Get customers to love your pricing in 10 steps
Early and later stage startups alike spend significant amounts of time and energy on product development. More often than not however, disproportionately little time and thought will be given to how much to charge for the products they work tirelessly to develop. Case in point with Evernote, where a lack of focus on pricing nearly led to the company becoming one of the first dead unicorns back in 2015. I’ve been an avid Evernote user since 2010, so fortunately for both me and Evernote, the business did turn a corner.
Pricing is as much a part of your product as is the UX and features themselves — a critical element to success. In the early days at Skype, we had a huge focus on “delighting our users”. It was a core value and informed every user facing decision we ever took (and decided against) — effectively a “will they love us for it” test. While it may seem a stretch that users can love your pricing model, Slack proved out that this is in fact entirely possible with a last minute pre launch decision to have a “Fair Billing Policy”:
In Slack’s case, only charging for those that actually used the product had a huge secondary benefit. A revenue hit when paying customers use your product less, means product teams are even more on the hook for engagement (or lack thereof). No question that this created a culture to make engagement a priority across the business early on, effectively building customer success into their business before anyone called it that. As a result, Slack’s pricing model was innovative and best in class for long term customer love, user engagement and revenue growth.
So yes — you should look for opportunities to innovate in pricing
Particularly with the holy grail of self-serve SaaS businesses, a pricing model done right will ensure you attract customers at scale, pave the way for revenue growth and help you get investor cash by hitting those all important SaaS funding metrics. Yet this seems to be a massive blindspot across SaaS businesses, large and small. According to an Openview survey of SaaS executives, 55% of expansion stage SaaS businesses ($1-20M ARR) say they have nobody in their company who handles pricing as part of their job description.
So if you’re an early stage founder/CEO (who we’re mostly working with at lool ventures), chances are you’re also the CFO, CMO, CPO, Head of HR etc. but what you may not have realised is that you’re also the head of pricing.
So to lighten the load of that mission, here are 10 steps to building an effective pricing model:
#1. Know your customer
One of the biggest pitfalls around pricing is not having clarity on your target customer and then optimising pricing around a “bad fit” customer. Working with bad fit customers ensures that your whole offering and ongoing learning is taking on you on the wrong path — often a slow and painful journey to failure. If you’re early stage and your customers are complaining you’re too expensive, then they’re not seeing the value, which could of course mean your overpriced. Are you selling to the right customers? Are you selling to the right person in the organization (i.e. who is your buyer)? What are they used to paying for other products providing comparable value. So know your customer, user and buyer and price accordingly. Clearly, these are core rather than purely pricing issues but know the impact on dramatically impacts your ability to find product-market fit.
#2. Follow a value based pricing model
Focus on how much your customers are willing to pay and avoid cost-plus and competitor-based pricing in SaaS. Of course, you must consider costs to be able to operate at profitable margins and take into account competitive pricing. But start with understand the value you’re delivering to your customers. Consider the 10x rule — we are charging $100 because the value our product delivers to customers is $1000. This forces you to think about product value rather than features. You have an in depth understanding of your product, where customers do not. Speak to customers, survey them, identify trends/common themes, understand what they value and focus pricing around. Here’s a great resource for value based pricing.
#3. Offer simple, no nonsense, multi tier pricing
Think about personas amongst target customer segments and develop pricing models and tiers that meet these. Think from both a buyer and user perspective. Push and invest in the model where you feel the best customer-market fit lies. Always keep it simple. If you’re early stage (<$100k MRR), don’t have more than three tiers. Highlight annual pricing and show monthly below or have a toggle. Monthly should be at a 20–25% premium, otherwise there’s no great incentive towards an annual commitment.
#4. Explore whether freemium could work
This is worthy of a post in itself. I define freemium where customers can use can your product, albeit with certain limits, for free without time limitation. As a opposed to a free trial, where they gut full/partial access for a limited time, typically 14–30 days. Consider if a freemium offering could support your growth in one of two ways:
i) Support a “land and expand” strategy, i.e. target individuals in larger businesses with a free tier with a downstream migration path to paid. We don’t have to look far to see best in class examples from homegrown Israeli unicorns (more or less) like SimilarWeb and WalkMe. Done well, Freemium becomes a highly scalable marketing channel for sales. For this to work, support, distribution and production costs need to be low/palatable and the customers you attract need to fit the demographic of paying customers. Do the CAC calculations — how does this compare against other marketing channels? I suspect at Slack, SimilarWeb and WalkMe, many free customers worked at companies that later became paid. Develop a hypothesis around the user story and journey from free to paid, set time goals and conversion rates and measure. Consider only accepting registrations with company email domains. If you go freemium, know when its not working and stop.
ii) If you had large numbers of free plan users, would they deliver value to your business even if they never converted to paid? Build a hypothesis on the value these “free” users could deliver. Set targets and measure. E.g. if you are an AI/machine learning business, and your product gets better with more users, usage, data etc. — they ask yourself if thousands of free users give you data that would accelerate your product development efforts for paid users. Even if these never become paying, as long as production and support costs are palatable, this could be a great strategy.
