Three Dimensional SaaS Pricing (and Why You Need It)

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:

  1. The most obvious - but also hardest to do - is just to change the price. Every Jan 1, simply increase your prices 5-10%, with no grandfathering. But what about churn? Well, above we discussed giving away features to get customer feedback. There is no better way to obtain user feedback - good, bad, and ugly - than to raise your prices. Ideally you have a certain amount of customers loyal to your platform no matter what. It may make sense to run some models on just how many you can afford to lose and still come out ahead with your higher prices. Raising pricing is a standard Private Equity takeover playbook - and it works or else they wouldn’t do it.
  2. Include a clause in annual agreements that each renewal cycle the price will increase by a percentage (commonly between 5-7%). This works especially well in industries where prices tend to be negotiated. Will customers try to negotiate this clause away? Of course they will. This gives your sales team some wiggle room, and you can also add that you’ll agree to flat increase only if the customer is not satisfied at the end of the term. This tactic comes with an added bonus: it gives the customer a good reason to discuss the account at the end of the term. If you have a great product that you feel confident in, customers will want to keep using it. Evergreen renewals without conversations don’t get you feedback and they don’t get you a 3-D pricing plan - do this to get there.
  3. Once you’ve implemented the automatic price increase, go ahead and negotiate with customers - but upgrade them instead. Offer to waive the 7% increase in favor of an upgrade to the next tier, with more features or users (which is likely to come out to more than 7% anyway - gotcha!).

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!