Despite the customer experience revolution that has taken place in the last few years, price is still a priority for the modern consumer.
In a 2018 study, 75% of baby boomers and 62% of millennials highlighted price as one of the top drivers of brand loyalty.
In other words, depending on your target market, optimizing your pricing models and strategies could win over almost three in four customers and encourage them to stay loyal to your brand. And yet most SaaS companies set and forget their pricing.
In this article, we’ll cover how pricing impacts customer loyalty, the most effective pricing models to reduce churn, and much more.
What is brand loyalty?
Brand loyalty is when a consumer chooses your brand over and over again. They deliberately purchase from your company whenever they need your category of product, services, or software.
For example, a runner that uses Nike shoes has an opportunity to switch brands when the old pair of shoes get worn out. If they choose to buy Nike running shoes again, they’re proving their loyalty to the brand.
But it’s not just a consumer goods phenomenon. From yearly renewals to upselling to “word-of-mouth marketing,” brand loyalty also impacts SaaS offerings.
For example, if a development team uses Slack for internal communication and collaboration, and the company needs a similar tool for their newly-established marketing department, then expanding their Slack workspace with new channels and users is an example of brand loyalty.
It’s a different setting, but a customer who chooses your product again and again under different circumstances proves themselves loyal (as well as a key asset to your company’s continued growth).
In the SaaS and startup space these customers are often referred to as “power users,” “true fans,” or “advocates,” rather than loyal customers.
What determines brand loyalty?
But what are the drivers behind customer loyalty? What turns someone into a repeat customer — choosing your product again and again in various circumstances?
These are not easy questions to answer. There are a variety of factors that determine brand loyalty.
However, it’s no surprise to anyone that pricing and quality lead the pack when it comes to influencing brand loyalty:
The Silent Generation and Baby Boomers put prices above anything else, while younger generations have it in clear second-place.
Consumers also care about brand values, perks, the overall experience, and more. But it’s hard to argue with the data: A product or service with a price that matches its perceived value is one of the most robust drivers of loyalty to a brand or company.
So if you want to maximize the lifetime value of each customer, it’s not enough to have the superior product. You also need to offer it at the right price.
But what is the right price?
For SaaS companies with a varied customer base, this usually means having to identify and offer the right mix of plans and prices, rather than settling on a single option.
For more on usage-based billing, check out our recent article, “5 Companies That Have Mastered Usage-Based Billing.” Alternatively, keep reading for a deeper look at why flat-rate & single option pricing can reduce customer loyalty.
How do you measure customer loyalty?
When you want to measure customer loyalty, the main questions you need to answer depends on your business and billing model:
- SaaS and other subscription-based businesses: How long does a customer stay subscribed, on average?
- Ecommerce, brands, or other product-based businesses: How many times does a single customer choose our brand, on average?
You can get a good handle on those questions, and the loyalty of your customers in general, by focusing on the following four metrics:
#1. Retention Rate / Churn Rate
For subscription businesses, some of the best loyalty metrics are your customer retention and churn rates.
Simply put, the customer retention rate is the percentage of your paying customers that stay subscribed to your business during a period of time.
It’s relatively easy to calculate using the following formula.
Total customers still subscribed at the end of measurement period / Total customers at the start of measurement period) x 100
The churn rate is the percentage of your customers that leave your company during any given period of time.
Customers that canceled subscriptions during measurement period / Total customers at the start of measurement period) x 100
If you have subscriber churn analytics, you don’t need to manually calculate or handle any data to get accurate numbers for both these metrics.
#2. Customer Lifetime Value (CLTV)
Another key loyalty metric is customer lifetime value, where you measure the average total a single customer is worth to your business.
Pre-cost gross revenue numbers are easy to calculate if you have reliable financial data.
ARPU (average monthly customer value) * Lifetime (average length of subscription)
To get the net value of a customer, you also need to consider the cost of goods and gross profit margin.
#3. Net Promoter Score (NPS)
If your SaaS or a particular product is still in its early phases, and you don’t have reliable historical customer data yet, the Net Promoter survey can be a helpful metric for assessing the levels of customer satisfaction and loyalty.
The survey is simple; you just ask your customers how likely they are to recommend your product to their friends, on a scale from 1-10.
Promoters are customers who answer 9-10, Passives are customers who answer 7-8, and Detractors answer 0-6.
% Promoters – % Detractors = NPS
The vast majority of SaaS founders and executives are already familiar with the survey but don’t administer it effectively.
#4. Repeat Purchase Rate
If your business isn’t subscription-based, one of the best ways to identify the loyalty of your customers is the rate of repeat purchases.
Repeat customers / Total customers x 100
The percentage will highlight loyal customers that choose your store/brand more than once, rather than first-time buyers.
Why flat-rate & single option pricing can reduce customer loyalty
By offering a single price point, you might think that you’re simplifying things and delivering an easy option to your consumers
However, modern consumers are used to choosing between a range of options, with prices to match. A lot of things have changed since the launch of the first mobile phone.