Note that I’m not covering “free trials”, which are normally time bound access to paid products and serve a different purpose to what’s laid out above.
#5. Grasp opportunities to innovate in pricing
Show off your product values and highlight deficiencies in your competitors business. Especially true where you are disrupting an industry or delivering benefits of technology/automation to an industry that is. Don’t just mimic current pricing, use this as an opportunity to displace legacy vendors, highlight poor practises and deliver value. Slack’s fair billing policy took direct aim at the enterprise software that sold “seats” and made huge margins on “breakage” (i.e. where companies pay for products their employees don’t use).
#6. Be transparent
Should you publish your pricing? There’s definitely some logic for earlier stage businesses to not publish pricing — particularly fear of competitors undercutting you and your own need to continually change pricing models. That said, keeping the pricing element of your product in a “closed beta” is a lost opportunity to get real world feedback and accelerate sales. Transparent pricing can also help win the hearts and minds of customers — especially if your competitors aren’t doing this, a great differentiator. Interestingly, there’s an increasing trend amongst SaaS unicorns to hide pricing. I suspect these guys are focused on large enterprise, who require customised packages, so don’t let that draw you in. If you’re early stage and not purely focused on large enterprise, consider publishing pricing early on. Great read from Openview on this topic here.
#7. Carefully consider Usage vs Seat based pricing
Whether you choose user/seat-based, usage-based or some combination of the two— ensure total cost of ownership is clear and transparent. Don’t let your own uncertainty around your business model be your customers problem. If you price by seat and see customers using single accounts over a long period of time, then there’s a problem with the model. Overall, there is definitely a growing trend towards usage based pricing, especially with AI, as compute power is the cost and automation is the value the customer derives. Lusha is a good example of a usage based pricing with a seat based element to it:
Never punish users who use your product “too much”. Consider allowing for reasonable overage charges or offering limited free overage first time as you try and nudge customers along to the next tier. Better still — if over usage would have pushed them up to the next tier, consider not charging them more than what what they would have paid on that price plan. Entice them with a discounted annual commitment to the next tier. Good opportunity to win user love here.
#8. Leave the door open for whales
If enterprise is a play for you — think and act big here. Of course, if you know that for the next 2 years you neither its not in your strategy then don’t, as sales cycles are long and you could get drawn in to a major distraction here. It’s fine to build a pipeline here without engagement, i.e. “we’re working on our enterprise offering, its some time a way, let’s talk again in 6 months”. If you don’t promote it, it’s certainly helpful to get a measure of inbound interest from enterprise, as long as you have the discipline not to get drawn in.
Having an enterprise pricing “contact us” button probably doesn’t hurt, as long as you’ve got a clear message when they reach out. It could also inspire confidence to non-enterprise customers.
#9. Never do round numbers
If you’re charging $50, $100 and $250 per month — then customers will know you’ve spent all of 4 seconds coming up with your pricing model. Take 6 seconds to come up with $44.99, $94.99, $245.99 or $45, $95 and $245 and look like pros. Better still, A/B test (your target customers not friends) to see what works best. Albeit that’s a lot more time than 6 seconds but the insights you will derive from this will result not only improve your pricing models but probably optimise for product-market fit..
#10. Don’t leave money on the table
Don’t be afraid to increase prices, particularly as your product offering matures and you add new valuable features. If you’re too cheap, it probably means you can’t give customers the level of service they need. If you do increase prices, make sure you’re open and transparent with existing users and grandfather your early customers — done well, it’s a great opportunity to build long term trust with early customers.
In summary, as an early stage startup, you should treat your pricing with the same level of love and product-market fit approach as you do your product — talk to customers, test, learn and iterate. Collect and identify common data points and trends and make decisions accordingly. Present them with pricing plans and ask which they would choose, get feedback. Do it right and you’ll be ready for scale.
And your customers will love you for it.
I’d love to hear your experiences and thoughts on pricing models — leave comments below or tweet to @tonysaigh.
lool ventures’ next ScaleUp Series Event will be on “Pricing Strategies & Hacks”, a hands on workshop in Tel Aviv for early stage founders and pricing leads. For more info and registration, click here.