Hey - it’s Alex!
Today, I will share with you:
1️⃣ 3 Actionable SaaS growth tips
👉 The 5 steps to get started with your SaaS pricing
👉 10+ SaaS pricing fundamentals
👉 6 great SaaS pricing examples
2️⃣ 1 Bonus tip by an experienced founder/VC/SaaS expert - this time by Jean Michel Diaz (Co-Founder of Echometer)
3️⃣ 1 Bonus material (software, content, news) - this time the 2023 comprehensive SaaS suite
… that will help you quickly grow your SaaS product 🚀.
👉 Before you read on:
✅ Create your own powerful SaaS Growth Strategy with my FREE Workbook (helped 2000+ SaaS professionals)
✅ Nail your Go-to-market strategy fundamentals with my FREE 1-page Notion Template (helped 750+ SaaS professionals)
✅ Unlock your growth potential with 90+ actionable SaaS growth tactics (helped 150+ SaaS professionals)
A lot of early-stage SaaS founders ask me frequently.
💡 "What is the right pricing for my SaaS product?"
The following Ultimate guide for early-stage B2B SaaS pricing will help you create powerful SaaS pricing for your product.
1. The 5 steps to get started with your SaaS pricing
Coming up with your pricing is not easy. But also don’t make the mistake to overcomplicate in the beginning.
If you follow:
✅ The 5 steps to get started, and
✅ The SaaS pricing fundamentals (part 2)
you’re doing great (and probably better than 90% of other startups).
Step 0: Understand your customers’ pain
It all starts with understanding your ideal customer profile and their main pain points (you are going to solve with your product).
Try to quantify the pain in € or hours. Doing so gives you a better understanding of how ‘big’ the problem is for them. The bigger the problem, the higher the value of a product that removes the pain.
Step 1: Decide on a value-based pricing model
Don’t make the mistake to go for cost-plus pricing or competitor-based pricing.
Cost-plus pricing would mean you calculate your costs for offering the service and add a margin on top (that’s what you mostly see in service businesses).
The big problem with cost-plus pricing is that your customers don’t care about your costs, they care about the value of your product. But of course, knowing how much it costs you to serve one additional customer (knowing your unit economics), helps you to figure out what’s the lowest price you can offer (and still be profitable).
Competitor pricing can be a great benchmark for your own pricing. It depends a bit on your SaaS positioning, and how much you should care about them.
My recommendation is to go for your own pricing, follow a value-based pricing strategy, and only check the competitors’ pricing for benchmarks if you’re in a crowded market. If you are in a relatively crowded market (red-ocean market) your price point needs to be competitive with your direct competition and can’t be completely off.
Value-based pricing
It basically means you’re charging your customers for the value they receive using your product.
Step 2: Choose your value metric
A value metric is “something that a customer or prospect associates value with” (Chris Hopf).
It’s basically what you charge your customers for.
Typical value metrics in B2B SaaS are:
✅ per user/seat
✅ per bookings
✅ per revenue
✅ per subscriber
✅ per contact
✅ per views
✅ and per storage (GB)
✅ Industry-specific metrics (e.g. zaps for Zapier, resources for Locaboo)
✅ Feature-gating as a specific type of value metric
Examples of value metrics:
- Payment providers —> € Revenue generated / € Transaction volume
- Email Newsletter Tool —> # of subscribers / # emails sent
- Video hosting platform —> # videos uploaded / video storage (GB)
The right value metric:
- allows you to scale with your customers (with more usage)
- prevent users to churn (if they reduce usage) and rather naturally downgrade
- allows you to be appealing to multiple customer segments (as you charge accordingly and not a flat fee)
So you are basically aligning your interest (grow revenue) with your customers’ interest (getting more value).
Pricing expert Patrick Campbell says
“a value metric however allows you to have essentially infinite price points — maximizing your revenue potential”.
Patrick Campbell (Pricing your SaaS product); guest post in Lenny Rachitsky newsletter
3 characteristics of a great value metric
How do you choose the right metric?
A powerful value metric combines the following 3 characteristics:
✅ Easy to understand
Keep it simple. Prospects need to understand it (fast) - on your pricing page and during the sales product demo. If it takes them too much thinking, you will lose potential customers.
They need to see the pricing and know which pricing package is the one for them (as they know how much of the value metric they will use in your product).
