# Pricing strategies - Great article: [How To Drive Up Your Average Deal Size. And Remember -- Almost All Pricing is Relative. | SaaStr](https://www.saastr.com/all-pricing-is-relative-how-to-make-that-work-in-your-favor/) - The Competition will Frame You.  So at least try to be the Cadillac of your space.  If your direct competition is $10 a month per user, ideally, redefine the space and try to get $100.  But if that’s too hard — at least be The Cadillac of Your Space and charge $20.  It may sound nutty, and scare your sales team.  But customers will pay for trust, for brand, and for the best solution.  Price yourself at The High End of Normal, at least. - Try to Double Your Pricing on The High End. Tomorrow. Even If It Doesn’t 100% Work, You’ll Learn. If your biggest customer is $50k a year now, ask for $100k next time. - If You Don’t Have a Ton of Direct Competition Yet — Create a Comp A Few Value Layers Up the App Stack. Not sure how much your Customer Success Software is worth? You know what, maybe it is worth 70% of Salesforce. Not 10%. - Be More Enterprise. It Doesn’t Really Cost That Much. Embrace security audits, SecOps, disaster recovery, penetration testing, ISO and HIPAA and all the acronyms. - If Your Seat Price Feels High, Maybe Your ACV Is Still Cheap. Try Perpendicular Pricing. $50 a seat may sound like a lot. But $20,000 a year may be cheap for a solution. Don’t let seat pricing, or other conventions, handcuff you. In fact, “perpendicular” pricing can really work. Paying an extra $50 a month on top of Salesforce per rep can seem rich. But paying $50,000 all-in to get the team more leads? A bargain at twice the price if it just leads to a few good extra deals closing. - Redefine Your Comp. Ask Your Existing Customers How You Can Solve an Even Bigger Problem. And Then Tell The Next Ones That’s Exactly What You Are Doing. Ask your top customers what you’d need to deliver to charge 2x. What new functionality, solutions, and value. And listen. And then reframe your product around that solution, at least for positioning for now. - Charge More for Higher End Editions, Not Less. The more value you provide, the more of a solution, the more you should be valued closer to a higher-end, more expensive comp. Don’t provide declining per-seat pricing for Enterprise Editions. Provide mark-ups. - Don’t Let Existing Budgets and Budget Thinking Define You 100%. If you are hearing your little tool isn’t budgeted today, or there’s only “$5k budget”, that may be true. But don’t let that define you, or deflate you. There’s always more discretionary budget for revolutionary products. - [Reinvent the Wheel on Product. Not on Pricing. | SaaStr](https://www.saastr.com/how-can-enterprise-software-saas-pricing-be-optimally-defined-taking-into-account-that-two-of-three-versions-of-the-software-can-be-offered-e-g-small-medium-large/) - [7 DOs and DONTs for Seed-Stage SaaS Pricing | by Rodrigo Martinez | Point Nine Land | Medium](https://medium.com/point-nine-news/7-dos-and-donts-for-seed-stage-saas-pricing-911acf88ca2) - Good recap - [Camels and Rubber Duckies – Joel on Software](https://www.joelonsoftware.com/2004/12/15/camels-and-rubber-duckies/) - Good recap - [Pricing your SaaS product - by Lenny Rachitsky](https://www.lennysnewsletter.com/p/saas-pricing-strategy) - Step 1: Determine your Value Metric - Step 2: Determine your customer profiles and segments - Step 3: User research + experimentation - Advice: - Don't discount over 20% (results in higher churn) - For upgrades to annual discounts don't use percentages and try offers - You should experiment with your pricing in some manner every quarter (more price changes correlate to higher ARPU) - Case studies boost willingness to pay quite a bit - Design helps boost willingness to pay by 20% - Integrations boost retention and willingness to pay - Good recap - [The Ultimate Guide to SaaS Pricing Models, Strategies & Psychological Hacks](https://www.cobloom.com/blog/saas-pricing-models) - Great article on pricing: [The Black Arts of SaaS Pricing](https://training.kalzumeus.com/newsletters/archive/saas_pricing) - [9 Tricks to Experiment with your Pricing Strategy | by Julian Lehr | Point Nine Land | Medium](https://medium.com/point-nine-news/9-tricks-to-experiment-with-your-pricing-strategy-329b07a5b171) - [The Hidden World of Pricing: Uber, Trulia, Etsy, Superhuman & More](https://www.nfx.com/post/the-hidden-world-of-pricing/) - Superhuman pricing sensibility measure - Number one, at what price would you consider Superhuman to be so expensive that you would not consider buying it? - Number