be more inclined to use your product. Without a subscription, your product is always available for use when the time comes.

Value that scales with usage

When the value provided by your company scales linearly with the “usage” level, a linear model might make sense. This is commonly seen in team communication, or project management software, where adding an additional user provides more value. Similarly, if usage decreases, and your customer is getting less value, they pay less. 

Considerations with Linear Pricing

While there are a lot of good reason to choose a linear pricing model, there’s also some things to consider to decide if it is the best model for your company.

Budgeting issues

One common argument against a linear pricing model is the issues that companies face with budgeting. With better metering tools, we can now price and budget better than ever before. While usage levels may be difficult to budget for at first, over time calculating costs and revenue based on usage becomes more predictable. Simple tools like Microsoft Excel make budgeting for usage easier than ever before.

Incentivising lower usage levels

If customers can’t correlate their usage directly to cost savings or revenue generation, they may use your product less. Customers who don’t see marginal value with each additional use may try to use your product as little as possible. They may also look for a way to workaround your product in order for them to cut usage costs.

Support costs

Customers that use your product or service very little may actually cost your company more than what they pay you. You might spend more time supporting lower paying customers than you earn on your high paying customers. This is especially true if your product is difficult or time consuming to set up. You might even be losing money on these low usage customers, particularly if you have no minimum contract period. If you don’t anticipate your smaller customers growing, this model might not cover costs well.

Wrap up

No matter which model you choose, generally, the more granular your pricing is, the simpler it is to understand. While there are many different usage-based models to choose from, it’s up to you to decide which model is the best fit for your company.

Once you determine a price and pricing model, its important that your pricing doesn’t remain static. Companies are constantly testing ad copy, website copy, and signup flow. It only makes sense to test your pricing as well. If you feel pigeonholed into a certain pricing model, or find yourself building complex pricing, you might be limited by your billing software.

If you need help setting your initial price or iterating your price, check our our Pricing Engagement. In the engagement, Cheddar will help put your pricing on the right track, and create a repeatable process to iterate pricing regularly

About Cheddar

Billing built for developers. Cheddar is a usage-based billing platform that helps you track customer activity, iterate your pricing, and optimize your revenue so you can focus on building awesome products, not billing for them. Made with <3 from the Midwest.

The post SaaS Usage-based Pricing Model Overview appeared first on GetCheddar.

Founders and investors alike benefit from using a value-based pricing strategy because it captures more value created by your product, leading to higher profit margins.

Let’s dive into what this strategy is and how to make the most of it when pricing your SaaS product.

What Is Value-based Pricing?

Value-based pricing is pricing your product as a certain percentage of the value created by your product or features. In theory, it represents the highest possible price customers will pay for your product.

Before starting Cheddar, our team worked with over 20+ startups to develop and launch their products. Throughout our experience, we’ve learned that you can generally charge between 10%-50% of the aggregate value your product creates.

The hardest part of this pricing strategy, however, is quantifying that value and understanding its relationship with your product.

How Much Value Does Your Product Create?

Calculating a value-based price relies on knowing how much value your product or service creates for your customers. While there’s no universal formula, it theoretically involves measuring an increase in your customers’ revenue or decrease in their expenses. A good framework for a value-based pricing formula is as follows:

Your product could increase revenue by increasing the number of total paying customers, average revenue per customer, or customer retention. Alternatively, your product could decrease expenses by saving customers time or money. It’s possible your product does some combination of these activities. Here are are a few examples:

• Lead generation products can help your company save time on prospecting while increasing your number of paying customers.
• Customer service and support platforms can increase your customer retention rate by helping you form better relationships with your customers.
• Infrastructure APIs can help you save time and money over building something in-house.
• Product analytics tools can help you determine which customers are most engaged in your product. These customers might be open to an upsell, which would increase ARPU (Average Revenue Per User).