Example: HR knows how many employees they have (e.g. per seat pricing), and Restaurants know how many table bookings they get (e.g. per booking pricing).
✅ aligned with the customers’ value of using your product
It’s best if your interest is aligned with the customer's interest. If you know that your customers want more bookings, charge per booking (e.g. hotel, restaurants, sports venues, etc.). Doing so prevents you and your customers have different interests. Being aligned helps a lot here.
✅ Scalable and grows with customers’ usage of your product
The higher the usage of the product, the more of the value metric is used, and the higher the value of your product for the customers, which leads to a higher willingness to pay. This means your revenue scales with the usage of the product.
Email validation tool Zerobounce is a great example here (value metric = email validations).
Or webinar software livestorm (charging per contact joining webinars).
Tips to keep in mind when choosing your value metric
✅ (ideally) Start with only 1 value metric
✅ Only choose seats if each seat provides additional value
Start with 1 value metric
If you check the big successful SaaS companies nowadays, you will mostly find pricing that’s based on a combination of 2 value metrics.
- Miro (feature-gated + per member)
- Calendly (feature-gated + per seat)
- Hubspot (feature-gated + per contact)
Obviously, that’s top-notch, but also very hard to execute well. It requires a lot of testing, a lot of customer insights, and a lot of resources.
And mostly that’s what is missing most early-stage SaaS startups. So make your job easier, keep things simple, and start with 1 value metric.
✅ Seat-based is great, but only if it works
Using users (e.g. employees) as your value metric is great. But only if each new seat provides additional value. If not, you will see that customers share user accounts and this will block you from adding expansion revenue. If each user sees different things in the product, user-based pricing can work. Some examples:
- Time tracking tool for employees (each user need to track their specific working hours)
- CRM for salespeople (each sales person need their own deal pipeline)
- Project management tool (everyone needs their own task list)
Step 3: Decide on your price point(s)
If you are just starting your business the exact price point isn’t as important as it is for later-stage companies. As Patrick Campbell said:
“In the beginning, the actual number you're charging isn't that important. There are some exceptions, but for the most part, you should first be figuring out the range you're in: a $10 product, $100 product, $1k product, etc. Don't waste time debating $500 vs. $505, because this doesn't matter as much until you have a stronger foundation beneath you.”
In order to know if you charge the right price point, you need to measure the value and quantify it (if possible). In case that’s possible for you (e.g. Revenue generated like Stripe), pick this as your value metric.
In most cases, it’s rather hard to quantify. So you need to find the best proxy for the value that your product delivers (in 99% you will find a great proxy for the value). The best proxy for the value is your value metric.
Check out the 10x rule and the Van Westendorp model to get into details on how to do it.
Using them allows you to find the price point(s) for your product.
Step 4: Decide on your packaging
Packaging means that you need to decide on the pricing tiers (how many do you offer), what’s included in each of the tiers, and also what’s not included in any of them (e.g. add-ons).
In case you want to package your plans around specific features (feature-gating), that’s the time to do so. Are there specific features that are only relevant to a specific customer type? What are the core features that need to be part of every pricing tier?
Limit to max. 5 plans (paradox of choice)
Limit the number of options customers can choose from. It's called the paradox of choice - the more options they have to choose from the harder it's for them to make a decision.
It’s highly recommended to offer a maximum of 5 pricing tiers, better 3 to 4 different ones. Each of the pricing tiers targets a different customer segment.
Add a short description of what this plan is and who is it for
This is another great way to make it clear to prospects what plan is right for them and what costs they can expect.
Notion pricing
Here are some notes on packaging:
- Exclude features from your pricing tiers and offer them as add-ons in case they are only relevant for a few customers (and are not fundamentally important for the core product)
- Keep the differences between the plans simple to make it easy to compare them. The mode metrics/features change between the plans, and the harder it is to get for prospects.
- Don’t make an extensive list of features, rather highlight the most important ones
Beehiiv pricing
If you are already more advanced, check out Jonas Rieke's article on data-driven framework for SaaS packaging.
Step 5: Pricing terms
The last step is deciding on pricing policies including cancellation policy, renewals, billing options, discounts, and how to handle price changes.
Let’s take a look at each of them.
Contract duration
What options do you have in terms of contract duration?
✅ Do you offer yearly or even 2,3,4 year contract options?
If yes, do you have the right to increase prices during that time? The more you serve enterprise clients, the more common long-term contracts (with agreed terms on if/how to increase prices).
