How should SaaS prices change over time? Product Life Cycle vs. Pricing
in Monetization and Pricing
Monetization & Pricing
October 10, 2022
Find out what stages EVERY SaaS goes through and how to adjust the pricing strategy to the Product Life Cycle.
You've probably heard that we are all connected to each other in a circle, in a hoop that never ends. But did you realize that the cycle of life applies not only to living creatures but also to products, including software? And in most cases, they’re as predictable as four seasons.
Today we're going to zoom out on software and look at it from the perspective of their entire life, from birth to death. So, if you haven’t yet considered where your product is on the line of life or how to adjust the pricing policy to your SaaS age, then fix yourself a tea, and let’s dig into it.
What is a product life cycle?
Product Life Cycle is the period from the creation of the tool and its entry into the market until it comes off the scene and (most often) gets replaced by new technology. Interestingly, every product goes through this cycle, and any software you currently use is either in the introduction, growth, maturity, or decline stage.
Depending on the product’s stage, you should promote, sell, and price it differently. For example, the growth strategy of a SaaS that just entered the scene should be different from a software that is slowly coming to an end.
If you consciously adjust your product's market strategy to its life cycle, you will use its full business potential. And if not… well, you probably never even get to the growth phase, not to mention the stage of maturity.
The 4 Product Life Cycles
The first phase is the birth of your SaaS and its launch. It hasn’t been tested yet and hasn’t won people’s trust, so your most significant challenge in this phase is to reach the broadest possible group of customers and encourage them to set up a trial and switch to a paid account.
At this stage, the profits are usually small (if any) because the development costs and marketing efforts absorb a massive chunk of the income.
If users have accepted your product, you enter the growth phase. At this stage, your sales will explode as the number of customers, and the revenue grow faster than costs. The investment in product development and marketing is starting to pay off.
At the same time, because you're visible on the market and openly show your value, the competition comes into play. So at this stage, the key is consistently building your position in the market, despite the emerging competition.
At the stage of product maturity, the sales boom is an echo of the past. New customers hardly come anymore, so sales and revenue decrease monthly. As a result, the product's biggest challenge is maintaining healthy profitability for as long as possible.
The last stage is the beginning of the end of the product. Decline usually occurs when the Board has no more strength to fight the competition, a new product enters the market and displaces the old solution, or the market need for the product simply disappears.
Although it may seem sad, getting there is quite an achievement. If you ever managed or will manage to reach this point – my sincere congratulations.
How to adjust the pricing to the Product Life Cycle?
Pricing strategies in the introduction phase
During the product-to-market phase, there are two basic pricing strategies. Which one you should choose depends on the degree of innovation of your tool and the number and quality of competition in the market.
The first is Price Skimming, which involves setting a high price at the beginning of a product's life to attract the premium audience, low price sensitivity customers, and innovators who will pay more than the average consumer for the new thing. Then, when the group of early adopters is covered and satisfied, you lower the price to make it affordable for the rest of the customers.
Companies choose Price Skimming when their product is innovative and builds a whole new segment of customers. In such cases, no competition on the market offers similar value or doesn’t offer it in such high quality.
The second strategy is Price Penetration, which is quite the opposite of Price Skimming. You deliberately underprice the product at the beginning of its existence to quickly gain as much of the market as possible. Then, when the product reaches the correct scale and demand, you raise the price to increase the profit.
Companies choose Price Penetration when their product is an alternative to what’s already there, so they have to cut their piece of the market action with, well, brute force.
When creating initial go-to-market strategies for Valueships clients, we recommend higher prices because start-ups are naturally reluctant to price rises in time. With the initially higher pricing threshold, they don’t leave that much money on the table in the early stage. Having said that, this heavily depends on the vision and your product’s overall strategy.
Pricing strategies in the growth phase
At this stage, you take the consequences of the initial pricing choices. So if you've entered the introduction phase with Skimming Pricing, then in the growth phase, you probably want to extend your customer pool and lower the price to reach a more price-sensitive market segment.
And suppose your original plan was to conquer the marketing with Penetrating Pricing. In that case, you increase prices for new and existing users and start executing your up-selling and cross-selling strategies.
What’s critical is that you’re not to underprice or overprice your product but to find the sweet spot where the price is adequate to the product’s value and the market’s demand. This strategy is called Neutral pricing. And this stage is the moment when the companies’ user profiles, market positions, and prices begin to stabilize. This is when you need to align the product with the overall Willingness to pay.
Of course, if the trends from the initial phase don’t stop, you want to stay true to your initial strategy. For example, suppose the competition is still in shambles, and the demand for your innovative SaaS is still growing. In this case, keep prices high until the premium market is completely saturated or competition emerges.
On the other hand, if your original strategy was to penetrate the market with low prices, the market is still growing, and you still haven’t reached the necessary scale of users – stay loyal to the aggressive pricing policy.
Pricing in the Maturity Stage
At this stage, the market is saturated. You and your competition have a specific place in the market, and your product’s value and price are clearly defined.
Of the three mentioned strategies, Neutral Pricing works best here. After all, you weren’t building your position for years to suddenly increase prices and lose a large part of customers, along with their trust. In the same way, you certainly don’t want to start a pricing war and lower your profitability out of the blue.
The overall pricing strategy shouldn’t be your leverage if you still want to grow in the maturity stage. Instead, it’s time for less sexy and exciting exercises, such as taking care of your existing user base. Customer segmentation and personalized prices for specific groups of users should be your bread and butter.
Pricing in Decline Stage
When the number of customers drops dramatically, and your rivals collapse one after another, the most important thing is to make your product purchase as easy as possible for your last users. It's time to simplify your pricing.
As for the pricing strategy itself, I suggest a neutral one for the same reasons as above.
Which pricing strategy is right for you?
I have already written about it a couple of times on the blog, but let me remind you that if you create your pricing policy based on your competitors' pricing, you aren’t really creating your own pricing policy. Instead, it’s the company you are comparing to that sets your rules.
For this reason, any SaaS pricing strategy should be preceded by in-depth market research. Aligning the price point with Willingness to Pay, targeting the right buyer personas, using good packaging and billing model, and leveraging the right value metric is a way to go.