two, at what price would you consider Superhuman to be priced so low that you would feel the quality could not be very good? - Number three, at what price would you consider Superhuman to be starting to get expensive so that is not out of the question, but you would have to give some thought to buying it? - And number four, what price would you consider Superhuman to be a bargain, a great buy for the money? - Thinking about more value-based pricing or pricing based on outcomes is also something that you want to think about if you’re pricing yourself or your services. - [Ten Year's Worth of Learnings About Pricing - Tom Tunguz](https://tomtunguz.com/pricing-summary/) - Strategy - There are only 3 pricing strategies: Skimming, Maximization, and Penetration. - [There are Only 3 Pricing Strategies for Your Startup](https://tomtunguz.com/the-3-pricing-strategies/) - Maximization (Revenue Growth) - maximize revenue growth in the short term. - Penetration (Market Share) - price the product at a low price to win dominant market share. - Skimming (Profit Maximization) - start with a high price and systematically broaden the product offering to address more of the customer base at lower prices - Philosophy - There are two pricing philosophies: cost-based pricing and value-based pricing. - Structure - 3 Part Tariff (3PT) - Again, the software has a base platform fee but the fee is $25,000 because it includes the first 150k events are free. Each marginal event costs $0.15. - In academic research and theory, the 3 part tariff is proven to be best. It provides many different ways for the sales team to negotiate on price and captures the most value. - Position - There are three ways to position pricing: per unit of consumption (message, analytics event, telephony minute), per person and ELA (enterprise license agreement), which is a prenegotiated deal for everyone in a business. - [3 Tips for Building Discounts into Your SaaS Pricing Model (from OpenView Labs) – SaaStr](https://www.saastr.com/3-tips-for-building-discounts-into-your-saas-pricing-model/) 1. If a SaaS purchase can go on a credit card, you don’t need to discount. 2. Build a double discount into your SaaS pricing structures for larger enterprise deals. 3. Understand when — and when not — to try to beat competing offers. - [Why Good-Better-Best Prices Are So Effective - HBR](https://hbr.org/2013/02/why-good-better-best-prices-are-so-effective) - When this strategy is implemented, it’s often surprising how many customers choose the best version and its bottom line effect. - [Pricing determines your business model](https://longform.asmartbear.com/pricing-determines-your-business-model/) - [Pricing Your Product](https://articles.sequoiacap.com/pricing-your-product) - Sequoia - Increase perceived value - “If nobody’s buying my product, it’s because the gap between price and perceived value either doesn’t exist or it’s not large enough.” - Let your price tell a story - Know your pinch points - Design for snap judgments - There’s another reason why traditional economics aren’t a good way to set price: people don’t act rationally. - Tip: Logic kicks in eventually, so your price needs to stand up to scrutiny. If your product is priced too low, someone will try to figure out why. If something cheap is dressed up with expensive imagery people will figure that out, too. Big purchases like a million dollar enterprise-software deal are going to require some rigorous analysis no matter how good the messaging. - Decoy pricing - Developing your pricing hypothesis # Best ACV & Deal size - [A Little Less About Pricing. A Little More About Deal Size. Please. -- SaaStr](https://www.saastr.com/a-little-less-about-pricing-a-little-more-about-deal-size-please/) - [Jason Lemkin, founder of SaaStr, on investment criteria & how to maximize company growth - YouTube](https://www.youtube.com/watch?v=2mGrQ-kmjmY) - [How do I get users to pay for my SaaS instead of other Free similar products? – SaaStr](https://www.saastr.com/how-do-i-get-users-to-pay-for-my-saas-instead-of-other-free-similar-products/?mc_cid=e410b799d8&mc_eid=9bf1246962) - Be the “enterprise” player in the space. Go upmarket. It’s a well-proven path. - Provide what medium and bigger businesses want, e.g. - True security. - Data export. - HIPAA, SOX, ISO, etc. - Professional Services. - Integrations with enterprise-grade products (Salesforce, Workday, SAP, Microsoft Dynamics, Box, etc.). - Etc. # The criteria of good pricing - The possibility to land & expand like most SaaS do (eg: Salesforce) - The possibility to make the client pay more if they are bigger, because they will get more value out of it. Add-ons, licenses, etc. - [How do you best calculate a price for a new product? | SaaStr](https://www.saastr.com/how-do-you-best-calculate-a-price-for-a-new-product/) - And remember, unless you are a true commodity, “cheaper” usually isn’t a pricing strategy in software. Brands matter. Trust matters when you are running your entire business on a piece of software. 