Even smartphones, though, have moved away from a single option at a static price point.
Let’s look at the development of a few key smartphone models.
At first glance, you might just notice how the top end of the spectrum has steadily moved further along over the last few years.
But the real story isn’t just about how smartphone producers have decided to bump their prices…
Over the past few years, all the main players have diversified their product offerings to be able to cover different price points and demands.
They have split their primary product offering into a tier of different products — including, at least, a premium and a basic version.
Samsung has the Galaxy S, Galaxy S+ and even the Galaxy Note. Apple launched the iPhone X, XR, and XS. Google launched a new XL version of the Pixel phone. A lot has changed.
This new approach covers essential loyalty factors we’ve covered already: product selection quality and pricing.
By covering the different price points, they can ensure that they retain the people who care the most about price, and customers who happily pay extra for a higher-quality product at the same time.
In today’s market, this has become the norm, and not giving your customers what they expect can negatively impact conversions, adoption and customer loyalty.
Customer loyalty benefits of tiered (good-better-best) pricing
If you want your customers to choose you because of the price, the goal can’t be to match the competition.
But underbidding them completely and decimating your profit margins isn’t a sustainable business model either.
Real-world tiered pricing example #1:
Southwest Airlines created a premium option with the Business Select package, and it helped them add $73 million in revenue in the first year.
The slight upgrade in comfort from regular economy had customers choosing Southwest for an affordable, but comfortable, flight, again and again.
Real-world tiered pricing example #2:
By offering options in an industry with mostly static plans, Allstate was able to sell 3.9 million new insurance policies between 2005 and 2008. By 2017, 23% of all customer plans were either gold or platinum, while only 10% of their customers chose the value plan.
These examples highlight a point that many business owners miss: customers will happily pay a premium for a superior experience. Offering upgrades or more expensive options can win you the loyalty of a customer group that is more loyal and less likely to churn than others.
A tiered plan with a good, better, best approach lets you take advantage of this by singling out a premium experience and offering it at a higher price point.
You can also win on price on the lower end while reducing your running costs to maintain the profit margin for your cheapest options.
That way, you can satisfy and win the loyalty of three different customer personas with very different priorities.
Bargain hunters will choose your cheapest option, and be happy with themselves that they’re saving money. Value-conscious buyers will still be happy about your main offering, and those that want premium treatment, for example, priority phone support, will happily pay extra for that.
As a B2B or SaaS business, you have to consider the different priorities of companies of various sizes. A cost-cutting SMB prioritizes low prices over dedicated SLAs. A customer service-focused enterprise will likely be the opposite.
For example, Zendesk:
Zendesk understands this and has drastically different pricing on its small business and enterprise options. A price range as wide as $5-200 might not be optimal for your product, but you owe it to your business to do thorough SaaS pricing research before you make the decision.
Avoid too many options, unless you use segmentation or dynamic pricing
One caveat here is that too many options can be even worse than too few. In a groundbreaking study, two Stanford and Columbia University researchers compared offering 24 different flavor options, versus focusing on just six options.
With 24 options, only 3% of potential customers made a purchase. With six flavors on the table, 30% of tasters made a purchase.
The implications seem simple; focus on a limited number of pricing plans, or you will confuse potential customers into not buying.
But you don’t need to show the individual customer hundreds of different pricing plans, add-ons and more. The easy option is to manually segment subscription plans by industry, tailoring each option to a specific persona.
The more advanced, more suited to B2B sales in 2020 option, is to generate tailor-made recurring plans based on each prospect’s actual business demands and situation with offer management tools.
Pricing models and their impact on churn rate
Reducing customer and revenue churn is one of the biggest challenges and most important goals of an up-and-coming SaaS. If you can’t keep your churn rate low, all your customer acquisition efforts will only yield short-term results.
Even in B2B markets, which historically have had much lower churn rates, churn is becoming an increasing problem. In 2019, businesses churned through 30% of their SaaS apps, with the majority moving on to a competitor or adjacent tool to complete the same business problems.
And when you want to combat it, it’s not enough to just tackle the most well-known reasons for SaaS churn like onboarding, customer engagement, inadequate customer success and bad support.
There is also a clear connection between how SaaS companies price their offerings and their churn rates.
When designing a product to keep a customer subscribed for as long as possible, every detail matters. How you communicate the price/cost with ongoing customers is no exception.
Feature-based pricing doesn’t have the same impact on users that it used to have. With increasing competition in most SaaS niches, your customers know that there is a high chance they could get the same features somewhere else.
Potentially, they are shopping around and know for a fact that your competitors offer a very similar solution. If their usage is moderate, a company with a events-based pricing model could make a cost-based argument and win their business.
If you focus on the right value metrics, you can take the focus away from shopping for the most advanced features, or the best deal. Instead, you can help your customers understand the bang they get for their buck, justifying the continued usage of your products.
