How A Smart SaaS Pricing Strategy Improves Retention (and eliminates upsell friction)
Product tiers and upselling go hand in hand…in theory. That being said, your SaaS pricing strategy should not be designed with the sole intention of upgrading as many customers as possible. Here’s why:
Retention is more vital to SaaS and subscription businesses than just about any growth metric, including upgrades.
An upgraded customer that cancels is worth zero next month.
Don’t get me wrong, acquisition, upgrades and upsells are obviously key factors in growth, but you simply can’t thrive without the fundamentals of a happy customer base.
As such, every decision you make should put the customers’ needs first. But with so much industry chatter and focus on designing a SaaS pricing strategy for the sole purpose of upselling, it’s easy to miss the mark on delivering the value that will help you get there.
Product tiers are a huge key to long-term customer retention and success. But, they have to be designed to provide value first. When that’s the case, upsells happen more naturally, with a lot less friction.
One Size Doesn’t Fit All
“So if product tiers should be designed around retention, wouldn’t I retain the most customers by offering all of my features to every customer?”
Here’s the catch.
Successful customers aren’t necessarily the ones with the biggest feature set.
Successful customers are the ones getting their needs most specifically met, without a lot of extra noise.
Your small startup customer is going to have different needs and pain points than your SMB corporate account, than your enterprise whale, and your SaaS pricing strategy should reflect that. It’s up to you to understand the differences in pain points at each stage, to understand the differences in the problem you’re solving for smaller and larger customers, and to find a way to serve each customer what they actually need. Find a way to do this and you’ll have an incredibly solid foundation for retention.
When too much is too much
How many times have you returned to the same restaurant simply because it’s too hard to pick a new place? This is the result of having so many options, it leads to inaction. It’s called analysis paralysis or the paradox of choice, and it explains why one-size-fits-all SaaS pricing models aren’t effective for customer retention.
When customers have so many features to choose from, it can become difficult for them to know what’s really best for them. This can lead to the analysis paralysis and leave them with an unsuccessful experience with your product.
If you put all of your customers into one bucket of limitless features, some users will be too small and get lost wandering through your product. Some will be too big and find that you can’t provide the in-depth assistance they really need. And you’ll start to see an uptick in churn.
Retention boils down to creating successful customers, not lost ones. Your users should feel as if their problem is being solved, rather than worrying about what they could do better with all the extra features.
If they feel like they’re only making use of 10% of your product, they’ll start weighing its worth. And when a customer starts weighing your worth, you’re in danger.
Don’t Starve your Customers for the Upsell
Upsells are a reliable stream of revenue, and they’re beneficial for your customers as well. As their needs increase, your product should be able to scale with them. But you shouldn’t limit your plans simply to encourage upgrades.
A SaaS pricing strategy that includes product tiers allows your customers to find the right fit and get the most bang for their buck. And those tiers should be designed to give the maximum amount of value at each stage of their growth.
If your tiers are designed to cut features off at the knees in order to push people into higher plans, you’re playing a risky game.
Think of it this way. If you went to order a medium latte at a local cafe and the barista said, “You know, if you ordered a small latte with an extra shot of espresso, you get the same amount for a dollar less, ” you would be thankful, excited, and ready to tell your friends about the awesome coffee shop down the street.
So maybe the cafe lost a dollar on that one order, but the barista proved they value customer happiness over an easy buck. They just earned one extremely loyal customer, and likely a few of your friends.
Don’t Skimp on Your Lowest Tier
Your lowest tier or shouldn’t just be designed with the sole intention of getting people in the door. A low-barrier entry point is effective, but if the plan doesn’t offer any real value, many of those users will churn before you have a chance to reel them into a better plan.
When designing a SaaS pricing strategy, make sure to create your bottom tier with a customer profile in mind. What do they need right now? How deep of a feature set can you provide at a fair price point?
Your lowest tier customers should get just as much value from your product as your highest tier customers. Period.
If every customer feels like they can succeed with your product, from the lowest end to the highest, they’re far more likely to stay with you as they scale. If you nickel and dime them from day one, they’re likely to go looking for another option instead of growing and upgrading within your product.
Creating a Retention-First SaaS Pricing Strategy:
Upsells are extremely valuable to your growth. But if you aren’t focusing on creating successful customers first, your revenue loss from churn can (and very likely will) outweigh any upsells you make along the way.
Your customers will grow, it’s inevitable. Their needs will ebb and flow, and if you can provide what they need, when they need it, at every stage of growth, they won’t have much of a reason to ever leave you.