Traditionally, SaaS products have had a pretty simple pricing scheme. You have a fixed price for a single product offering, or tiered pricing for increasingly more advanced versions (i.e. basic, pro, premium).
And this has worked pretty well. It’s straightforward and makes it easy to compare options, meaning it speeds up the decision-making process. But this traditional pricing has some downsides as well, namely limited flexibility for users and sometimes restrictively high prices for those who just need a few features.
These drawbacks are what have spurred the rise of optional product pricing, which is pretty much the flexible, take-what-you-need alternative to long standing pricing strategies.
Optional pricing includes two critical pieces:
- A base product that functions on its own to fulfill your customers’ needs, but is relatively basic in its capabilities. Sometimes these are referred to as loss leaders.
- Additional features or “add-ons” that users can purchase ala carte to add to the functionality of your base product.
Your users pay one flat fee for the base product and then pay additional fees for access to each add-on. Often, the main product is priced relatively low (and sometimes even at a loss), resting on the hope that your users will get the real value out of the add-on features.
While this has been popular in non-tech industries like airlines for decades—who hasn’t been tempted by cheap flights even if you have to pay for all of your checked bags, assigned seats, and ridiculously expensive can of soda before?—it’s now taking hold in SaaS.
So… does it really work?
The short answer is yes. The long answer is yes… if you have the right strategies in place to make this pricing worth it.
The SaaS products (and the teams behind them) that are best poised to reap the benefits of this optional product pricing are those with a suite of add-on features that are genuinely (and uniquely) valuable to their client base and have a strong upselling team that can reliably get clients to understand that it’s worth it to upgrade from the base package.
When this strategy works best
In short, the best contenders for this pricing strategy are products whose core functionality serves the basic needs of a wide user base, with optional features that cater to more specific or advanced requirements.
And without being a bait and switch, the “optional” add-ons should be pretty much core to your product’s core value to your most lucrative audience segment(s). While your product shouldn’t feel incomplete without the add-ons, this pricing strategy typically only works if your users will outgrow the base functionalities more often than not.
Essentially, your base product is the gateway drug to your real value.
Software like project management tools, CRM software or cloud storage are great examples of when this works best. Consider products where freelancers or students may start in the free or cheap version of the platform and hit no barriers, but they quickly need more features as they start using it in a small business, startup or enterprise context.
When optional pricing doesn’t work
If you have a robust core platform with accessories that are more of a cherry on top than a driver of your core value, you’re probably better off opting for a more traditional pricing model.
Benefits
The core reason that the optional product pricing model works so well is its ability to hook customers with a low base cost (even if it ends up being more expensive than your competition after adding on all the features).
Potential customers are more likely to give your platform a shot, since it’s likely cheaper than your competitors. And once they’ve already signed up and taken it for a spin, they’re more likely to give into the sunk cost fallacy and stick with you to upgrade to additional features.
On top of your ability to leverage this pricing strategy as a marketing/sales asset, there’s a whole slew of other benefits, both for your users and your bottom line.
Customization and flexibility
Customers can create a product that fits their specific needs while avoiding the expenses of features they don’t need. This leads to better adoption of your product since they had a hand in essentially custom-building it for themselves, and you will likely have customer satisfaction.
Some of these add-ons could also include integrations with other platforms, and given the importance of product extensibility, this could be an extremely valuable deciding factor for your users.
This benefit also extends internally to your product team. You don’t have to create several distinct products to fit all kinds of different users. You’re able to just create new individual add-ons to address specific needs as they pop up.
Scalability
Optional pricing ensures that your product can grow with customers as their needs grow. Instead of a growth-stage startup having to make the decision to move to an enterprise solution as their needs expand, they can simply add more advanced features to the platform they’re already using.
This increases your customer lifetime value by supporting more long-term relationships that can deepen as you follow a company throughout any stage in their growth cycle.
One great example of how optional pricing supports a highly scalable product is Zoom.
Their basic capabilities can support students and personal users, which is often where people started out on the platform, especially during COVID. But as that casual user begins to use it in their career, and perhaps gets into more sophisticated virtual meeting use cases, zoom is there to meet them.
Just a sample of their add-ons include: Zoom scheduler, Zoom whiteboard, Zoom webinars, large meeting, tranlsated captions, and clips plus.
They have a variety of base packages for users to choose from, and then users can pick and choose any additional features on top of that, giving them some pretty powerful incentive to stay with Zoom as their needs evolve.
Revenue diversification
Multiple streams of income aren’t just considered the ideal end state in the personal finance realm, this reality can also be a major safety net and accelerator for SaaS businesses, too.
Within a single product, you can tap into several different streams of revenue. This cracks open your potential to boost your revenue and helps you cater to a broader market without having to expand your core product offering
Greater potential for upselling and cross-selling
Closely tied to the last point, optional product pricing also gives you infinitely more potential for upselling and cross-selling. When you have limited product tiers or packages, your revenue is pretty limited by the number of customers you have.
When you build out a suite of valuable, sellable add-on features, you don’t just have to rely on new customers to help you reach even the most ambitious revenue goals, you can tap into your existing user base that’s more likely to spend more money with you (67% more money, in fact) than new prospects in the first place.
Meaningful customer insights
This SaaS pricing strategy also gives you the most direct insight into the features that are most in-demand by your customer base.
