Determining the purchasing power of a product involves assessing the affordability and value perception of potential customers. While mathematical models may not capture all aspects of purchasing power, they can provide insights into affordability and financial capacity. These are critical pricing aspects. You can learn the art of pricing your SAAS product with the help of these mathematical models combined with user research. Here are five mathematical models commonly used to determine the price fit in the SAAS industry.
Income Elasticity Model: Income elasticity measures the responsiveness of demand to changes in income. By applying this model, you can estimate the impact of changes in customers' income on their purchasing power. Higher-income elasticity indicates greater purchasing power as customers can afford to allocate a larger portion of their income towards buying products. Example: You offer a SaaS project management tool with a monthly subscription fee of $50. You analyze the income elasticity of demand by conducting a survey among potential customers and asking about their income and willingness to subscribe to your tool. You find that for every 10% increase in income, there is a 15% increase in the number of customers subscribing to your tool. This indicates a positive income elasticity of 1.5, suggesting that customers have higher purchasing power and are willing to invest more in your product as their income grows.
Price Elasticity Model: Price elasticity measures the responsiveness of demand to changes in price. By analyzing the price elasticity of a product, you can assess the impact of price changes on customers' purchasing power. A lower price elasticity indicates higher purchasing power, as customers are less sensitive to price changes and more willing to purchase the product even at higher prices.Example: You have a SaaS accounting software targeted at small businesses, priced at $100 per month. To analyze price elasticity, you experiment with different price points and measure the change in demand. If you increase the price to $120 per month and notice that the demand decreases by only 5%, it indicates a relatively inelastic demand and suggests that customers have higher purchasing power, as they are less sensitive to price changes.
Consumer Surplus Model: Consumer surplus represents the difference between the price customers are willing to pay and the price they actually pay for a product. By estimating consumer surplus through demand analysis and pricing data, you can gain insights into the perceived value and purchasing power of customers. A higher consumer surplus indicates greater purchasing power as customers perceive the product to be of high value relative to its price. Example: Consider your SaaS customer relationship management (CRM) platform with a monthly subscription fee of $80. By conducting customer surveys and market research, you find that customers perceive the value of your CRM platform to be $120 per month. This indicates a consumer surplus of $40, suggesting that customers see significant value in your product and are willing to pay more, indicating higher purchasing power.
Affordability Index Model: The affordability index is a ratio that compares the price of a product or service to the income level of potential customers. By calculating the affordability index, you can determine the proportion of income required to purchase the product. A lower affordability index suggests higher purchasing power as customers can afford the product without significant financial strain. Example: You provide a SaaS email marketing tool with a monthly subscription fee of $50. To calculate the affordability index, you analyze the income distribution of your target market and determine that the average monthly income is $3,000. With this information, you calculate the affordability index as (Subscription Fee / Average Monthly Income) * 100, resulting in an affordability index of 1.67%. A low affordability index indicates that customers can comfortably afford your tool without allocating a significant portion of their income, suggesting higher purchasing power.
Purchasing Power Parity (PPP) Model: Purchasing Power Parity is an economic theory that compares the cost of living and relative purchasing power between different countries or regions. By applying PPP calculations, you can assess the purchasing power of customers in different markets and adjust pricing strategies accordingly. PPP takes into account factors like currency exchange rates and price levels to determine the relative affordability of a product. Example: Suppose you have a SaaS language learning platform targeting international markets. You compare the purchasing power of customers in two countries: Country A and Country B. In Country A, the monthly income is $2,000, and your subscription fee is $100. In Country B, the monthly income is equivalent to $3,000 when adjusted for PPP, and your subscription fee remains at $100. Based on PPP-adjusted income, customers in Country B have a relatively higher purchasing power compared to Country A, as they have more disposable income available for your product.
Remember, this is an oversimplified article, and these examples are hypothetical; the values will depend on your specific SaaS product, target market, and real-world data. Conducting market & User research, analyzing customer behaviour, and collecting relevant financial data will provide a more accurate understanding of the purchasing power of your potential customers.
Feel free to dive deep into each method, or you can hire a user research expert like Ungrammary
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