Whatever your product does, you’ll want to quantify how much value it creates through its impact on one of your customer’s KPI’s or other metrics. Some of these metrics might be:

• Your customer’s expansion revenue
• The number of qualified leads you help generate
• Hours of a business development representative’s time
• Free to paid conversion rate

The more granular you are, the better your chances are at finding commonalities between customers of various sizes and segments. You’ll also be more likely to pinpoint the value metrics and features to structure your pricing around.

To begin uncovering these dynamics, you should estimate your product’s value for a small, medium, and large customer. As you work through your estimates, you’ll force yourself to better understand what your product is worth to various customers and how much those customers should pay you.

Deciding On A Value Metric

A value metric is a measurable component of your software which correlates with the value your customers gain from your product. Pinpointing a good value metric is a great pillar for pricing that scales with your customers. The closer your value metric aligns with your customers’ value, the better you’ll be able to serve different sized customers. Additionally, you’ll be able to minimize churn, increase revenue, and decrease any friction to sign up.

Value metrics vary widely depending on the type of product. Some well-known value metrics are:

• Seats (project-management software)
• Emails sent (email management software)
• Gigabytes of data (cloud storage).

You can also have and use more than one value metric to structure your pricing around. Here are a few other examples of value metrics for a range of software companies.

Experimentation can help you find your value metric(s). Using a usage-native billing system like Cheddar, you can track a range of potential value metrics and quickly iterate pricing around them.

You can also sign up for our free Pricing Bootcamp to help you pinpoint your product’s value metric(s). During the email series, we’ll walk you through the process of surveying customers, brainstorming value metrics, and determining the value metrics that best fit your business. You’ll also receive templates, best practices, and tips to perform pricing calculations and iterations. 

Feature-based Pricing

Not all software lends itself to pricing through metering its value metrics.

Sometimes, feature-based pricing—controlling the availability of certain features—functions best when software usage doesn’t correlate linearly with value.

For example, many SaaS products have “advanced analytics” or “premium support” features. Rather than metering usage, many companies opt to limit the availability of such features to specific pricing plans.

Feature-based pricing is also useful when the value a particular feature provides varies significantly across customer segments.

For example, an “advanced reporting” feature in an email marketing software might not be that valuable to a small business such as a coffee shop. For a quickly growing software business, however, it might be incredibly useful. In this instance, the best pricing approach might be to have a few plans with different features while still implementing a value metric. This is similar to what Mailchimp does with its pricing.

If you anticipate implementing feature-based pricing, or have some sort of usage based pricing model, a usage-based billing system like Cheddar will help you quickly iterate your pricing.

How Much Value Can You Capture?

After you get a better idea of how your product creates value for various customers, you’ll then have to decide on how much value you can capture.

The amount you can charge customers depends on how well your product is tied to the value received by your customer. Perception of value is everything. The better you’re able to connect the relationship through key performance indicators (KPIs), the higher price point you’ll be able to charge relative to the value created.

In general, companies with products that show value quickly through an impact on revenue or other KPIs can charge a higher percentage of the value created. Companies with less tangible value, or products that don’t show value quickly, won’t be able to charge customers as much.

When deciding on a monthly price, you’ll also have to normalize aggregate value over your customer’s lifespan. If you are unsure of your average customer lifespan, 24 months is pretty typical for a SaaS company. For example, suppose you save your customers $2,400 up front, and decrease expenses by $100/mo. Your normalized monthly value is $200 ($2400/24mo + $100/mo).

B2C Value-based Pricing

While the value-based pricing method isn’t unheard of in B2C, it’s far less common than B2B.

Generally, B2C purchases are more emotional and based less on the return on investment (ROI). For example, even some of the B2C products which could likely price based on value due to their time-saving nature often position their pricing emotionally. Some examples of this are companies such as Dashlane (password manager) and Grammarly (writing enhancement platform).

Consequently, competitors, customer surveys, and cost-plus strategies influence B2C pricing the most.

