The Ultimate Debate About SaaS Pricing

SaaS models inspire a lot of entrepreneurs (and investors…) At daphni, SaaS companies currently account for more than 30% of our portfolio. No doubt this number will keep growing, since charging recurring fees to clients each month is the model everyone dreams about in the StartupLand. But finding the right pricing model is far from easy. As an entrepreneur, whether you’re tied-up in tiered pricing, frustrated by freemium or still figuring out how to make your customers open their wallet, in the end, pricing remains the #1 question.

No matter how your business is structured, you’ll need to adapt your pricing to your clients’ need and your competition. Which tools should you use to build the perfect pricing? How can you make your current clients pay more for your service? How should you communicate on your pricing?

Recently, we gathered our SaaS founders and two experts in a — desperate — quest for the best framework for our portfolio companies, during a “da coffee and croissants” session. Those small events feature both our founders and c-level executives, sharing together their best practices on a specific business struggle, for one hour. This time, our two experts were :

• Julien Coulon, the founder of Cedexis in 2009, a company acquired in 2018 for 100M$ by Citrix. He is an expert in e-commerce and cloud solutions, sold to big retailers on an annual subscription model.
• Florent Tardivel, who has build Stripe’s sales efforts in France since 2014.

Here are what we learned with them.

1. Know Your Market

To find the right pricing strategy, start by honestly reviewing your product and your market. You can rely on your clients on this quest, Julien Coulon advises. Of course, they will always say you’re too expensive but you should keep going and try to assess how much value they get from your product.

Online polls and phone interviews are a must do to understand who your clients are, why they need your products, what their budget is… In the end, it will help you to define your segmentation: in BtoB, your price (hence the level of service you provide) won’t be the same for all.

Stripe, for instance, has two types of clients. Startups, who value simplicity and going quickly to market, and large businesses, who value granularity and support. Stripe has built pricing models for each. Startups (usually self-served businesses) can benefit from a “Sticker price” (1,4% + 0,25€ per transaction) that decreases as payments volumes go up, while large businesses (usually supported by account managers) can benefit from a tailor-made offer, depending on their volume, the services they use, how their consumers tend to pay, etc.

2. Don’t Do It For Free

Spending time with your clients is also a great source of information about your direct competitors (competitive advantages, pricing, loopholes in their offers…). Sometimes, you’ll notice that a service you provide for free or include in a bundle, has real value on your market. Don’t forget to involve your whole team in the process — the sales, but also the techies: they know best what’s unique in your product.

Let’s take Stripe’s model: most users never interact directly with them: the service can be a full self-service one. But some users can be time-consuming, especially during the onboarding process. Florent’s advice is clear: “if you come across a client looking for consulting services, make the set-up time part of the offer”. As Stripe went upmarket, it starting offering new paid services such as 24/7 phone support for large accounts and tailored SLAs (Service-level agreement).

3. That’s Affirmative, Your Price Is Too Low

Pricing is by far the easiest lever you can pull to increase your revenue overnight. For sure, you won’t find the perfect pricing model overnight, it implies a lot of experimentation. Most startups do the same mistake: they underestimate the value, hence the price, of their service early on. And as they build new features and services they tend to keep the same pricing for fear of losing customers. According to Stripe, only 16% of Saas businesses evolve their pricing year on year. At Cedexis, for instance, the price increased 6-fold over the years. And clients didn’t run away! Maybe at the end, your product will be ten times more expensive than today, but what is almost certain is that right now, you’re at your lower price.

Good news: this kind of early-days mistake is not such a bad thing. It’s easier to increase your price than to cut it. Actually, if you have to sell off your product, its a bad sign to the market, but you have to be smart in doing so, by constantly adding new value-added features to your offer to justify the hike. “Connect your product roadmap to your pricing strategy” recommended Julien Coulon.

4. Keep It Simple

Both for the comfort of your clients and your sales team, you should focus on having a clear and easily understandable pricing strategy, correlated to your market’s’ processes and habits. Depending on the product, SaaS companies charge by the number of users and accounts created on their platforms, the number of API calls a month, or they take a cut on a transaction.

Of course, you could innovate on pricing, but remember to rely on a metric your client can easily relate to, in order for them to get early on an idea of what they will pay on the long run. And try to align incentives with your customers. At Stripe, all of the products are priced to help businesses grow their revenue so that Stripe only makes money if their customers do too, therefore making it much lower risk to try a new product. Once again, getting a clear vision of your market and your clients is key.

5. Build Up Your Pricing Power

If pricing is a crucial point in your go-to-market strategy, you’re unlikely to win in the long term. Someone will always win on price. Instead, focusing on the overall value created allows you to present your service on your terms. Stripe’s product is deliberately “premium”, meaning it will never be the cheapest pure payment processing service on the market. However, the additional services offered beyond just pure processing help turn payments into a profit center (vs a loss center). Florent explained how an accurate positioning and go to market strategy can help your company win on value, not just pricing against competitors.

Defining the pricing strategy is not only a CEO’s job, but it should also involve the whole company, from tech to c-levels in marketing and sales. You can’t do it alone.

Thanks to Benoit Zante for co-writing this article and insights from the Stripe (Christopher Abboud) and Cedexis’s teams. Want to dive into this topic? You can read First Round Capital’s Tyler Gaffney’s blueprint, listen to Michael Froger (Lengow) and Marie Sermadiras (Treatwell) talking (in French) about their pricing strategies in this podcast by NUMA, or download great Stripe guides on Pricing and SaaS Business.