SaaS Startup Pricing Strategies

Here is a bold statement; If your pricing strategy is driven by finance, operations, product or even sales, then you have already made a critical mistake. Pricing is a function of marketing.

Pricing is not output from a spreadsheet but rather an input that helps you determine growth and profitability.

Another factor to consider is that unless your product is operating in a highly regulated or competitive space, where a penetration strategy is best, there isn’t a clear way to know how to best price your product or feature.

When looking at a new product category or a product with a highly differentiated value proposition, there are often no comps, and the focus becomes strategizing around value-based pricing. This, in itself, is difficult to do and requires cycles of experimentation.

I’m not saying that there are no winning tactics or strategies to employ when setting your initial pricing; I just have seen many teams struggle with getting a product out there and validating whether or not users will pay for the product or service because they get into analysis paralysis over the ‘right’ price.

Pricing is dynamic and therefore is not a ‘set it and forget it’ function because as your product, market and positioning evolve so too should your pricing.

Remember; product/market fit aside, the real test of whether a product has value isn’t usage, it’s whether people are willing to pay you to use the product or service.

At this point, I think it’s important to preface the next set of suggestions because it might be easy to become too focused on the micro and lose track of the macro. If the user is not at the heart of your entire pricing strategy, then you’ve already lost, and a pricing strategy won’t save you.

Having said all of this; the chances of getting pricing right the first time are not favourable, there will probably be churn on your low-value customer tiers and additional negotiations for your enterprise/tier 1 users.

A pricing increase or bundling shouldn’t add any friction to your conversation flow, and it also shouldn’t create an opening for conversation around product value, it should be reasonable and frictionless.

The one thing to consider in the pricing process is the messaging and packaging of the pricing changes. If your users are impacted by price, then you probably won’t be able to retain them in the long run since cheaper competitors will surely come to market. Instead, the conversation needs to be about value.

I suggest that the conversations you have with prospects and current users should be around outcomes, results and success. If your messaging is around feature, then you’ve already lost the battle because any competitor can copy features. Think about what value you bring and how it is represented in the price.

While there are multiple pricing strategies often seen in both the physical and digital goods space such as ‘skimming’ which we see in the mobile device space that focuses on higher prices upfront for early adopters to ‘penetration’ that concentrates on undercutting your competitor in the hopes that you can extract users, in recent years a more elegant strategy has emerged for SaaS companies called ‘Value Pricing’.

The definition of Value Pricing is ‘Applying a price to a service that is congruent with the value derived from the service rather than the underlying cost to create and deliver the SAAS, market prices, specific margins, etc.’

The fundamental difference between this strategy and others that have proceeded it is that it focuses on the psychology of the user and affixes perceived value as the north star.

The new paradigm is focused on ‘what’s in it for them’ vs ‘how much can I charge for this widget’. This slight context change is quite drastic since we now have to treat each conversion as an emotion-based transaction focused on benefits, or in other words, the desired outcome.

This introduces an exciting new advantage for vendors; the value doesn’t have to be ROI-able in a traditional sense. An example of this is SuperHuman; keyboard shortcuts have always existed within email clients, but the positioning and perceived value of the product have catapulted it into becoming a Silicon Valley darling with a waiting list in the tens of thousands.

In closing, I would say that pricing comes down to understanding what the user cares about, their goals, their motivations, the problem statement and their desired outcomes. Remember that there is no ‘perfect’ price and that it’s a process of testing and validating what the market is willing to accept based on the perceived value you provide.

If you have a specific price in mind that you want to generate per user and the market doesn’t value your product at that tier, then go back to your user research and see if there is a feature gap that once filled will allow you to move upmarket in your pricing.

Nabi Awada is a product manager, strategist and entrepreneur with over 15 years experience in the development and management of consumer and enterprise web & mobile software. He can be reached via Twitter, Linkedin or his website.