Value-based Pricing Doesn’t Exist On Its Own

Value-based pricing is certainly one of the most popular SaaS pricing strategies. That doesn’t mean, however, that setting a price for a customer based only on value is the only pricing method you should consider.

Your results will likely be somewhat arbitrary and high compared to your product’s actual value if you only consider a value-based approach. That’s expected due to your inherent biases of the value of your product.

To counter your biases, and determine what pricing works best for your company we suggest you looking at:

• The price of similar products (competitive pricing)
• Whether your price covers your costs (cost-plus pricing)
• Customers’ willingness to pay (survey-based pricing)

Only by using a variety of pricing strategies will you be able to construct a well-balanced and scalable pricing model.

If you’re ready to make pricing a competitive advantage, sign up for our free Pricing Bootcamp. Included is a step-by-step guide to combining pricing strategies into a framework for regularly improving pricing.

About Cheddar

Billing built for developers. Cheddar is a usage-based billing platform that helps you track customer activity, iterate your pricing, and optimize your revenue so you can focus on building awesome products, not billing for them. Made with <3 from the Midwest. 

The post Value-based Pricing: A Go-to SaaS Pricing Strategy appeared first on GetCheddar.

Critics argue that using a cost-plus pricing strategy “leaves money on the table” because software typically sells with higher value-based pricing, producing a healthy 60-80% gross margin. Additionally, cost-plus pricing doesn’t require that you talk to any customers, which is generally frowned upon in any business.

Yet, even in the software industry, if your unit cost of doing business is higher than customers’ perceived value, you won’t be doing business for long. Hence, it’s important to understand the dynamics of cost-plus pricing in SaaS.

What is Cost-plus Pricing?

By definition, cost-plus pricing means you calculate your business’s costs and add a desired markup percentage to get to your product’s selling price. It’s essential to any pricing strategy because your costs dictate the lowest possible price you can charge and still operate profitably.

When people think about a cost-plus pricing method they tend to only think about their cost of goods sold (CoGS). Things like cloud infrastructure, customer support, software engineering, and other product costs are typical SaaS CoGS. Having a founding team that has worked with 20+ SaaS startups, we’ve learned that on average, CoGS typically accounts for around 30% of revenue. If your business requires physical products, hardware, or custom development, your CoGS will likely be higher.

Calculating cost-plus pricing using only CoGS, however, provides an inaccurate benchmark, as you would ignore sales and marketing costs. Moreover, hidden among these operating expenses is one of the most important SaaS metrics for many businesses: your customer acquisition cost (CAC).

Calculating Customer Acquisition Cost (And Other Important Cost-Plus Metrics)

Your customer acquisition cost is the average amount of money you have to spend to gain a new paying customer. It’s one of the most critical SaaS metrics because it’s usually higher than CoGS per unit and can have a big impact on your cash flow.

To calculate CAC:

1. Determine your target months to recover, the period of time that you’d like to recoup your CAC.
2. Sum your total sales and marketing expenses during that period, including your staff (marketing and sales team), advertising expenses, and overhead.
3. Divide that number by the number of customers you acquired during that time period.

Voilà, you have your cost of customer acquisition. When combined with your average customer lifetime value (LTV: CAC), you can get a good idea of the health of your business. The higher the ratio, the quicker you can grow and more profitable you can become. Typically, a healthy Saas company has a LTV:CAC ratio of 3:1.

However, you need to make your CAC and CoGS the most relevant in the context of your pricing. This can be done by normalizing them on a per-customer per-period basis using your target months to recover. Normalization will help you understand how much money you should allocate to each billing cycle. 

For example, let’s say you sell your product on a monthly basis and you’ve determined the following:

• CAC: $324
• CoGS per customer: $144
• Target months to recover: 12 months

You’d need to allocate:

• $27 ($324/12 months) of CAC  
• $12 ($144/12 months) of CoGS

to your cost-plus pricing each month to account for what you’re spending to acquire and provide services to that customer.

