7 DOs and DONTs for Seed-Stage SaaS Pricing
Pricing is one of the biggest levers that you have in SaaS. The recurring nature of the business model makes any price increase, decrease or discount an important decision.
But at this early stage of your company, the goal of your pricing is not to optimise to make (THE real) money. The goal is to test if customers will pay something that will make your business work.
And your business will work if:
- It’s cheaper to acquire a customer (CAC) than whatever $$ they generate in a period of time (LTV).
As you know, ARPA which depends on price, affects LTV in SaaS. - You have an interesting market size.
If you want to raise VC money, ARPA times the number of potential customers should be in the 100s of millions dollars, or better yet, billions of dollars.
You will always have time to optimize pricing later.
About this series
This series of articles are drafted from our experience at Point Nine Capital on the top priorities for early-stage SaaS companies. Note that though more relevant for startups who focus on SMBs first and then go upmarket, the priorities are general enough to apply to most SaaS companies.
Some suggestions here to decide your early pricing for a SaaS biz:
#1 Back-solve the Amount
If you’re selling to small businesses, you need to get 100s$ of dollars from them a month to scale. If you sell to medium sized businesses 1000s$ a month. For enterprise, a lot more than that.
When you decide your first pricing, pick a figure relevant to your customer’s size and cost of acquisition.
If you see friction, try to stick to that figure. Instead of lowering the price to get an adoption, refocus the product to provide value to your customers. Keep asking them: “What can I provide you so you pay me xx?”
#2 Reduce the Number of Pricing Plans
1 plan + a trial period is better than 2 plans + a trial…. and yes, I know that you should have 3 plans for psychological reasons.
You should think that every pricing tier adds a lot of extra complexity to manage. The more plans, the harder it becomes to understand the different conversion and expansion rates. At this stage you don’t have the resources and understanding of the market to deal with that.
If you can, try to simplify your pricing to a metric that somehow correlates with the value perceived (ie. users/seats).
#3 Do NOT Over-Engineer It
Remember that the goal today is not to optimise, but rather to check we have a potential business.
Then, try to copy a pricing plan that the potential customers have seen before. You don’t want them to avoid trying your product because they don’t understand your pricing.
Users tend to understand well pricing models in which they can control the input (again, number of seats, data ingested, etc.).
If they sense that the pricing can be uncontrollable, they will probably not even try your product.
#4 Do NOT Set the Pricing Too Low
Increasing it by even x2 later will be veeery hard. First because you anchored yourself and your customers to a lower price, so there’s a lower perception of value. And second because you will feel scared of rejection and your team will feel it too and push against it.
An exception to this rule is if your product has some kind of product virality — like Slack, Trello, etc.. Then you want as many users as possible, thus it makes sense to lower the price.
#5 Think Twice About Freemium — if you can, do trials instead
The goal of pricing at this stage is to get your customers to pay something relevant. A free plan sometimes makes sense for marketing reasons or to lock-in a market.
If you add a cheaper pricing tier to avoid competitors and become the category leader, don’t do it just now. You can do that later.
On top of that, a freemium plan brings the following challenges
- If your customers aren’t willing to pay for your product, it is better to learn it as soon as possible. 98% of freemium users never convert into paying customers.
- The free users can be a big distraction, because they will still give you feedback that affects your roadmap and ask for support. But they don’t pay :)
- Freemium pricing anchors you very low. If there’s a free version, you need to provide a ton of value to ask somebody to pay big money.
- I’ve seen that founders tend to be very generous with the free product. It seems like usage, even if not paid, could be a proxy for success (?)
If you can, extend trial periods instead of freemium. Learn why people are not converting —it might be hard to understand the value, your product might have a long on-boarding, etc.
#6 Limit Discounts In Time
If you don’t limit discounts over time, you are giving away a big chunk of revenue over the life time of a customer. A 20% discount of $1000 month, over 3 years means $7.2k per customer.
#7 It’s OK to be Generous with Referrals
Referrals are a great source of leads at this stage.
The person who does the referral is endorsing your product and sharing his “trust”. That helps bring customers.
Pricing is a very complex topic. Those comments are just focused on early stage, because pricing should not be a key area of your focus then — you have higher priorities. But as soon as you get some growth, you should start learning about the elasticity of price and how to capture more of the value you’re generating.
But those are topics for a future post.
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In case you missed the previous ones:
1. Setting the Right Goals
2. Having the Right Infrastructure & Monitoring in Place
3. Get Your Finance Plan Right
4. The Right Team & Roles
5. Invest in Sales & Marketing