90% of customers don’t want the cheapest solution — they want the best solution. # Usage-based pricing - [The state of SaaS pricing - Kyle Poyar’s Growth Unhinged](https://www.growthunhinged.com/p/the-state-of-usage-based-pricing?utm_source=newsletter.failory.com&utm_medium=newsletter&utm_campaign=the-funded-dead) - [Usage Based Pricing: 3 Questions to Ask Before Leaping by @ttunguz](https://tomtunguz.com/usage-based-pricing/) - Is my startup selling an application or infrastructure? - Selling UBP to a buyer accustomed to buying a flat seat count introduces more friction into the sales process. Often, the effort probably isn’t worth it, unless the company’s stated strategy is to differentiate on price structure. - What should my unit of pricing be? - The goal of UBP is to align the cost of software with the value. The unit of pricing is the crux to unlocking that puzzle. - Can this pricing model achieve certain boundary pricing conditions? - How much should a Fortune 500 bank pay for your startup? How about a 50 person SaaS company? - The UBP pricing scheme needs to satisfy these boundary conditions: a certain customer ought to pay a certain amount in order for the business to succeed. - Often, a straight UBP pricing model doesn’t scale into the enterprise. A F500 may not consume enough units to justify a $250k or $2m deal. Introducing pricing layers on the unit of pricing can remedy this challenge. Basic units cost $1. Units that are HIPAA compliant cost 3x as much and FINRA compliant is one dollar more per unit. - Sometimes, companies add a second part to the UBP model: the platform fee, which makes the UBP a 2-part tariff. The platform fee instant boosts the ACV ad can be tailored per customer segment - How to use usage-based pricing - [Usage-based pricing isn't always best](https://chrisreuter.me/2023-02-16-usage-pricing/) - When should you use usage-based pricing? - Usage-based pricing is a good primary metric for saving people money based on what they were doing before - If you aren’t saving people money, you’re going to start to run into the classic consumption pricing problems: - Charges aren’t predictable - Metric confusion (what’s a Credit ™️?) - Capture the whale with usage-based pricing as a secondary metric - While you might not be a great candidate for usage-based pricing as a primary metric, you can still include it in your pricing tiers as a secondary metric. - B2B SaaS has always relied on the whales to effectively monetize. In following with the Pareto Principle, a disproportionate % of revenue comes from a very small % of clients. This is the concept of a fat tail. - Usage is probably a part of your product, but you may inhibit adoption based on the objections above. The solution is to place a usage-based cap on your pricing tiers. If a team or organization can embed your product with accessible pricing, they’re more likely to hit usage caps on whatever tier they are on. Once usage caps are breached, then the usage metric can flip to your primary metric on a client-by-client basis. - You’re betting on the 0.1% of companies that will embed your product to the extent that they need outsized usage and are willing to pay an outsized amount for that usage. At that point, it becomes a necessity for their business model and usage-based pricing becomes a value-add as opposed to an objection. # Annual contracts? Not always needed - Interesting research that shows retention benchmarks and shows that annual contracts don't change net retention (vs. monthly subscriptions). - Hence there is value in letting people buy the way they like to buy - The research: [SaaS Capital: Across 1,500 SaaS Startups, Yearly Contracts Don't Actually Increase NRR | SaaStr](https://www.saastr.com/saas-capital-yearly-contracts-dont-actually-increase-nrr/) # Freemium vs Free trial - [Freemium vs Free Trial: Which is Better for SaaS Startups? | by David Sacks | Craft Ventures | Medium](https://medium.com/craft-ventures/freemium-vs-free-trial-which-is-better-for-saas-startups-97b9ac737597) - First, although our sales team liked the ability to prospect into warm accounts, they complained that there was little urgency to buy. Most