How Acquisition Strategy Affects Cost-Plus Pricing

How you choose to sell your product dramatically influences your customer acquisition costs and as a result, your pricing decisions.

We’ve talked about how your acquisition strategy influences your SaaS pricing strategy before, but it’s worth diving into again. Simply put, selling via personalized, relationship sales model will lead to a relatively higher CAC and justify a higher price. Contrarily, selling via a scalable, self-service model will lead to a relatively low CAC and justify a lower price. Neither approach guarantees a healthier LTV: CAC ratio, however.

Relationship Sales as a customer acquisition strategy:

Relationship sales involve focusing more resources on your sales and lead-generation team. If you use a relationship sales approach to acquiring customers, you should consider the time and money spent on:

• Researching leads
• Making calls
• Building relationships with potential customers
• Giving demos
• Traveling to meetings

The total costs of all of these engagements can easily cost upwards of $2,000-$3,000 per potential customer.

With this highly personalized approach, companies acquiring customers through relationship sales often charge at least $1,000-$1,500 per month. Depending on the product’s churn rate, conversion rates, and customer lifetime value, some companies can get away with charging less.

While relationship sales tend to lead to a higher CAC, they also let your charge much more for your product.

Self-service as a customer acquisition strategy:

Self-service or self-signup, as a SaaS customer acquisition strategy, is often seen in the same industries as relationship sales. The price of their software, however, is usually much lower because of their lower relative customer acquisition cost.

Self-service SaaS involves focusing more resources on your marketing team, content, and advertising. If you use a self-service approach to acquiring customers, you should consider the marketing and labor costs associated with:

• Digital advertising
• Creating marketing assets such as ebooks, blogs, videos, and podcasts
• Supporting customers on free trial or freemium accounts
• Conducting webinars, attending events, traveling to speak

With this content and advertising-driven approach, some SaaS companies could charge as low as $5 or $10 per month. For this to work, they expect to acquire relatively more customers—“flies” or “mice”—through their marketing efforts. Similarly, if they plan to acquire relatively fewer customers, they’ll likely need to charge more, starting at $25-$100 per month.

While self-signup companies benefit from a relatively low CAC, they also tend to charge less than their relationship sales counterparts.

Cost-plus Pricing Becomes Vital As You Grow

While helpful to understand, cost-plus pricing won’t necessarily represent how you’ll price your product. Nor does it constitute a holistic SaaS pricing strategy. You still need to consider a customer’s willingness to pay, your value to a customer, as well as competitors’ pricing.

However, cost-plus pricing does help you understand your business’s true costs so you can operate profitably in the future. It will also be helpful as your customer acquisition strategy changes and grows.

A new product or service has an advantage in that they can price based on value—and they should to maximize their revenue. Unfortunately, that’s a short-term pricing strategy. If you have high profit margins, you’ll likely see competitors enter the market. This limits what you can charge unless you maintain a strong product differentiation strategy, healthy level of product loyalty, and high customer value.

Curious to learn more about cost-plus, value-based, competitive, and survey-based SaaS pricing strategies? Sign up for our Pricing Bootcamp. Over the free email course, you’ll learn how these strategies work together, receive templates, example spreadsheets, and additional information that will walk you through transforming pricing into a competitive advantage.

About Cheddar

Billing built for developers. Cheddar is a usage-based billing platform that helps you track customer activity, iterate your pricing, and optimize your revenue so you can focus on building awesome products, not billing for them. Made with from the Midwest.

The post Why a Cost Plus Pricing Strategy is Still Important in SaaS appeared first on GetCheddar.

Payment Processing: the Act of Moving Money

There are a lot of payment processors on the market. At their core, these companies ensure the process of moving money from a customer to you goes smoothly.

To do this, payment processors verify account information, make sure no one commits fraud, and in general, relay information from the acquiring bank (who receives money) and the issuing bank (who sends money).

