Month: July 2021

Businesses across all industries have evolved significantly over the course of the 21st century. But the evolution of SaaS has moved at an even greater speed.

Case in point — SaaS pricing. In recent years, there’s been a growing trend where more and more companies are using dynamic pricing, which, simply put “means that your customers see prices that are relevant to market and channel conditions at any given point in time.”

Rather than offering fixed pricing that never changes, dynamic pricing fluctuates and is tailored to each unique situation, allowing you to maximize revenue, while at the same time delivering value to your customers. 

For this post, I’m going to explain why this SaaS pricing strategy can be so effective and unpack the full logic behind it. I’ll also point you to helpful resources so you can make it work for your company.

What the Research Says

As always, one of the best ways to gain perspective is to look at concrete data. At the end of the day, what’s the true impact of using dynamic pricing?

A recent piece of research made some very promising findings. 

“Studies have shown that 98% of SaaS businesses earned positive results from making core changes to their pricing policy,” explains Phil Alves, CEO of DevSquad. “With tough competition, industry saturation, and the rapid evolution of SaaS platforms, many are starting to reinvent their pricing models according to the needs of their clients or customers.”

It’s hard to argue with 98%, and this stat clearly proves that, when done correctly, implementing a flexible SaaS pricing model like this helps the vast majority of brands capitalize on leads and land more deals. 

Alves also notes that an integral part of making effective pricing changes is basing decisions on business intelligence and analytics. “Responsive pricing methods based on analytical reports are the most successful models in SaaS companies,” he adds. 

In other words, this isn’t something that should be done on a hunch. Rather, you should continuously be capturing robust data to see:

• What’s happening in the competitive landscape
• How things are unfolding
• What your customers are most responsive to
• What works and what doesn’t

In turn, you can make smarter decisions that allow you to choose the optimal price point for each customer, helping maximize your revenue, while at the same time providing a positive customer experience. 

Dynamic Pricing is Already Used By Many Top SaaS Brands 

At first glance, it may seem like this pricing strategy is only used by a handful of uber innovative, adventurous SaaS companies. But it’s more common than you may think. 

Subscription management expert Anne Egdal makes a great point in this quote.  

“Think about it. How often do you look for a SaaS program, and when you reach the ‘Enterprise’ or ‘Corporate’ tier, you see a “Contact Us’ call to action rather than price? These businesses are likely to be using dynamic pricing, tailoring what they charge depending on the size of the client and the services they need.”

HubSpot is a great example. If you browse through the pricing page for their sales software, you’ll see their Enterprise plan “starts at” $1,200 per month, and their CTA says “Talk to Sales.”

And it’s the same story with marketing automation software Marketo. In fact, the first three options on their pricing page prompt leads to contact sales, and the “Enterprise” plan prompts them to “Request Information.”

So, they’re not featuring any static pricing, and instead funnel leads to a sales rep that can discuss pricing on an individual level. And if big name, ultra successful SaaS companies like these are using this type of pricing strategy, there’s probably something to it. 

This Model Also Helps Account for SaaS Price Increases

There’s one other massively important benefit of dynamic pricing to mention. By design, it provides a seamless framework for raising your SaaS prices without creating a lot of unnecessary friction. 

According to financing lender Lighter Capital, most large-scale SaaS companies increase their prices 5-7% each year. And if you’re not increasing your prices somewhere in this ballpark, you’re essentially leaving money on the table. 

While you obviously don’t want to use deceptive techniques to deliberately shroud how much your products cost, using dynamic pricing in a similar way as HubSpot and Marketo, where you direct leads to a sales rep to discuss deals, is a highly effective way to continually bump up costs up without rubbing leads the wrong way. 

On top of that, you don’t run the risk of alienating your existing customer base. 

Further Reading

Earlier I mentioned a quote from subscription management expert Anne Egdal. If you’re interested in learning more about the nuts and bolts of dynamic pricing, I highly recommend reading this post by her. 

In it, she discusses:

• Different dynamic pricing models
• How to implement dynamic pricing into your SaaS business
• How to increase sales with it
• How to avoid any complications when making the transition

Final Thoughts

Dynamic pricing is an emerging trend in the SaaS world that a growing number of brands have chosen to adopt. Although it won’t necessarily make sense 100% of the time, it’s definitely a pricing strategy to consider, especially if you’re selling to enterprise level customers. 