of our users were quite happy on the free version. Our sales reps often said that their biggest competitor was “Yammer Free.” - Every time there’s a feature release, the product team has to decide what’s free and what’s paid. This is not a one-time decision as the team will want to measure the results and constantly tune the paywall. A time-based paywall is simpler and saves a lot of brain damage. - Third, paid marketing is much more complicated with a Freemium model. It’s hard to assess the ROI of a paid marketing campaign when it can take many months or even years for a lead to convert into a revenue-generating account. => Like Slack - Free trial > freemium - Free Trial risks user attrition in a way that Freemium doesn’t, but at least Free Trial forces a decision in a reasonable amount of time. Freemium causes procrastination, as users try to get by on the free version as long as possible. A time limit is more compatible with the sales process, which tries to reduce cycle time at each step in the funnel. - A well-crafted free strategy has the potential to rip through the market far faster than traditional enterprise sales. - [How freemium drives MRR for Trello, Slack, Wordpress, and Dropbox](http://blog.profitwell.com/how-dropbox-trello-automattic-and-slack-drive-mrr-with-subscriptions-and-freemium) - [Why You Need 50 Million Active Users for Freemium to Actually Work – SaaStr](https://www.saastr.com/you-need-50-million-users-for-freemium-to-actually-work/) - [Stacking the Bricks: Will Low Prices Help You Sell More?](https://stackingthebricks.com/will-low-prices-sell-more/) # Figure out willingness-to-pay - [The ultimate guide to willingness-to-pay](https://www.lennysnewsletter.com/p/the-ultimate-guide-to-willingness) # Raise pricing - [Stacking the Bricks: How to Raise Your SaaS Prices](https://stackingthebricks.com/guides/raise-saas-pricing/) - [Stacking the Bricks: How I raised prices... by customer request](https://stackingthebricks.com/how-can-i-raise-prices-for-my-existing-customers/) - [Stacking the Bricks: Make your customers beg you to charge more](https://stackingthebricks.com/make-your-customers-beg-you-to-charge-more/) - [Stacking the Bricks: Raise your SaaS pricing with my proven email templates!](https://stackingthebricks.com/template-copy-raise-saas-prices/) - [Stacking the Bricks: One weird trick to raising your monthly price without a customer revolt](https://stackingthebricks.com/one-weird-trick-to-raising-your-monthly-price-without-a-customer-revolt/) # Grand father customers - [5 Reasons Not To Raise Prices on Existing Customers. And 2 Better Ways to Do It Anyway. | SaaStr](https://www.saastr.com/5-reasons-not-to-raise-prices-on-existing-customers-and-2-better-ways-to-do-it-anyway/) # Discounts - [The Confounding Logic of Discounting | SaaStr](https://www.saastr.com/the-confounding-logic-of-discounting/) - **Control, but don’t eliminate, discounts in larger deals**. Put it through a control process so reps have bright lines. You can do that through simple rules at first, and later, through systems like a CPQ system. Don’t allow reps to decide on any discount outside of a small range. - **Segment your pricing so it gets more expensive for the largest customers**. And then — mark everything up 20%. If you have transparent pricing, make the prices for the most enterprise tier(s) 20% higher than the yielded pricing you actually model. If you have non-transparent pricing here, do the same thing by marking the first quote up 20%. Even if it’s more expensive than the competition — it’s OK. Pricing is rarely the #1 issue in a competitive deal, and if it is, you’ll hear about it, and the quote won’t lose you the deal. - **Model an additional “procurement discount” into larger deals.** Maybe mark the deal up 30% if the deal has to go through procurement.  It is what it is.  You can’t win here. - **Finally, once you have a real one — trust in your VP of Sales to work this out and hit her team quota and company ARR commit.**  If your VPS has to hit the company’s ARR goal (and not just a bookings goal), the two of you will be 100% aligned here. # Designing a pricing page - [B2B SaaS pricing pages in 2017: 100+ top businesses analyzed](https://chartmogul.com/blog/saas-pricing-pages-2017/) - [I Analyzed 250 SaaS Pricing Pages — Here’s What I Found | Process Street | Checklist, Workflow and SOP Software](https://www.process.st/saas-pricing-pages/) - [3 principles of killer SaaS pricing pages](https://blog.close.com/saas-sales-pricing-page-principles/) 1. Keep it simple stupid 2. The scalable plan 3. Value over price