Payment processors typically charge a percentage and a per-transaction fee. Due to the number of payment processors, the industry’s rates have commoditized. The standard payment processing rate for card not present (online) transactions is 2.9% plus $0.30 per transaction. 

Payment processors charge a percentage of revenue because their business is inherently risky.

As the amount of money you’re moving from one bank account to another increases, so does the risk associated with the transfer, mainly due to payment fraud. If you move $100, you’re dealing with $100 worth of risk, but if you move $1000, you undertake $1000 worth of risk, ad infinitum.

Billing: Knowing When and How Much Money to Move

There are relatively fewer billing systems on the market than payment processors. These companies’ core service is providing an interface and logic to help you tell your customers that they owe you money.

In addition to maintaining the logic around calculating how much to charge and when, most online billing systems also provide services like:

• Invoicing: creating a document that says which products or services to charge for
• Dunning: telling your payment processor to try again if a card fails
• Email communications: sending invoices to customers
• Managing subscription metrics: tracking customer lifetime value (LTV), conversion rates from free accounts to paid accounts, and churn rate
• Managing customer plans: handling upgrades, downgrades, and cancellations
• Switching payment processors: letting you switch payment processors if you negotiate or find a lower rate

A lot of billing systems on the market charge a percentage of revenue for these services—perhaps due to their close association to payment processors—but Cheddar fundamentally believes in the opposite.

Cheddar doesn’t charge a percentage of revenue because there is no inherent risk associated with billing.

While there is “risk” that a customer doesn’t pay you, that risk is held by your company, not by your billing system. 

Paying a percentage of revenue just to use your billing system is like paying a percentage of revenue to use your customer relationship management (CRM) software. There is no risk. We believe it makes the most sense to charge a subscription fee to access the platform, a per-use charge for each invoice generated, or some combination of the two.

Have more questions about billing or payment processing for SaaS companies? We’re happy to help—tweet at us!

[Click here for a full infographic on the difference between billing and payment processing]

About Cheddar

Billing built for developers. Cheddar is a usage-based billing platform that helps you track customer activity, iterate your pricing, and optimize your revenue so you can focus on building awesome products, not billing for them. Made with from the Midwest.

The post How Payment Processing and Billing Are Different appeared first on GetCheddar.

While useful, this approach isn’t sufficient enough to create a long-term SaaS pricing strategy. For that, you’ll have to complete a competitive pricing analysis.

What is Competitive Pricing?

Competitive pricing is pricing your product or service relative to competitors in the market. Competitive pricing analysis is a structured approach to knowing the price of your direct and indirect competition. This can help you better charge customers relative to the Total Cost of Ownership.

The Total Cost of Ownership refers to the costs linked with enacting any solution. These costs are a combination of:

• Explicit costs (ex. dollars)
• Implicit costs (ex. time and resources)

Your potential customers are always comparing prices and weighing the Total Cost of Ownership as they consider your competition.

Direct Competition vs. Indirect Competition

Businesses battle with two types of competition: direct and indirect.

Direct competitors are products or services that compete for the same market share as you. Consumers view these as basically the same solution. Indirect competitors are products or services that solve the same or similar problem as your product, but in a different way.

As an example, let’s say you’re going to lunch and would prefer Mexican food. Two local Mexican restaurants nearby are direct competitors of each other. Consumers in the area consider their food basically the same. You may, however, decide to try out the new Thai restaurant on the corner instead. The Mexican restaurants and Thai restaurant would be considered indirect competitors. Your general problem, hunger, could be solved by any of the three restaurants.

The difference may seem gray at first. Defining your industry or the problem you solve can provide clarity between direct and indirect competitors, especially in SaaS.

Indirect Competition as a Direct Competitor

It’s important to consider groups of products from your indirect competition. These groupings can quickly become your fiercest competitors.

Let’s look at a price comparison for a SaaS example within an industry: marketing automation software.