Cancellation policy
You need to decide how your customers can cancel their subscriptions.
✅ for monthly paid plans: it’s common to offer monthly cancellation options.
✅ for yearly paid plans: it’s common to offer cancellation to the next billing cycle
And as well as how customers can upgrade and downgrade during their contract.
✅ for yearly plans: most common is that customers can upgrade anytime, while downgrading is only possible to the next billing date. For monthly plans, it’s easier.
(Auto) Renewals and timelines
Make sure that contracts are automatically renewed if customers do not actively cancel their contracts. It’s common for SaaS. Make sure that customers know their timelines if they want to cancel.
Billing policy (monthly, yearly)
What kind of billing options do you offer? For SaaS, the most common are monthly payments or yearly upfront payments.
✅ Unless there is a specific reason to offer quarterly (or any other billing cycle) stick monthly or yearly payments. It makes your and your customer’s life easier.
Check out subscription billing tools like Chargebee, Stripe or Paddle.
Discount policy
Every startup gives discounts. That’s totally fair. But make sure to create a framework on when, how, and why you give discounts. Especially if you are following a sales-led growth strategy, how flexible is your sales team with discounts?
Here are some recommendations to start with:
✅ offer up to a maximum of 20% discount (better 10-15%) for yearly upfront payments (vs. monthly payments)
✅ (for enterprise deals), you can also offer discounts on long-term contracts (e.g. 3 or 5-year contracts). Of course, there are a couple of things to consider:
- Can we use upfront payment (cash flow and liquidity) to invest in further growth?
- What is our annual churn rate right now, so how much is it ‘worth’ for us to lock in customers for 3 or 5 years?
Your discount policy also depends on the stage of your company (early-stage trying to find product-market fit vs. scaling your business with 2-3x growth per year). In both cases, it’s recommended to get something in exchange for the discount.
In early-stage this could be:
- a testimonial or case study
- being a referral partner
- hosting a webinar or event together
For later-stage companies, you can offer a discount in exchange for:
- an upfront payment,
- long-term contracts (e.g. 3 years), or
- being a pilot customer (for a new product or feature).
Price increases
Almost every startup will change its pricing over time. This means you will get confronted with the question of how to increase prices for existing customers.
💡 Do you keep existing customers on their existing plan (called grandfathering) or do you upgrade them to the new pricing?
Grandfathering means that your existing customers remain in your old pricing, while only for new customers the new pricing is applied.
If you grandfather or update existing customers is a case-by-case decision. But here are some thoughts on how to decide:
✅ If you grandfather, always offer your existing customers to switch to a new pricing plan - especially if you restructure your plans. This makes it easier to maintain for you over time.
✅ Communicate price changes early enough (3 months before) and focus the communication on how the product evolved since they joined and what this means in value for them.
✅ Combine the communication about the new pricing with releasing/communicating new highly valuable features (doing so links the new pricing to increased value).
✅ Send different emails to the different types of customers - existing customers vs. trial users vs. your MQLs/SQLs - doing so can actually boost your sales (as you say prices will increase, so now it’s a good time to get started with the old pricing)
✅ Be aware that upgrading existing customers will result in churn. Make a calculation on the potential upside (additional revenue) vs. the downside (churned revenue). If you see a chance to increase revenue by 15-20% or more, do it. If the potential upside is lower, I would rather recommend not touching existing customers now (not worth the hustle).
Now you know how to get started with your SaaS pricing and what’s most important for early-stage SaaS startups.
🚨 Coming soon…I’m launching a new program in Q3 2023 🎉
You know that I’m helping early-stage B2B SaaS founders to grow from 0€ to 1M€ ARR with a powerful GTM strategy.
At the moment I do this in two ways: Advisory/Sparring & Consulting.
As many of you ask for it, I’m now launching a 3rd way 🎉.
A 12-week GTM coaching program for early-stage B2B SaaS founders and leaders.
The program will help you:
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✅ to do the right things at the right time (proven frameworks)
✅ to hold yourself accountable to get things done
👉 Interested? Apply HERE for my waitlist (Limited to 10 founders).
2. The SaaS pricing fundamentals for early-stage B2B SaaS
Isolation effect (on pricing page)
Highlighting one pricing tier (Isolation Effect) will increase your pricing page conversion rate as humans tend to decide on products that are highlighted or in some way 'isolated' from the rest of the options.