Doing so allows you to routinely make pricing changes based on market conditions, competition, trends, and general inflation. And with a staggering 98% of SaaS brands seeing positive results from dynamic pricing, there’s a good chance it can have an impact on your company as well. 

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Churn. It’s a word that keeps many SaaS business owners up at night. 

Although inevitable and unavoidable, churn is something you want to constantly monitor and keep in check. Otherwise, things can get out of control in a hurry, and before you know it you’ve got a full-blown mass exodus on your hands. 

There are countless factors that impact churn rate, including SaaS product quality, features, UX, pricing, and the competitive landscape. But hands down, one of the biggest is contract length. 

In this post, I’ll share with you some compelling data I’ve found that shows the correlation between contract length and churn rate. Then, I’ll offer some practical advice on how to find the sweet spot for your product’s contract length so you can retain more customers and improve their overall experience. 

Average Churn Rate

Let’s start from the top. What exactly is the average churn rate for today’s SaaS companies?

According to 2019 research from ProfitWell, it’s 13.2%. There’s a ton of other data out there, with some stats finding the average churn rate to be much higher and others pinpointing it as being much lower. But 13% is about the average. 

Considering, however, that most experts say a “good” or “acceptable” churn rate is significantly lower than that at 7% or less, it shows that many SaaS companies could use some improvement in this area.

And a good place to start is with contract length. 

The Correlation Between Contract Length and Churn

One of the best studies I’ve found about how contract length impacts churn rate is this one from Finances Online. 

According to their findings, longer SaaS contracts equal lower churn, while shorter SaaS contracts equal higher churn. 

Those, for example, that are less than a year have an average churn rate of 16.7%.

Those that are between 1 year to 1.5 years have an average churn rate of 15%.

And those that are at 2.5 to 3 years have an average churn rate of only 8.5%. 

So, a quick look at this data and it’s easy to see that extending SaaS contract length helps reduce churn. The only caveat from this study is that month-to-month contracts actually have a slightly lower churn rate of 14% than 1 to 1.5 year contracts of 15%. 

But the difference is only marginal, and we can safely surmise that customers will hang around longer when they have longer contracts. After all, they can’t help but do so.

So, Should You Make Customer Contracts Super Long?

After absorbing this data, the logical conclusion would be to increase the lengths of customer contracts. But is that always the best approach?

Not always.

SaaS strategist Natalie Roy makes a great point about the potential pitfalls of doing so. 

“Let’s say you’ve locked a customer into a three-year contract. This is great, right? The likelihood of churn is statistically low, and you have ample time to recuperate customer acquisition costs and turn a healthy profit.

There’s a downside though. If you’re using a traditional pricing structure it means you won’t be able to increase the price of your product for three years.”

Considering that SaaS prices increase 5-7% annually, this can take a toll on your profitability in the long run. 

Besides that, you may lose out to competitors. If, for example, a customer doesn’t want to be tethered to a long-term contract and instead only wants a year max, they may go elsewhere if you only have a 3 year option. 

This is extremely important to keep in mind. While having a contract length of 2.5 years or longer has nearly half the churn rate of one that’s less than a year, there are some inherent drawbacks that could potentially hurt your overall revenue. 

Finding the Sweet Spot

Like many areas of business (and life in general), the optimal path is often in the middle of two extremes. When it comes to determining the ideal contract length, I suggest looking for the sweet spot — one that allows you to get your churn to the absolute minimum, but without diminishing your revenue or compromising the customer experience. 

But where exactly is the sweet spot?

That’ll vary from company to company, and there is no one-size-fits-all game plan. Usually finding it requires some trial and error where you experiment with different contract lengths to see what works best. 

Many SaaS brands start at year simply because that’s what a lot of other brands do. If this is where you’re currently at but you’re unhappy with your churn rate, I suggest lengthening it to see if it has any noticeable impact. 

Because the average churn rate for contract lengths of 1 year and 1.5 years are exactly the same at 15%, you’ll probably want to go ahead and make the shift to 2 years. If you’re happy with the results, you can just stick with that. 

Otherwise, if you think you could do better, you could extend the contract length further to 2.5 years or even 3. As you gather more data, you’ll be able to figure out what’s best for your brand. 

Keeping Your Churn Rate in Check

The churn rate for most SaaS companies is somewhere around 13%. 7%, however, is a more acceptable number, and the lower the better. 

There are numerous factors that contribute to churn, but contract length is one of the most obvious. Research indicates that extending a SaaS contract length from less than a year to 2.5 years or more can nearly slash your churn rate in half. 

