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“It’s never 100% done”: Pricing and packaging strategies for SaaS companies

This month, Lerer Hippeau, OpenView, Primary Venture Partners and Work-Bench jointly launched a four-part SaaS Growth Camp for companies across the firms’ portfolios. In a series of recap posts, we’ll share key takeaways from the sessions in case they may be helpful to other founders and their businesses. Kyle Poyar, VP of Growth at OpenView, kicked off the first workshop, guiding the group through pricing and packaging for SaaS companies.

Here are our four favorite takeaways.

It takes some fine tuning.

Per a SaaS pricing survey of more than 2,200 companies conducted by OpenView, only 6% say that their pricing aligns perfectly with the value the product delivers. Why might this be the case? Out of the gate, SaaS companies can’t necessarily rely on data to inform pricing decisions, which means they might easily undervalue their services. However, as the company grows, pricing should evolve along with it. “The best companies treat pricing like they treat the product itself; they’re learning, they’re iterating over time and it’s getting better in a way that meets customer needs,” said Poyar.

Pay more attention to pricing.

When looking at startups that struggled to raise capital compared to those where the process went smoothly, the former typically reported that they monetized too late, chose the wrong business model, or burned cash too fast compared to the latter. Overall, the most common mistakes when it comes to SaaS pricing, according to Poyar, break down into the following: the service is too cheap, it has the wrong value metric, it’s difficult to sign up for, the upsell isn’t there, and the pricing isn’t dynamic as the market evolves. Founders should keep a close eye on pricing at every stage of their business and watch out for common missteps that can lead to churn or inhibit growth.

Clearly communicate pricing changes.

As the company grows and adds more users, there comes a time when pricing should better reflect the service’s value for customers. Poyar says that the best way to retain customers when raising pricing is to validate the decision, communicate the thought process, market the pricing change, offer customers a choice, and factor existing users into the decision. By following this flow, SaaS companies can attract new customers while satisfying their earlier adopters. When done well, customers will feel like they’re getting their money’s worth while the company grows its ARR.

Build in flexibility.

The fastest-growing SaaS companies see net negative churn. Poyar explained that two avenues for safeguarding your upsell include feature packaging and usage-based pricing, which can help you achieve net negative churn. Some feature packages include all-in, category, segmented, and the most popular option, which is good-better-best. Each package offers new routes to growth through upselling to existing customers which ultimately offers flexibility based on their needs. As the upsell becomes more flexible and dynamic, pricing itself should follow suit. As a SaaS company grows from seed stage, to growth, and reaches later stage, the product evolves with new features, and its availability expands into new markets. Founders might never think that they’ve quite nailed their pricing, which is exactly why it can and should grow with the company.

Read more on SaaS strategies on OpenView’s blog.

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Lerer Hippeau

Lerer Hippeau

Lerer Hippeau is the most active early-stage venture capital fund in New York.