Pricing experiments: How to price your SaaS product just right

As Forbes highlights in their article on B2B SaaS pricing mistakes, getting your pricing strategy right can be the difference between thriving and barely surviving.

In this guide, we'll dive into the world of pricing experiments. We’ll provide you with a data-driven framework to find the optimal price for your SaaS product.

You'll also learn:

• How to conduct different types of pricing experiments.
• The key metrics to track for evaluating your pricing strategy.
• Best practices for implementing pricing changes.
• How to leverage a billing platform to maximize the impact of your pricing experiments.

First, we’ll start by explaining what pricing experiments are and their special role in SaaS.

What is price testing?

Price testing is a process of experimenting with different prices for your SaaS product. The goal?Finding the optimal price that maximizes revenue and profitability.

It involves systematically adjusting prices and observing how customer behavior changes in response.

This approach allows you to pinpoint the price point that strikes the right balance — making sure your pricing is low enough to attract and retain customers but high enough to sustain profitability and business growth.

SaaS price testing explained through an example

Here's a simple example to illustrate price testing:

Imagine you offer a SaaS product that helps businesses manage their social media accounts. You start by setting a price based on your costs and a perceived value. However, you're unsure if this is the ideal price.

To test it, you run pricing experiments. You divide your customers into two groups:

• Group A: These customers are offered the original price.
• Group B: These customers are offered a discounted price.

You then track how many customers sign up for each group and how much revenue each group generates. By comparing the results, you can determine whether the discounted price attracts more customers and generates more revenue than the original price.

Remember: You can also do a price experiment with different models, such as freemium, tiered pricing, or usage-based pricing.

Key points to remember:

• Price testing is an iterative process that requires continuous monitoring and adjustment.
• It's important to segment your customers carefully to ensure the validity of your results.
  
• Consider factors such as your competitors' pricing and your target market. You should also factor in your product's value proposition when designing your experiments.

Importance of a price test for SaaS businesses

Finding the right price for your SaaS product is a critical step toward success. Pricing experiments provide a data-first approach to make your pricing strategy more effective. Here's why price tests are essential:

• Unlock revenue growth: Pricing experiments help you find the pricing sweet spot that maximizes revenue. By testing different price points and models, you can find the optimal strategy that resonates with your target audience and drives conversions.
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• Boost profitability: Fine-tuning your pricing through price testing can greatly impact your margins. Even small adjustments can lead to notable improvements in profitability over time.
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• Decode customer behavior: Pricing experiments provide key insights into how customers perceive the value of your solution. This knowledge allows you to tailor your offerings and messaging to better align with what they expect from you.
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• Gain a competitive edge: In the competitive SaaS industry, pricing can be a key differentiator. Price testing lets you find and implement competitive pricing strategies. Particularly, you can find the ones that attract your target customers while keeping profits high.
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• Keep customers hooked: Pricing plays a crucial role in customer satisfaction and retention. By conducting pricing experiments, you can identify pricing models that encourage long-term subscriptions and reduce churn.
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• Improve product development: Data from price tests can inform product changes. This data can reveal which features or bundles customers are willing to pay more for and can also guide your product roadmap and help you prioritize valuable additions.
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• Improve marketing efforts: Price testing can help you pick the most effective messaging and positioning for your product. It can help you see how users respond to various price points and the value you’re articulating. You can then tailor your campaigns to echo their needs.
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• Reduce sales friction: A well-defined pricing strategy, informed by pricing experiments, can facilitate the sales process. Clear and transparent pricing reduces confusion and objections. As a consequence, it makes closing deals easier for your sales team.
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• Adapt to market dynamics: Market conditions and customer preferences are constantly evolving. Price testing allows you to stay ahead of the curve. How? By regularly evaluating and tweaking your pricing strategy to keep that competitive edge.
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• Mitigate financial risks: By conducting price tests, you can reduce the risks of pricing decisions. Testing different options allows you to recognize potential pitfalls. Plus, you can avoid considerable revenue loss if you drop the ball with your pricing strategy.

Common types of pricing experiments for SaaS companies

Pricing experiments are vital for finding the optimal price that attracts users while maximizing revenue. Here are some of the most common types of pricing experiments used in SaaS:

1. A/B testing

You might recall the simple example we discussed earlier about offering different prices to two groups of customers. That was a classic example of A/B testing in action. It's one of the most direct yet effective pricing experiment methods.

In essence, A/B testing involves splitting your audience into two groups. There’s A (the control group) and B (the variant group). You present each group with a different pricing option and track their responses.

This strategy allows you to isolate the impact of the pricing change and determine which option performs better.