HubSpot, Marketo, Pardot, and Act-On are direct competitors in the marketing automation software market. The four platforms offer a suite of marketing automation features, such as:

• Customer relationship management (CRM)
• Landing page creation
• Email management
• Segmentation
• Website analytics
• SEO auditing
• Content marketing
• Social media marketing

These four full-stack marketing automation products also have countless products competing with them as indirect competition. For each feature in the full-stack solutions, there likely exists several products that could replace it. When combined, several of these products grouped together now offer a viable replacement for the full-stack alternative.

Indirect marketing automation competition as a direct competitor

Source: LeadFeeder

Finding the Total Cost of Ownership for Direct and Indirect Competition

It’s tempting to compare direct competitor pricing to the sum of the prices of a group of indirect competition. These results won’t properly reflect the actual Total Cost of Ownership.

It seems like potential customers would quickly jump to a custom stack instead of paying 4x-8x more for the full stack.

Source: LeadFeeder

Setting up a custom marketing automation stack, however, creates a large time burden. Companies might have to spend hours or days:

• Learning how to use new software
• Making sure tools communicate with each other
• Switching between tools
• Configuring settings
• Contacting support
• Generally tailoring the stack to their particular needs

Looking at these costs, the full-stack solutions’ seemingly steep costs might start to make more sense.

Scalable Pricing: an Important Factor When Looking at Competitors

With software, especially in B2B, dynamic pricing is becoming more and more the norm.

Your competitors likely have scalable pricing, where the customer pays relative to the value they receive. As you analyze your direct competitors’ pricing and groups of indirect competition, it’s important to consider:

1. How their pricing scales
2. How effective their price scaling is

Pricing that scales more closely with customer value will help minimize churn and allows companies to capture more customer segments.

Ideally, you can look at your competitors’ pricing through a value metric. A value metric is the variable which most closely aligns with the value the customer receives. However, value metrics vary by industry and software solutions. You might have to launch your product and look at real time usage data to pinpoint your value metric.

For an initial competitive analysis, the number of product users in a company can work as a suitable proxy.

Create a spreadsheet, write down several direct competitors and groups of indirect competition, and note each’s pricing model. It might also be helpful to include additional notes such as points of differentiation, target market, and sales methodology.

For each direct competitor or group of indirect competition, write down the cost of their product for a:

• Startup (1-5 users)
• Scaleup (10-25 users)
• Enterprise (100+ users)

As you accumulate competitive pricing data for each competitor or grouping of indirect competitors, calculate:

• Average upfront costs
• Average monthly costs
• Average monthly cost per user

Then, take those averages to arrive at your product’s competitive landscape.

Sign up for our Pricing Bootcamp to access a completed example of a competitive pricing analysis

Competitive Pricing Analysis with Few Competitors

If you’re going into business, there’s likely a problem you want to solve. If you think you have few competitors, ask yourself: how are people currently solving this problem? Think of that as an indirect competitor and complete the above analysis.

If you are a new technology or innovative new business and have few, if any, competitors, there is another way.

In this case, your best route for competitive pricing analysis is to look within your industry. Take a look at the products your potential customers are already purchasing. Analyze what your potential customers pay for those products. This can give you a decent idea of their willingness to pay and business margins.

You’ll also want to put more weight on surveying potential customers and cost analysis to establish your initial pricing model.

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A competitive pricing strategy can be helpful, but it shouldn’t be the only input for your SaaS software pricing strategy. A complete strategy includes looking at your costs, surveying customers, analyzing product value, and keeping track of product usage.

If you’re ready to apply your insights to your startup or iterate your pricing, sign up for our Pricing Bootcamp. Over the free email course, you’ll receive templates, example spreadsheets, and other pricing information. We will also walk you through a competitive analysis and other pricing strategies step-by-step.

About Cheddar

Billing built for developers. Cheddar is a usage-based billing platform that helps you track customer activity, iterate your pricing, and optimize your revenue so you can focus on building awesome products, not billing for them. Made with from the Midwest.

