One of the most difficult strategies every SaaS application needs to develop is pricing. Few things could impact revenue - and therefore the future of your company - as much as pricing. And yet, faced with the overwhelming tasks of creating and running a SaaS business (not to mention the intricacies of pricing models), many SaaS startups don’t put the proper thought into this critical component.
Most SaaS organizations end up with something that looks like this: some version of bronze, silver, or gold plans with more features at each tier. You may also, either separately or as a part of this, see per seat licensing or other “usage” pricing metrics. “This many users” or “send this many messages” or “use this much storage space”.
What are 2-Dimensional Plans?
Those plans are what I call two dimensional plans. One dimension is the tier, the other dimension is the usage. Many early stage companies over simplify, often really only using a single dimension. Some might only have one plan, or don’t charge per user for whatever reason. In some cases, this is appropriate (for example selling to SMBs with very few employees, or specialty apps in fields like accounting or legal where there are very few users in a department). For usage, the plans might already include enough messages or storage for most users, just protecting against extreme usage.
Another common tactic startups use is “grandfathering” early customers into an all-inclusive package with no upsells. Why is that a problem? Well, because you’re creating a legacy of no price increases, and you’re ultimately not charging for the increased features you’ll eventually create. Some companies are afraid that adding a "pricing gate" will deter current customers from using new features - which is a problem because they need them to provide feedback so that they can optimize the platform and create the best experiences. That’s a real concern.
Here’s the problem. All of this is leaving money on the table. And you’ve left out other pricing dimensions that are critically important as you scale.
The Third Dimension - and Why it Matters
Simply put, time is the third dimension. Your prices, similar to the pricing of everything around you, should rise over time. You can’t rely on upgrades, changes, or even inflation to grow your share of wallet over time. In fact, increasing pricing strictly in line with inflation will likely cost you money in the long run. The fact is that over time, your price should increase to remain competitive in the current market as well as adjust for inflation. You need to grow. Growth-minded SaaS businesses know that every area needs to grow over time. Grow features. Grow customers. Land and expand accounts. This is how you can obtain the ever-coveted Net Negative Churn.
Many startups are hopeful that their prices will rise naturally over time with an increase in one of the dimensions I mentioned above (for example, customers will naturally increase usage or of course will want that new feature you created). The problem is, these strategies are hopeful in nature and not a concrete path to more revenue. My suggestion is that rather than wait for these variables to result in a price increase, you be explicit and make it happen. Your revenue will thank you for it.
Makes Sense - But How?
I didn’t say it would be easy! But it’s certainly possible to take time into account and adjust your pricing accordingly, to lead to higher revenues. Here’s a few ideas:
Pricing is an issue that isn’t going away for SaaS founders. It is essential to get pricing elements right so that your revenue and profit numbers meet your goals. No one is saying setting pricing is easy, so don’t be afraid to engage an expert if you need some assistance with your strategy. Just don’t ignore it and hope it magically solves itself!