Here's a more detailed example of A/B testing in a SaaS context:

Imagine you have a project management SaaS tool with two pricing tiers. You’ve got Basic and Premium tiers. You hypothesize that introducing a third, "Pro" tier between the two might attract customers.

You believe these are customers who need more features than the Basic plan but aren't ready for the Premium package. To test this, you divide new website visitors into two groups:

• Group A: Sees the original pricing page with two tiers (Basic and Premium).
• Group B: Sees the new pricing page with three tiers (Basic, Pro, and Premium).

So far, it’s looking very similar to our first example, but there’s one extra step. You then track key metrics for each group, such as:

• Conversion rates for each plan
• Average revenue per user (ARPU)
• Customer lifetime value (CLTV)

Analyzing these metrics gives you vital insights. You can now determine whether adding the Pro tier positively impacts your overall revenue.

2. Multi-armed bandit testing

Multi-armed bandit testing takes A/B testing a step further. It does so by using an algorithm to dynamically adjust the allocation of traffic between various pricing options. Think of it as a "smart" A/B test that learns as it progresses.

The algorithm starts by randomly assigning traffic to different pricing variants. As it gathers data on each variant's performance, it allocates more traffic to the better-performing options. The key thing here is it does that automatically. You can optimize your pricing strategy in real-time

Here's how multi-armed bandit testing could work for a SaaS company:

Let's say you're experimenting with three different monthly pricing options for your email marketing software. The prices are $50, $75, and $100. The multi-armed bandit algorithm would initially distribute traffic evenly among these options.

As customers start signing up, the algorithm monitors conversion rates and revenue generated by each variant. If the $75 option outperforms the others, the algorithm will slowly increase the traffic going to that option. Conversely, it will reduce traffic to the less successful ones.

This dynamic approach allows you to quickly identify the optimal price point. The best part? You’re doing it without wasting valuable traffic on underperforming options.

3. Multivariate testing

Multivariate testing takes the complexity up a notch. This strategy allows you to test multiple pricing variables at the same time. This is particularly useful when you want to understand how different pricing elements interact with each other.

For instance, you might want to test different combinations of:

• Pricing tiers (e.g., Basic, Pro, Premium)
• Pricing models (e.g., flat-rate, usage-based)
• Promotional offers (e.g., discounts, free trials)

By testing these variables in various combinations, you can gain a deeper understanding of how they influence customer behavior and find the most effective pricing strategy.

Here's an example of multivariate testing in a SaaS setting:

Imagine you offer a video-editing software. This software has different pricing plans based on the number of users and storage capacity. You could use multivariate testing to experiment with different combinations of these variables, such as:

• Number of users: 1 user, 5 users, 10 users
• Storage capacity: 100GB, 500GB, 1TB
• Pricing model: Flat monthly fee, pay-as-you-go

With the results in hand, you can determine the combination of user count, storage capacity, and pricing model that maximizes your revenue and keeps customers coming back.

4. Conjoint analysis

Conjoint analysis involves presenting users with various hypothetical product profiles. Then, you ask them to rank or choose their preferred options. It’s an assertive technique for understanding customer preferences.

This method lets you quantify the relative importance users place on different features. It can also shed some light on how much they are willing to pay for specific feature combinations.

Here's how conjoint analysis can be applied to SaaS:

Suppose you're developing a new CRM software with features like contact management, email marketing, and sales automation. You could use conjoint analysis to present potential customers with different combinations of these features at various price points.

By analyzing their preferences, you can identify the optimal mix of features and pricing that maximizes customer appeal and willingness to pay.

5. Dynamic pricing

Dynamic pricing involves adjusting your SaaS product's price in real time. This adjustment is done based on factors such as demand, competition, and customer behavior.

This strategy is particularly relevant for SaaS businesses with fluctuating demand. It’s also quite useful for those operating in highly competitive markets.

By implementing dynamic pricing, you can make sure that you're always charging the optimal price. Plus, you’re also maximizing your revenue while remaining competitive.

Here's an example of dynamic pricing in SaaS:

Imagine you offer a cloud storage service with different storage tiers. During peak hours or periods of high demand, you could dynamically increase the price for higher storage tiers. This increase reflects the raised value and helps users manage their resource allocation.

Conversely, during off-peak hours or when demand is low, you could offer discounts or promotions to incentivize customers to upgrade their storage plans.

6. Geo-testing

Geo-testing means offering prices for your solution based on the user’s location. This strategy can be useful for tailoring your pricing to different markets with varying purchasing power and exchange rates.

By implementing geo-testing, you can confirm that your pricing is competitive and accessible to customers in different regions. The goal? Maximizing your global reach and revenue potential.

