I recently did office hours with 500 Startups. Their most recent SF batch is astoundingly awesome. I met with a few SaaS companies and we talked about pricing.
I’ve given this advice to a number of founders in our portfolio, SaaS and otherwise. They’ve found it useful.
Your company’s products should be priced in a way that align’s your success with your customer’s. That is to say that your customers don’t buy your product for its features, they buy it because of what the features do for their goals. This is a subtle but important difference.
In many SaaS businesses the price increases as features and/or users increase. A SaaS business selling to businesses often charges by the number of users that use the platform. That may come in the form of employees using a tool or a business’s total number customers or orders. You get the point.
Most pricing grows along with that scale. More users = higher costs. The logical thought is that a higher number of users puts more load on the SaaS business and should pay a higher cost. This thinking is flawed.
Businesses buy your product for what it does for them. A marketing tool will hopefully increase your business’s revenue per customer, making you more money. An infrastructure management tool increases your computational efficiency per machine increasing your profit per machine and/or your overhead per machine, saving you money.
If your product’s cost scales linearly as your customer’s size grows, you are penalizing your customers for their success.
Instead, make your business about helping your customers achieve their goals. Charge more when your customers achieve them and less when they don’t. Slack does this well. As did a upsell recommendation tool I used in a past life managing a large ecommerce business.
If your business is selling tools that increase average order value in ecommerce, then get paid when you do that. Setup a constant control group in your tools to show what customer behavior is without you and then show what it is with you. Get paid a percentage of that performance when you perform. Adapt this thinking to your business’s fundamentals.
When you don’t perform you’ll get paid less.
Costs that rise linearly are the first thing businesses look to cut when times get tough or they start to reach scale. A great example of pricing gone bad is Zendesk. Your costs to use Zendesk rise linearly as your staff size increases. Nothing about Zendesk’s pricing is tied to your business’s success. As you grow in people you pay more. I don’t know what Zendesk’s goals are for my business except to charge me more if I grow.
Be in the business of helping your customers be more successful, no matter if you are a SaaS business or a widget maker. Show them that you are only successful if you can deliver on the promise to make their business better. Don’t just get paid to show up.
Do this and your customer relationships will be more defensible than the lower linear pricing that your competitors will offer then.