You can do so by highlighting with a plan with a badge (e.g. most popular), different color, or a frame.
Price anchoring (nudging)
Make use of the fact, that humans use reference points to assess the price and value of something. Leverage this fact and nudge customers to your preferred tier. You achieve this expensive tier 'relatively' cheap compared to the cheaper options, so your customers get the feeling that this is a 'great deal'.
Incentivize yearly payments (also visually)
Offer yearly discounts (10-20% discounted) compared to monthly plans.
✅ Offer discounts for long-term contracts (e.g. yearly upfront payments)
✅ For your annual discounts, you can offer up to a 20% discount (don’t offer more than that).
✅ Communicate the monthly price, even paid annually.
Don't undercharge
Most startups undercharge their product. There are multiple reasons for this:
❌ They don’t know the value of their product (never quantified the value; see above)
❌ They believe being cheap helps them to win more clients (the opposite can be true)
❌ They never strategically thought about the right price, once implemented it never gets touched again
Collect pricing-relevant insights (like churn reasons & closed lost reasons)
In order to effectively optimize your pricing, you need to collect feedback from the market. Good sources are churn reasons (do customers churn because of pricing?) and lost reasons (what % of deals are lost because of costs).
Work continuously on pricing (min. 2x per year)
Responsibility for pricing is for most early-stage companies not clearly defined.
CEO, product, sales & marketing mostly share the responsibility. Shared responsibility means no one really feels accountable and cares about it. This leads to almost no optimization and iteration of your pricing. Don’t make the same mistake:
✅ Decide who is accountable for pricing in your company
✅ Establish a routine to work at least twice a year work on your pricing strategy
Don’t offer Freemium
Jason Lemkin recently said that you need 50 million active users for freemium to actually work.
✅ Freemium is great for later-stage startups that target a huge market.
✅ Freemium only works if you have a super large TAM (total addressable market) and is better for well-established players (e.g. Zoom, Dropbox, Slack, Calendly…).
If you are early stage and offer a freemium plan, you will not know if your customer really values your product (and later on are willing to upgrade to a paid plan).
So it’s better to go with free trials and paid plans.
Transparent pricing (only hidden for enterprise clients)
Don’t hide your pricing and have a transparent pricing page.
Unless you are selling SaaS to really large customers (Enterprise market) there is absolutely no reason to hide your pricing.
3. Get inspired by 6 awesome SaaS pricing examples
Take a look at the following pricing pages and get inspired for your own pricing.
2️⃣ Slack Pricing
3️⃣ Paddle Pricing
6️⃣ Beehiiv Pricing
💡 Best tip, failure, and learning by Jean Michel Diaz (Co-Founder of Echometer)
Productivity alone will never make your startup succeed (only Learning Speed will)
I am a true productivity-freak: I rigorously plan my working weeks, mostly stick to my schedule and (almost) never miss a deadline. And I am proud of my productivity.
Given this background, it was hard to learn that “productivity” is not what makes a startup successful.
The success of a startup depends on its ability to find a solid product-market fit. The key factor for achieving this is not productivity, but learning speed—the rate at which critical hypotheses are validated. Here’s how to optimize learning speed:
- Question everything: Actively explore the potential flaws in your startup’s most crucial assumptions. Too often founders convince themselves of something to be true that isn’t. Wishful thinking sets you up for failure.
- Test leaner: Testing assumptions often don’t even require launching an MVP. Instead: Check if there is a search volume, if people click on ads, and experiment if they sign up on a landing page.
- Iterate your ways of working: Avoid long-term planning and focus on identifying and testing the most crucial assumptions. Work in short sprint cycles and use retrospectives to continuously improve your ways of working and remove barriers that hinder quick learning.
At Echometer, we run more than three experiments per week, which drives our growth and informs our decision-making.
🧠 Do you want to be next and share your best tip with 2000+ SaaS professionals? Reach out to me via Linkedin.
💪 1 Bonus material (software, content, news) - this time the 2023's Comprehensive SaaS Suite by Brian Ortiz
The 2023 SaaS suite is a compilation of 20+ SaaS resources including:
🔸 41 profitable SaaS ideas
🔸 list of 8000+ VCs including emails
🔸 SaaS copywriting checklist
🔸 and much more
P.S. Check out my list of best software tools for SaaS startups for more inspiration.
Happy growth 🚀.
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