Foundational Pricing Principles
Updated: Mar 20
Revenue is the most significant driving factor in your organization. Your pricing strategy can enable you to reach your growth goals or block you from connecting with potential customers. According to Price Intelligently, companies only spend six hours on their pricing strategy throughout the entire history of their business.
Are you putting as much thought into your pricing strategy as you should?
SaaS Pricing Models
The best pricing model is one that scales with the value your customer receives. As the customer gets more value from your product, they should pay you more money for it. However, that’s putting it simply. Especially when it comes to SaaS, pricing can get incredibly nuanced.
Most enterprise SaaS products have a minimum software cost called a “platform fee” which sets the floor price for their product. Commonly, this will be coupled with different buckets of features. Companies will often have a primary variable pricing lever which should increase as a customer adopts and derives more value from the product. Almost all will have multiple additional pricing levers which make it easy to incrementally increase pricing as adoption and maturity increase.
Common types of scaling primary pricing variables include:
- Seats (SFDC, Slack, DocuSign)
- Usage
- Pre-bought with overages (Hubspot, Segment, Amplitude)
- Pay as you go (Snowflake, Twilio, AWS)
Additional pricing lever examples:
- Product add-ons (SFDC)
- Business Units/Teams/Products (Amplitude)
- Data Taxonomies/Supported Languages (Avo)
- Pro-services/Support (Adobe)
These additional levers are also great for negotiations since most don’t have hard costs as usage pricing can.
Pricing by Seats
Pricing based on the number of users in the platform is great for products that will be ubiquitously adopted across a company or department. The value of the product increases as more people use it or can easily be tied to an employee’s productivity.
Seats-based pricing is ideal for any tool which is a ‘no-brainer’ for a new employee. Examples include Salesforce for a new AE, Gainsight for a new CSM, Slack for all new employees, and more.
Slack
Docusign
Pricing by Usage (Pre-bought)
Pricing based on product usage is awesome for most SaaS companies. Whether it’s data ingested, emails sent, users tracked, contacts created, forms filled out, etc., the amount a customer pays is directly connected to the usage of the product and — hopefully — the ROI.
Hubspot
Segment
Pricing by Usage (PAYG)
The difference with the PAYG model vs pre-bought models really comes down to customer preference vs. business preference. The business (e.g you) would prefer pre-bought usage because it’s easy to forecast as ARR.
On the other hand, your customer, particularly when it is a bottoms-up developer product, may want to just pay for what they use. This model is great for essential life-blood products where the usage inevitably goes up over time. For example, Snowflake data usage will simply compound over time. Companies will still often provide incentives for a customer to pre-buy, like AWS.
Snowflake
Twilio
Developing a SaaS Pricing Strategy that Works for Your Business
How you price your SaaS product should be based on your overall business goals, how you work with clients, and how your product fits into client organizations. Moreover, pricing shouldn’t be a decision you make once at the beginning of product development, but rather an ongoing conversation between sales, marketing, and engineering.
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