Navigating the SaaS Pricing Odyssey
A Complete Guide to SaaS Pricing and the Art of Product-Market-Price Alignment
In SaaS, success hinges on the interplay between product, market, pricing, and channel. Pricing in particular can remain opaque, which is why seeking out the insights of seasoned experts is imperative for businesses navigating this at the earliest stages. Andreas Panayiotou, Director of Pricing & Monetisation at Notion Capital, and Kyle Poyar, Operating Partner at OpenView, recently shared their insights on the world of SaaS pricing with Earlybird — we’ve gathered the key insights here.
📈 Pricing Phases from Start to Scale
Existing frameworks can help us gauge what the most appropriate pricing strategies for different stages of a company’s life are. SaaS pricing is a continuous journey for companies from their first customers to the public markets, but having rigor early on sets up companies for success down the line.
Start phase ($1m-$3m):
In this phase, companies should lay the groundwork for future pricing models while prioritizing experimentation and customer feedback. Your start stage checklist should include:
✅ Optimizing for Product-Market Fit: Prioritize simplicity and agility, laying the groundwork for future pricing models.
✅ Experiment and Gather Feedback: Actively collect customer feedback during this experimental phase.
✅ Foundation for the Future Model: Establish the foundation for the future model with a focus on the right unit of value creation.
Build phase ($3m-$30m)
In this phase, attention shifts to balancing market share and margins. At this point, companies need to achieve better price discovery and willingness to pay, to avoid underpricing and forgoing higher ACVs. This phase challenges companies to seriously consider pricing initiatives as a means of enhancing durable growth. Your build stage checklist should include:
✅ Optimize for Go-To-Market Fit: Shift focus to go-to-market fit (e.g. assessing the impact of incremental price increases on the pipeline as an indicator of optimal pricing)
✅ Balance Share and Margin: Strategically balance market share and margin to avoid impediments to becoming a market leader
✅ Price Discovery and Packaging Evolution: Emphasize price discovery and evolve packaging with product releases and TAM expansion
Scaling phase (> $30m):
In this phase, there is an overall need for systematic pricing optimization. Clarity in decision rights, aligned incentives, and the ongoing balance between efficiency and the development of market power form the core tenets of a successful scaling strategy.
The check-list would be:
✅ Optimize for Systematic Execution: Prioritize systematic execution of effective pricing
✅ Clarity in Decision Rights: Clarify decision-making power, provide colleagues with the right information, and align incentives
✅ Balancing Efficiency and Market Share Development: Strike a balance between efficiency and development of market share
⚠️ Avoid These 5 Mistakes With Your Pricing Strategy
1. Avoid being too cheap. Particularly in the early stages, SaaS companies tend to price their products way too cheaply, however, the good news is B2B buyers are not as price-sensitive as other consumers. This makes it a little easier for B2B companies to start with higher prices from the beginning. If companies need to adjust their prices they should always:
- Validate their course of action
- Communicate why they are raising prices
- Use the pricing change as a marketing tactic
- Give customers a choice
- Have a plan for existing loyal customers.
2. Avoid picking the wrong value metric. Selecting a value metric that aligns with the product’s uniqueness and resonates with customers is so important. Given the heterogeneity in software categories, pricing is more complex; a careful decision on the value metric is more crucial and may even help SaaS companies differentiate against competitors.
3. Don’t be too hard to buy. The nature of software buying has evolved in the past years (see graphic below) and the need for seamless integration and compatibility has increased. Overall, it’s important to align pricing with customer preferences and to adapt to customer buying behaviors as this can drive substantial growth.
4. Fix your upsell path. Feature packaging and usage-based pricing can play a pivotal role in achieving net negative churn. Overall there are five types of feature packages, each increasing in complexity:
- All-in package: One offer with everything included
- Category packages: Packages with all features in a product category
- Segmented packages: Tailored packages for specific segments or use cases
- Good-Better-Best packages: Packages with increasing features and services
- Modular packages: Customized, build-your-own packages
At the moment 70% of SaaS companies, including Slack, opt for the “Good-Better-Best” model, making it the most popular. Additionally, the majority employ usage-based pricing. Remember to allocate features to the right packages, as shown in the graphic below.
5. Avoid static pricing! Pricing should evolve as your company evolves but most people don’t take it seriously. According to an OpenView Pricing study, when asked “Have you done pricing research?”, 45% haven’t done research and only 8% have done in-depth research. This type of research is the key to SaaS companies reaching their highest potential.
🧭 Navigating the Ever-Changing SaaS Pricing Landscape
Overall there are key points often overlooked by SaaS companies in communicating pricing and packaging:
- Build for Someone: Design packages with clear personas in mind.
- Resonant Package Names: Choose names resonating with customers that reinforce value propositions.
- Clear Propositions: Articulate clear package propositions, providing reasons to buy and expected outcomes.
- Benefits Over Features: Communicate benefits clearly, avoiding feature-centric lists.
- Digestible Complexity: Prioritize what matters upfront, providing details only for comprehensive understanding.
Don’t forget the Customer-Centricity: Start with the customer and work backward:
💡 Three final tips for early-stage companies running a pricing project:
- Signals that it’s the right time: Rapid, unscrutinized customer purchases, faster usage growth than spending, significant value addition with no pricing changes for 6–12+ months, or targeting a new Ideal Customer Profile (ICP) without a defined pricing strategy.
- Launching pricing changes with new cohorts before migrating existing customers, conducting retrospectives on pricing changes, avoiding long contracts that cap potential revenue, monitoring go-to-market KPIs through a pricing lens, and treating pricing as an ongoing process rather than a one-off project.
- Key inputs during the process: Consider goals, business value, alternatives from the customer’s perspective, and strategies for testing or piloting pricing changes before a complete rollout.
📣 For more input on pricing and monetization, follow Kyle Poyar’s newsletter “Growth Unhinged” and Andreas Panayiotous’s blog “Principles of Pricing”.
This article was co-written and edited by Stephanie Stein and Akash Bajwa with input from Andreas Panayiotou, Director of Pricing & Monetisation at Notion Capital, and author of the Principles of Pricing, and Kyle Poyar, Operating Partner at OpenView, and author of the newsletter “Growth Unhinged”.