They’re not paying $20 per user per month to use your product. Your product is there to solve a real business problem. The best value metrics make it clear that the money is an investment, and that it’s paying off. It’s an excellent strategy in most pricing scenarios for SaaS companies.
For example, a CRO and analytics SaaS could price based on the number of experiments generated by their insights and run with their testing tools. Any good growth marketer knows that every test will bring you closer to your growth goals, so they will be happy to pay — month in, month out.
That’s the difference between grounding your price in value metrics and deciding on different price tiers based on packaged features. Only one approach communicates the value your service contributes to your customers.
In this way, the right pricing model can create a solid foundation for other customer retention strategies.
For more information on how to reduce churn, check out The SaaS Churn Bible, our dedicated ebook on the topic.
Price optimization is low-intensity & high reward
Growth-focused startups and SaaS companies often disregard pricing as a potential growth lever. Most early-stage companies spend less than 10 hours a year on pricing strategies.
And yet, monetization is an incredibly efficient growth lever, where improvements have up to 8 times the revenue impact of acquisition optimizations.Dedicate more time to pricing research and experiments, and you have the chance to improve the revenue of all your acquisitions exponentially.
Five hours a year is a pitiful amount of time to spend on one of the most critical growth levers of your company. Make it a priority, assign the responsibility to key founding team members, and ensure progress is made.
Maximize the revenue from your core offering by finding the optimal price
Even if you choose a tiered plan or a mix of events-based pricing, chances are you will still have a core offering that appeals to the majority of your target customers.
Finding the right price point, one that maximizes conversion rates, as well as loyalty/LTV, can make a tremendous difference for your company. Imagine if you could increase your price by 7-10%, with minimal impact on your churn rate, what would that do to your profit margin?
For early-stage companies that don’t have the data or the platform to run fast-paced pricing tests, you can survey potential customers, for example, by following the Van Westendorp Price Model.
You need to ask the following questions:
- At what price point would you think this product is a bargain?
- At what price would you think the product is getting expensive, but still consider it?
- At what price is the product so cheap you doubt its quality and not consider it?
- At what price would you think the product is too expensive?
From there, you can calculate the ideal price points for different pricing strategies and approaches.
By using the survey respondents’ answers as data, you can quickly identify different theoretical price points that would have different impacts on your business.
- Point of marginal cheapness (PMC): Price point that is so low that you would lose more potential sales to questionable product quality than you would gain sales from bargain hunters.
- Point of marginal expensiveness (PME): Price point where the same number of prospects think your product is too expensive and affordable.
- Optimal price point (OPP): Price point where the same amount of customers think the product is too cheap or too expensive.
- Indifference price point (IPP): Price point where an equal number of respondents think the product is cheap and expensive.
The range of acceptable pricing or RAI is equal to the difference between the PMC and PME price points. You can go beyond that price range if you are developing tiered plans, but you would do well to price your core offering within the range.
If you don’t have the time or resources to arrange a large-scale pricing study, you will want to lean on existing customer data.
Chargify uses automatic exit surveys and other data points to create a detailed subscriber profile that can highlight potential reasons for churn.
If you see a lot of cancellations due to price or features, you might want to start reaching out to past and existing customers and developing pricing options that better suit your customer base.
Usage-based billing: let the customer pay only for what they use
If you truly want to turn your price into a major loyalty-driving factor, usage-based billing is the way to go.
Usage-based or metered billing is an approach where instead of charging a static price each month/year for your customer’s subscription, you calculate the amount each month based on certain metrics.
And it’s not just a strategy reserved for web hosting or cloud services companies.
When customers only pay for what they use each month, your product feels less like an expense and more like an asset.
It might seem complicated, but it’s easy to implement with a billing solution like Chargify. We support both purely metered models and monthly subscription + overage by default.
If you don’t want to build a whole event tracking system from scratch to integrate with our API, don’t worry.
Through Chargify’s Acquisition of Keen, we secured a complete event tracking and management platform for our client base. We’ve developed native integrations to make event-based billing easier and more accessible than ever.
That means you no longer need a team of developers or hundreds of hours to make the switch to metered billing. You can also rely on a much wider range of potential event metrics to bill on, including outcome-based metrics like views, revenue generated and other data points that tell a story.
Any Chargify customer can get started with Keen and install event tracking with the same approach that you would if using Google Analytics or Facebook Pixel tags.
Even though the majority of companies only dedicate a handful of working hours per year to consider pricing, it can be a key factor in driving sales, customer loyalty and growth.
Most companies have room to improve and should focus on their customers and their expectations rather than on competitors’ pricing pages.
By developing a tiered plan, you can serve multiple customer segments at fitting price points, maximize your potential revenue and deliver the level of service each customer expects.
But if you truly want to use pricing as a differentiator and driver of loyalty, you need to move beyond tiers. Usage-based pricing centered on value metrics helps your customers see the value you are delivering, rather than the dollar amount you are billing for every month.
For more information on how to improve customer loyalty, and reduce churn with your pricing strategies, talk to one of our SaaS pricing experts today.