Assuming that your product marketing is equally fine-tuned on all features, you can trace add-on purchases to audience segments to uncover what your users are using and want to use your product for most.
This guides future product or feature development and where you invest resources in optimizing existing product features.
Designing the best optional pricing strategy
So you’re sold on this optional product pricing strategy. Great. Now how do you actually determine your prices?
Start by understanding your marketing and customer needs
This strategy doesn’t work if you don’t have a clear understanding of the most pressing needs of your target audience. Dig in deep to see what they struggle with, what they value, and most importantly, what they’re willing to spend money on.
In this customer research, you’ll want to identify audience segments. The criteria you use to split up these segments can vary, but a common scenario is small businesses, enterprises, and individual users.
Decide on core features vs. add-ons
Your segments will help you map out which features should be core to your base product, and which solve the additional hot-button issues these segments are willing to shell out more money to solve.
You want to strike a balance between offering enough value in your basic product to lure potential customers in, but reserving some advanced features that provide enough value to motivate additional purchases.
The key here is to define your product’s core value proposition. Typically this value proposition includes one of three outcomes: increasing value, improving productivity, or reducing costs.
Your base product should still meet the basic needs of your target segments as it relates to this value proposition. In other words, don’t pack all of your value into your add-ons. (Just most of it)
Setting price points
You want to start by determining your base price.
As we mentioned earlier, this may be pretty low, to the point where you may actually lose money on it. Don’t be afraid to go low if you have confidence that you picked the right add-ons that you know will entice your users and deliver more than enough revenue to offset the low base price.
When it comes to the actual dollar amount, it could vary from company to company since you should use value-based pricing. This basically means you charge what your customer is willing to pay, as determined by how valuable the problem you’re solving for them is.
You can determine their threshold for willingness to pay by first studying your competitors’ pricing strategies and how your target market perceives the value of their offerings in comparison to yours.
If you’re offering something (even if it’s just a single feature) that no one else is but there is a clear need for, then your value is objectively high and you can reflect that in your price.
The best way to determine your value-based pricing is to actually get in front of your clients and ask them what they’re willing to pay.
A simple survey to engaged users or prospective customers with a few questions about how much they value certain features and if they can put a dollar amount to that value is the best way to get this information. You can also set a price and see how the market responds. You can always walk back a pricing strategy that isn’t working.
Common challenges
Optional product pricing isn’t all rainbows and butterflies, even if it is the perfect choice for your product. It comes with a set of challenges, but luckily, they can all be addressed with just a bit of strategic intention.
Balancing base packages and add-ons
Of course, this is the most important component of this strategy, but it’s also the hardest.
It’s a tricky balance.
On the one hand, you don’t want to make your base product inadequate by relying too much on add-on features, but on the other hand, you don’t want to make your base product too comprehensive and risk there being too little incentive for add-on purchases.
The solution: In addition to conducting really solid upfront research that gives you a confident and sturdy foundation of what your target market is willing to pay for, this also requires you to constantly strive to incorporate customer feedback and act upon your experience analytics.
We said this was a flexible strategy, so you’ve got to be flexible and know when to adapt.
Complexity in decision-making
As we mentioned earlier, one of the perks to traditional SaaS pricing is the simplicity in decision-making. This can often be a pain point with optional pricing.
Making a purchase requires potential customers to weigh several different factors and price points, deciding what they need and what they could live without for not. This could lead to them feeling overwhelmed and running back to a simpler buying experience.
The solution: Simplify the decision-making process by limiting the number of options, or if you have a wide range of features, provide clear recommendations based on their needs.
If you have tons of add-ons, you may want to consider grouping add-ons based on needs. For example, let’s say you have a podcast recording software. You could offer a bundled group of add-ons that all relate to social media posting, including AI-powered clip recommendations, AI-powered description generator, and live streaming to social media platforms.
Cannibalization of revenue
Since your base costs are lower, there is always the risk that optional pricing can sabotage your revenue if customers opt just for base prices and decide to say no to additional features that they might have otherwise paid for in a more inclusive package. This could lead to a lower overall revenue per customer.
The solution: Clearly communicate your value proposition and have a reliable process for upselling.
Your users bought your product to solve a problem, so you just need to make it clear to them how your additional features can further solve their problem. Your base product is good at solving it, when boosted by your add-ons, it’s great.
In addition to training your sales team on upselling strategies, you can also bake this into your product itself. In-app nudges with helpful and non-intrusive tips on additional features that are relevant to your users can helps do a lot of the selling for you and can boost your add-on revenue even without sales interactions.
Customer confusion and frustration
Even though this is becoming an increasingly popular SaaS pricing strategy, many users may not be familiar with how it works. This can lead to confusion on how pricing works and even frustration if they see features available on your website but not accessible to them in your platform.
The solution: This one’s simple, just communicate well and set expectations.
Make your pricing clear, which includes communicating what features that pricing includes. Don’t give someone sticker shock by waiting until the end to tell them what they’ll be paying every month and every year. With every additional cost that you clearly lay out, pair the clear value that they’re getting out of it.
When it comes to existing users, provide great customer support and educational materials like simple but thorough onboarding, user assistance, and tips on making the most of every feature to ensure that your users never doubt the value your product is delivering.
So, back to the title of this blog post. Is optional product pricing the best solution for every SaaS product? No. But is it the best option to help highly flexible, scalable products maximize their revenue and boost their customer satisfaction? That’s a definitive hell yes.