Here's how geo-testing could work for a SaaS company:

Let's say you offer a graphic design tool with a monthly subscription fee. You could offer a lower price for customers in developing countries with lower average incomes. This way, you’re making your product more accessible to a wider audience.

How to run pricing experiments

Let's break down the process into seven clear steps:

Step 1: Determine a specific goal and how you'll measure it

Before diving into your experiment, it's crucial to define what you hope to achieve. Are you aiming to increase revenue, boost conversions, or improve customer retention? Once you've specified your objective, select the right metrics to track your progress.

Here's how different metrics can track various successes:

• Conversion rates: This metric measures how many visitors or leads convert into paying customers. This metric is useful for assessing the effectiveness of various pricing tiers or models.
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• Churn rates: This rate tracks how many customers cancel or downgrade their subscriptions. It helps you understand if your pricing is aligned with customer expectations and perceived value.
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• Average revenue per user (ARPU): With ARPU, you calculate the average revenue generated per customer. This metric is valuable for evaluating the overall profitability of your pricing strategy.
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• Customer lifetime value (LTV): With LTV, you can estimate the total revenue a customer will generate throughout their relationship with your company. This is a key metric for assessing long-term pricing sustainability.

Step 2: Identify the pricing variable to test

Next, pinpoint the specific pricing element you want to experiment with. Here are some common variables:

• Price points: Test different price levels (e.g., $20 vs. $25 per month).
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• Pricing models: Compare flat-rate, tiered, or usage-based pricing — for instance.
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• Feature bundling: Experiment with different combinations of features in tiers.
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• Discounts and trials: Assess the effect of free trials or discounts on acquisition and retention.

Step 3: Segment your audience

Segmenting your audience allows you to tailor your pricing testing to specific customer groups. This approach helps confirm that your results are relevant and meaningful. Consider segmenting by:

• Demographics: Age, gender, location, income level.
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• Firmographics: Company size, industry, location (for B2B SaaS).
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• Behavior: Past purchases, website activity, product usage.
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• Psychographics: Lifestyle, interests, values.

Step 4: Choose the experiment type and make a plan

Select the type of pricing experiment that best suits your goals and resources. Consider factors such as:

• Duration: Set a reasonable timeframe to collect sufficient data (e.g., weeks or months).
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• Sample size: Make sure there are enough participants to make statistically significant conclusions.
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• Control group: Keep a baseline group with unchanged pricing for comparison.

Step 5: Implement the experiment

Use appropriate software and tools to implement your pricing experiment. Many SaaS platforms offer built-in A/B testing features or integrate with third-party tools. Confirm that your experiment is set up correctly to avoid skewed results.

Step 6: Monitor performance

Track the key metrics aligned with your objectives. Think conversion rates, churn rates, average ARPU), and LTV. Monitor these metrics closely throughout the experiment to spot any emerging trends or notable changes.

Step 7: Analyze results

Once your experiment concludes, analyze the data to draw meaningful conclusions. Compare performance across groups or variations. Look for statistically significant differences. Identify trends, such as whether higher prices deter new signups or increase perceived value.

Remember: Use these insights to inform your pricing strategy and make data-driven decisions.

Use price testing in Orb's platform to increase your SaaS revenue

We've explored the ins and outs of pricing experiments in SaaS. But what happens once you've gathered those valuable insights? How do you effectively implement pricing changes and make sure they're reflected in your billing system?

That's where Orb shines.

Orb is the done-for-you billing platform built for modern SaaS pricing. It empowers you to translate the results of your price tests into revenue growth. Here's how Orb helps you leverage the power of price testing:

• Agile pricing implementation: Integrate the winning pricing strategies from your experiments into your billing system. Adjust pricing tiers, usage thresholds, and billing cycles with ease. Ensure your billing aligns with customer preferences.
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• Data-driven insights: Gain granular insights into customer behavior and usage patterns. With Orb's robust tracking and reporting features, it’s simple. This data helps you fine-tune your pricing strategies and maximize customer lifetime value.
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• Flexible billing models: Implement a wide range of pricing models based on the insights you've gained from your price tests. Orb's flexibility allows you to create pricing structures that adapt to both your business and user needs.
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• Real-time pricing adjustments: Respond quickly to market dynamics and customer feedback. It’s easy with Orb's real-time pricing adjustment capabilities. Test new pricing models and optimize your strategy without disrupting your billing operations.
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• Accurate and transparent billing: Guarantee accurate and transparent billing with Orb's invoicing and reporting features. Build trust with your customers by providing clear and detailed invoices that reflect their usage and pricing.

Ready to combine the power of price testing with Orb's robust billing platform? Explore how Orb can help you unlock significant SaaS revenue growth. Consult our pricing options to find the right plan for you.