Different sectors of the market have unique challenges associated with pricing—the competitive landscape and the maturity of the industry being two major factors. In this article, I’ll be focusing on the SaaS (Software as a Service) market—a market that has grown exponentially but appears to be entering a more mature phase as growth begins to level off.

The SaaS Market Is Showing Signs of Maturity with Slower Growth

In 2008, the SaaS market was a $5.56 billion industry. Today it’s worth over $120 billion, with the same study forecasting less dramatic growth to $132.57 billion by 2020.

I’ve found myself studying subscription-based pricing models after finding myself woefully unprepared for a debate between a CEO and a CFO at a SaaS startup’s office.

One of the most challenging aspects of providing a Software as a Service (SaaS) is positioning the product so that it adds maximum value for the client (lower upfront cost), while protecting your company’s huge upfront investment (get dollars in the door quickly).

CMOs Need to Balance the Need to Generate Capital Quickly with the Need to Entice New Customers with Lower Upfront Costs

In many instances, a CMO will find themselves pitted between a CFO that wants to leverage every possible promotion to quickly refill the coffers, while the CEO is more focused on user-acquisition, hang the expense.

There are clear merits to both arguments. Offering a substantial upfront savings to customers in return for a long-term commitment is common. But some companies are finding themselves in a race to the bottom, offering lower month-to-month pricing in order to supercharge new user acquisition.

If you’re a CMO that’s struggling to define your fee structure, that is also worried about long-term customer churn, or find yourself debating about strategies to convince new customers to sign-up, this article is for you. Hopefully I can provide a few takeaways to help you sound a lot smarter than I did.

Is It Better to Compete on Monthly Pricing or Annual Pricing?

If you look at strategic pricing within the SaaS market, you’ll see pricing structures ranging from month-to-month to one and even three-year commitments. Most CMOs are choosing to offer steep discounts on multi-year plans in return for the upfront cash and a longer-term commitment.

It appears that the real price competition comes into play on the longer-term contracts. Although some CMOs have decided to flank their competitors by offering aggressive month-to-month pricing, I’ve found significantly more companies getting aggressive on their multi-year plans, remaining closer to the pack on monthly costs.  

Let’s Look at a Real-World Example

If we look at market-leading SaaS applications in the VPN industry, we see that long-term pricing is where user growth is happening. We know this because it’s where price competition gets the most aggressive.

In this comprehensive analysis comparing ExpressVPN and NordVPN—two heavyweights in a $23.6 billion industry—it’s easy to see where the pricing war is taking place.

The Price War Heats Up as the Contract Terms Increase in Duration

There is just a 10% spread in pricing on their month-to-month commitments. But the pricing delta jumps up dramatically to 55.17% once customers agree to a three-year commitment.

Of course, this is multi-dimensional chess. Pricing is just one factor. ExpressVPN achieved slightly higher performance scores in the head-to-head analysis, which may account for their ability to command a higher price from consumers. Yet NordVPN proved to be more P2P friendly—technology usually leveraged by torrenters, which are a major market segment for consumer VPN services—while offering more aggressive pricing.

CMOs Can also Get Creative in Terms of Contract Length

The other takeaway from the report is that the CMO at ExpressVPN chose to deviate from traditional contract terms. While their competitors offer the traditional monthly and annual plans, they chose to segment their fees based on monthly, 6-month and 15-month commitments.

By choosing different contract lengths from their closest competitor, they are able to further muddy the waters and distract from their higher cost.

So, if you find yourself in a meeting with a SaaS firm that needs help marketing their products, here are your talking points:

• Low monthly pricing does not necessarily guarantee an increase in new user acquisition.
• Large SaaS enterprises are willing to get most aggressive on pricing when they can secure long-term contracts with upfront payments.
• It’s not just price that matters, but how you present your package options. Using different terms from the competition can help camouflage fatter margins.

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