Why a Simple Pricing Model is Bad for your Startup

SaaS pricing is a complex topic that’s too broad to cover in a single post (though some brave attempts have been made to some success). In this post I would like to focus on an often debated aspect of this topic , which is — should your pricing model be simple or complex.

Some examples of simple pricing models are usage based pricing (i.e. bandwidth, API calls, amount of data etc.) with linear scaling, or fixed-price all-inclusive plans (with no caveats or traps in small print). Proponents of the simple pricing model argue that customers prefer simplicity and are more likely to sign a contract based on a simple model. The counter argument is usually that simple models leave money on the table and are unable to capture the full willingness to pay of different customer segments.

Principles of effective negotiations

I personally believe complex models are better, but not for the reason cited above. I once took a negotiation course where one of the core principals taught was this: the more elaborate the offer negotiated, the higher the chances of finding common grounds. negotiations may start with a single item on the table, but when revealing the true motivations and interests of each side, there are always more values and assets that emerge. Placing those assets and values on the table enables both sides to find a deal that best serves the true needs of both.

Years after taking this course my career led me to business positions where I negotiated on a daily basis, and the more experience I gained the more validated that theory became. To clarify how this theory applies to SaaS pricing, let’s take a simple hypothetical case of a SaaS company named CodeScanner whose core technology it to scan static software code for security vulnerabilities.

Case Study: CodeScanner Pricing

CodeScanner’s pricing model is very simple: it’s a fixed price (say $1) per byte of code scanned. But does this simple model truly represents a customers value from CodeScanner? in other words, is the volume of code scanned a good measure of customer value?

CodeScanners real values

As with many SaaS services, the set of real values is probably more complex. For example, some customers may have relatively low volumes of code but are extremely sensitive to cyber attacks and see most of the value in some of CodeScanner’s advanced vulnerability detection features that are unavailable from other providers, others may see most of the value is the simple management interface that helps them monitor a large, globally distributed R&D team. Other customers may see value in CodeScanner’s integration capabilities enabling them link the service to a complex set of CI/CD tools, and others yet see most of the value is a set of features that help them attain certifications or meet compliance.

A pricing model that takes all of the above into account will do a much better job than the simple model, albeit in a more complex manner. Customers need pricing models to make sense. They need to understand exactly what they’re paying for and why. They also need the flexibility to custom-tailor their account to meet their budget by choosing only the highest priority features. A simple pricing model will miss on all these points while having the sole benefit of being easier to calculate (which for most tech buyers is not a big issue).

More negotiation options

The complex model also has the benefit of giving you more flexibility during negotiations. Some of the separately priced features you offer may have a very low added cost for you, but a very high value to the customer. I the case of CodeScanner, imagine a customer is trying to negotiate a discount. During the discussion you find that a premium feature you offer, for example, scanning for bugs in addition to security loopholes, can save your customer a lot of money by canceling a subscription to an overlapping service they‘re using’. throwing in that extra feature for free doesn’t cost you much, but is worth to your customer more than the requested discount.

Better response to quotes

Even if both models produce the same price for a particular customer, a quote based on the elaborate model would be better received since it binds the cost more tightly to values received. The same price produced by the simple model would feel too random and misaligned with value. It could lead the customer to think they they are overpaying because of a technical detail (lines of code scanned) and drive them towards trying to limit the parts of code scanned which limits the customer’s value from the service unnecessarily.

Stand behind your pricing

As a startup you work very hard to build the perception of the value you offer to your customers. You do this by defining a new terminology, engaging in thought leadership, generating whitepapers and publishing case studies. A sloppy pricing model trivializes all that work and makes the final quote seem like an afterthought. And if your quote was set as an afterthought (thinks your customer) why not cut it in half? or 70%? If you don’t take your pricing model seriously, why should your customers? To be able to stand behind your pricing you need a well crafted, robust and elaborate pricing model that makes sense for both you and your customers. Once you define that model, you need to stand behind it as if it was carved in stone. That is the only way to make sure your customers take your pricing seriously.




Writing about entrepreneurship, sales, startups and strategy

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Nir Halutzy

Nir Halutzy

Writing about entrepreneurship, sales, startups and strategy

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