Software pricing power

Extracted Attributes

• Definition

  The ability of a company to set and maintain prices for software products and services.

• Current SaaS Trend

  Diminishing pricing power due to a lack of network effects.

• Influencing Factors

  Pricing position, market segment, pricing competence, and competitive reaction strategy.

• Strategic Objectives

  Profit maximization, market share growth, defensive positioning, and market entry.

• Common Pricing Models

  Flat rate, per-user/seat-based, tiered, value-based, captive, and demand-based pricing.

Timeline

• McKinsey conducts the '2022 State of Software Pricing' survey of 184 software companies to capture major pricing trends. (Source: Web Search)

  2022-12-31

• The All-In Podcast (Episode 161) discusses the diminishing software pricing power in SaaS models following the Carta scandal. (Source: a7a96b3e-b0a7-41e7-a179-b42068a2117b)

  2024-01-12

Pricing strategy

A business can choose from a variety of pricing strategies when selling a product or service. To determine the most effective pricing strategy for a company, senior executives need to first identify the company's pricing position, pricing segment, pricing capability and their competitive pricing reaction strategy. Pricing strategies, tactics and roles vary from company to company, and also differ across countries, cultures, industries and over time, with the maturing of industries and markets and changes in wider economic conditions. Pricing strategies determine the price companies set for their products. The price can be set to maximize profitability for each unit sold or from the market overall. It can also be used to defend an existing market from new entrants, to increase market share within a market or to enter a new market. Pricing strategies can bring both competitive advantages and disadvantages to its firm and often dictate the success or failure of a business; thus, it is crucial to choose the right strategy.

Web Search Results

• Ultimate Guide to Software Pricing Models: Strategies for SaaS ...

  Charging a flat rate is a simple and common pricing strategy used by SaaS and software firms where every customer pays a set fee for access without considering how much they use the product’s features. For instance, a company may charge $100 monthly for using their software without additional options for extra modules or usage-based pricing. [...] Under this model, customers are charged based on the number of users who access the software. This model is particularly common among SaaS companies that cater to businesses focused on collaboration or team-based tools, making it ideal for companies that scale based on team size. For every additional team member added to the account, the cost increases, allowing the pricing to grow alongside the customer base. [...] If your product has unique or premium features, you can leverage that to justify higher price points. This is the case for many vertical SaaS tools whose production differentiation allows them to charge premium pricing tiers to their customers. Of course, this isn’t the case for all SaaS companies. But in the case that your offering is significantly more valuable than your competitors or solves a niche problem, you should adjust your pricing accordingly. Consider an internal analysis where you

• Software Pricing Models: Enterprise SaaS Pricing Models & Strategies

  Software pricing and packaging is an art form regardless of whether it’s delivered as a service or as physical on premise software. There is also a lot of science involved. This paper explores the most critical aspects of introducing and managing SaaS applications and presents independent software vendors (ISVs) with ideas on how to build, execute and manage effective software pricing and packaging strategies for cloud services and recurring revenue streams. Get the Whitepaper [...] A per-user or seat-based pricing model is a payment structure where the cost of a product or service is determined by the number of users or "seats" that will have access to it. The total cost increases as more seats are added. For example, Acme Inc. offers three pricing tiers: Tier 1: 1-50 licenses - $100 per license Tier 2: 51-100 licenses - $80 per license Tier 3: 101+ licenses - $60 per license ### Advantages: [...] Another monetization technique is pricing according to perceived value. The question is what pricing axis will incentivize buyers to move up a pricing tier. For example, your customer might want lots of users to be able to use your software product product. This means they'd be willing to upgrade to a new pricing tier if it provides access to more users. Others might be more incentivized to tier up if they get access to upgraded features.

• Software pricing: three key levers to create value

  ##### Key findings from our Software Pricing Survey of more than 100 senior executives from companies and private equity firms include the following: [...] pricing structures that help cater to diverse customer needs. [...] ## 3) Invest in dedicated resources and add rigor to governance processes

• Decoding Vertical SaaS Pricing Strategies: Maximizing Revenue ...

  ### 5. Captive Pricing Captive pricing involves setting a low entry price for the main product and higher prices for essential complementary services or features. In vertical SaaS, the core software could be priced attractively, while necessary add-ons, integrations, or premium features carry higher prices. This strategy can drive initial adoption while ensuring long-term profitability through additional purchases. [...] Demand-based pricing sets prices according to current demand levels within the specific industry. This strategy necessitates monitoring and responding to demand fluctuations and adjusting prices accordingly. For vertical SaaS, this means setting higher prices when demand is high, such as during peak business periods specific to the industry, and offering discounts during off-peak times. [...] Example: Salesforce, a leading cloud-based CRM solution initially targeted enterprise-level clients who were willing to pay a premium for cutting-edge technology. By charging high prices at launch, Salesforce was able to capture early adopters who valued innovation and were less price-sensitive. Salesforce then gradually lowered its prices to attract smaller businesses. This pricing model helps them expand their market share while maximizing early revenue from high-paying customers.

• Five strategies to strengthen software pricing models

  To understand what specific actions software companies can take to get the most out of pricing, we surveyed 184 software companies’ decision makers to learn how executives are thinking about their pricing strategy.2The 2022 State of Software Pricing survey was conducted in late 2022 to capture a holistic and up-to-date perspective on major pricing trends. We also looked at how outperforming software companies within this group have differentiated their pricing strategies. This analysis [...] Five strategies to strengthen software pricing models | McKinsey Skip to main content # The art of software pricing: Unleashing growth with data-driven insights | Article Print Save Software companies struggling with shrinking margins can unlock the power of pricing by considering five actions for profitability in a market focused on efficient growth. ### DOWNLOADS Article (11 pages) [...] ## Five actions to strengthen software companies’ pricing practices