The post Competitive Pricing Analysis: A Cornerstone of SaaS Pricing appeared first on GetCheddar.

Treating pricing with an iterative mindset can impact your startup’s success as much as applying lean principles to product development. Pricing studies show that iterative pricing can improve your lifetime value (LTV) to customer acquisition cost (CAC) ratio from as much as 3:1 to 11:1 and power you through slow periods of growth.

The three most important factors to consider when updating your software’s pricing are:

• Your product’s usage data
• Your costs
• The value of your product to customers

1) Usage: How Customers Use Your Product

When pricing SaaS software, knowing how your customers actually use your software is critical to understanding your different customer segments. You can also see if you’re successfully catering your SaaS pricing model to each segment.

To best leverage usage data in your next pricing iteration, you need to answer two important questions:

1. Which features are my customers using?
2. How much are my customers using my features?

The first question will help you bundle your software into better plans based on available features within your software. The second question will help you set a better price based on the number of times customers use metered components of your software.

Example – How much are my customers using my features?

MailChimp, one of the most successful bootstrapped companies, attributes a lot of its success to its relentless pricing experiments.

In a blog post, MailChimp CEO, Ben Chestnut, stated the company religiously tracked profitability as it relates to order and usage volume. Like a lot of other companies that have adopted usage-based billing, MailChimp centered its pricing around one value metric. MailChimp’s value metric focuses on the number of subscribers on a customer’s email list.

On one of its earlier pricing pages, you can see MailChimp had larger pricing gaps as its customers grew their subscriber bases. MailChimp charged its customers:

• $15/month for up to 1,000 subscribers
• $30/month for up to 2,500 subscribers
• $50/month for up to 5,000 subscribers
• Etc. until its customer hit 50,000 subscribers 

Before pricing change – additional 500 subscribers/$5 increments until 1,0001 subscribers

Through its pricing experiments, MailChimp likely realized that the inconsistent usage gaps didn’t make sense.  The gaps were too wide, and the company neglected customers who were on the edges of usage plans. Put another way, MailChimp forced customers in the bottom end of subscriber tiers to pay too much for its software.

Soon enough, MailChimp changed its tiers. To continue with 500 subscribers at $5 increment until 50,000 subscribers and beyond. While it might seem like a subtle change, these pricing iterations based upon customer usage levels have helped propel MailChimp to generate more than $400 million a year in revenue.

After pricing change – additional 500 subscribers at $5 increments indefinitely

2) Costs (to sell and deliver)

When determining how to price SaaS software, understanding costs and how they change is critically important. Knowing the lowest possible price you can charge and still operate profitably is essential for a successful SaaS business. 

When people start to think of their costs, they often turn to their cost of goods sold, or COGS. In SaaS, however, the largest chunk of your costs is determined by how you decide to sell your product. COGS for software—server space, hosting, and 3rd party services—are relatively negligible. Consequently, your customer acquisition cost (CAC) becomes one of your most important cost metrics. Your CAC is made up of expenses to sell your software by acquiring more customers. This might include researching prospects, creating marketing content, offering a free trial or freemium account to customers, and spending money on advertising. As you evolve as a company, these costs will too.

Example – adapting pricing to an evolving CAC

Let’s run through a scenario with a fictional product, Swiss. Starting out, you might want to sell Swiss by targeting individuals through online marketing. By casting a wide net, you might be able to operate profitably by selling your product for as low as $9/month.  

At some point you’ll likely see profitability slow down. Swiss can’t reach all potential customers solely through online marketing. To sell to those that require a higher level of trust, you’ll have to do more higher-touch sales. This might include individual walkthroughs, product evangelism, or webinars. You will need to increase prices to compensate for the additional overhead associated with these sales tactics. In addition to this, you will also need to support your growing number of customers. You might have to sell your product for $99/month or more in order to maintain profitability.