Doing so, however, requires a careful, calculated approach where you test the waters rather than jumping in head first. But with the right experimentation, you can find your contract length sweet spot for minimal churn and maximum revenue. 

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Offering a free trial has basically become the norm for SaaS companies these days. In fact, roughly three-quarters use this tactic to generate leads, with the hopes of ultimately turning many into paying customers. 

And for the most part, it’s really effective. More than 50% of new business comes from free trials for 16% of SaaS companies. But there’s one key question you have to ask yourself when using this strategy. 

Should you require free SaaS users to provide their credit card info?

Let’s Look at the Data

As you probably know by now, I don’t like speculating on whether something works or not, or simply going on a hunch. I prefer to crunch the numbers and analyze cold, hard, objective data.

According to one of the top studies conducted on this topic from Invesp, it’s pretty clear. You’re way better off not requiring credit card info from free SaaS users.

More specifically, they found, “SaaS companies that allow sign-ups without a credit card generate twice as many paying customers from their free trial.”

This stat shows us point blank that not asking for credit card info is the best choice and results in double the paying customers long-term. For the rest of this post, I’m going to fully unpack this data and figure out the precise logic behind it. 

Why Eliminating the Card Info Barrier is the Best Choice

It’s pretty simple. Having this barrier creates friction during the free trial sign up process. 

Put yourself in the shoes of your average lead for a second. 

They’ve found your SaaS product, have gone over the features and benefits, and think it may be the perfect fit for their business. They then see that you offer a free trial and are excited to test it out. 

They fill out their contact info and are chomping at the bit to take your product out for a spin. But then…wham…they’re hit with the dreaded credit card barrier. 

Just like that, their enthusiasm takes a nosedive, and their day just had an injection of friction added to it.

Some leads will still go through with it, begrudgingly pulling out their credit card. Many others, however, will simply back out and look to other competitors. While it’s by no means a dealbreaker for everyone, you can’t deny that requiring credit card info for a free trial is disruptive. 

I know I personally get turned off when I have to fork over my info. When given the choice between a no strings attached sign up and one requiring a credit card, I always prefer the former. And that seems to be the sentiment across the board with nearly all SaaS customers. 

At the end of the day, it’s just another hassle that adds an unnecessary complication to their day. 

The Trust Issue

There’s one other vital detail to point out, which involves trust (or the lack thereof). We’re living in an age where cyber crime has reached epic proportions. Just look at this graph of the monetary damage caused by cyber crime during the 21st century. 

It’s off the charts. 

Understandably, many people aren’t super comfortable with the idea of whipping out their credit card and forking over sensitive payment information. Even big name, well known SaaS companies like HubSpot and Salesforce run into issues stemming from trust.

So just imagine how problematic it can be for smaller SaaS businesses that don’t have a ton of brand equity. And remember, at this stage of the buying journey, your brand is still unproven in the eyes of many leads.

Once they actually use your product for a while and you have a chance to build rapport, they’ll warm up to you. But when they’re signing up for a free trial, you just don’t have that level of trust, which is another huge reason why credit card barriers are so problematic. 

What an Expert Has to Say About It

To wrap up, I’d like to share with you the opinion of one of the top voices on this subject matter. 

Lincoln Murphy is a customer-centric growth expert and founder of SaaS consulting firm Sixteen Ventures. He wrote a fascinating article about the great credit card info debate, and I think this quote summarizes everything perfectly. 

“Asking for a credit card up front (an “opt-out SaaS free trial”) does little to help conversions and this is backed up by the fact that I routinely see SaaS vendors with < 20% conversion rates that ask for a credit card up front,” explains Murphy. “The only thing I can guarantee with an opt-out SaaS free trial is that you’ll get less prospective customers into your free trial than if you didn’t require a credit card to start. 

Murphy admits that requiring credit card info might increase your overall conversion rate in the sense that a higher percentage of leads who provide it may eventually become customers. But you’ll get far less actual customers from the traffic you generate. 

The Bottom Line

To say that no SaaS companies should ever require credit card info from free users would be a misstatement. There are some cases when this is the better option — mainly for well established businesses with huge brand equity that are looking to increase their lead quality. 

But generally speaking, the data clearly shows that this is ill-advised for most SaaS companies. Not asking for credit card info helps you capitalize on a larger percentage of your traffic and generate twice as many paying customers. 

So it’s a no-brainer. 

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