Eventually, you’ll want to move up to enterprise sales and sell a product company-wide. Enterprise sales are much more high-touch than selling to startups or medium-sized businesses. The process of making a sale is much more involved. Enterprise sales may require phone calls, in-person meetings, plane rides, and longer sales cycles. Your enterprise CAC might now require you charge upwards of $5,000 per month to maintain profitability.

As you evolve how you sell your product, be sure to always consider how your customer acquisition cost will change.

3) Value of Your Product (to customers)

Understanding the value of your product to customers is important for knowing the upper limit of where you can price your SaaS software.

As a good rule of thumb, companies can charge a between 10% to 50% of the cost savings or additional value created by your product. The clearer the return on investment (ROI) from similar use cases, the more you can charge. This allows you to push the fraction of the cost savings or value created in your favor.

As you increase the price of your SaaS software, the more your potential customer will look for other options. They may want to build it themselves or turn to a competitor instead of buying it from you. As a result, it’s important to always consider your software’s price in the context of your competitors. Its also important to publish case studies from your past customer to justify a higher price.

Long term, the value of your product for a specific customer segment should be correlated with a value metric. A value metric is a measurable component of your software which closely aligns with the value your customers receive. The more your pricing plans revolve around this value metric, the more attractive your pricing will be. Customers of all sizes will be more drawn to use your product. Additionally, a well-tuned pricing plan focused on a value metric allows your pricing to scale with customers’ growth. As a result, you’re left with a higher lifetime value and lower churn.

It’s important to note a company’s pricing model likely shouldn’t only be based on a single value metric. The exception here is for software that is extremely specific. Depending on the business model, many of the following companies make use of a price tiering strategy. This strategy sets tiers of features to divide up different customer segments or buyer personas. Within each tier, product pricing scales with the value metric.

Common Value Metrics by Software Type

Example – Adjusting for a value metric

Let’s consider Gouda, a fictitious customer relationship management (CRM) software.  

Gouda goes to market with a CRM system they believe can save the average 20-50 person size company a clear $1,000 per month. After thinking about its cost savings and the additional value added by its software—being able to engage and form relationships with a long list of contacts—Gouda initially prices its SaaS product at $50 per 200 contacts per month.

Over the next year, Gouda realizes that most of its customers are startups. They also notice a lot of them churn once they reach more than 1,000 contacts ($250/month). They find that the average Gouda account had 3 or 4 users at the time of leaving Gouda.

After asking one ex-customer why they decided to pursue another CRM software, they reported that Gouda’s software was great, it just became too costly. The ex-customer had lists of 2,000 contacts they wanted to filter, but they didn’t see the value in immediately paying another $500 a month. After all, their sales team can only engage a finite number of prospects at once

Gouda updates its pricing. Instead of pricing by the number of contacts, Gouda priced by the number of users that could simultaneously use its software ($75/user/month) to engage prospects. After making the change, Gouda saw its churn rate drop. Customers continued staying with them from startup to scale up and beyond. As customers grew, hiring more people to use Gouda’s software, so did Gouda’s revenue.

A cheesy example? You bet. But the lesson is clear: be careful what you choose your value metric to be, and be open to changing it.

Not every SaaS company that systematically experiments with pricing becomes a successful, sustainable company. On top of pricing, startups need great products, better teams, and the right timing.

However, treating your pricing with as much criticism as your product and paying attention to your product’s usage, costs, and value, and will help your company get closer to success as your industry evolves.

If you’re ready to create the next iteration of your pricing model, sign up for our Pricing Bootcamp.  Over the free email course, you’ll receive templates, example spreadsheets, and other information that will walk you through each of these inputs and other pricing strategies step-by-step.

About Cheddar
Billing built for developers. Cheddar is a usage-based billing platform that helps you track customer activity, iterate your pricing, and optimize your revenue so you can focus on building awesome products, not billing for them. Made with from the Midwest.

The post How to Price SaaS Software: 3 Things That Influence Pricing Over Time appeared first on GetCheddar.