Pricing Principles
Pricing plans have significant implications for all aspects of your go to market strategy.
It will influence how prospects perceive your value, how efficiently you can acquire new leads\customers, how sales teams run their deals, and the cash flow of your business — just to name a few.
This post unpacks some of the critical topics when thinking through a pricing strategy:
Transparency
It’s amazing to me how much business will invest in deep content around a product highlighting the simplicity, short time to value, and ease of use — and then require a prospect to schedule a 30 minute call with the sales team to understand the cost of their solution.
While this approach may allow your sales team to maximize the deal size for a single opportunity — it can hurt a business in three ways:
- You will introduce friction to the SMB, Mid Market, and departmental Enterprise prospects who want to move quick.
- Your Product and on-boarding experience will suffer as fewer customers come through low touch channels (you’ll soon ignore optimizing this funnel).
- It’ll create an environment where too many deals are dependent on custom pricing processes — which is difficult to scale.
The best performing cloud businesses focus on ease of customer adoption and low cost of customer acquisition. Pricing transparency plays an important role towards these ends.
This doesn’t mean one should be transparent with all pricing plans — it is important to have a call out for ‘enterprise’ or for the small segment of larger customers who will require pricing that may not make sense for the vast majority of your customer base.
The one caveat for this approach is a new product\service\feature that has zero customers. In this scenario, I’d recommend launching it as a ‘public limited beta’ — with no public pricing. This will allow you to begin the critical customer feedback loop on what type of pricing makes sense. Once you’ve validated with 5–10 paying customers — then launch a version publicly.
Consumption and Utility Pricing
‘Seat’ based pricing models are common SAAS pricing plans. The benefits of this model are simplicity, and makes a lot of sense for end user heavy applications.
The downside of these types of models is that your upside is not directly correlated to business outcomes of your customer. Head count, for example, rarely grows at the same pace of your customers business , which will mute your long term expansion rates relative to a consumption based model.
For platform businesses — I highly recommend a structure where billable event is tied directly to a usage metric of your service. These range from events which drive your cost (i.e. storage fees) to events that drive the business outcome for your customer (i.e. an API event where customers derive value). The mix will vary depending on the type of business, but I’ve found the benefit of consumption based pricing models to outweigh seat based pricing for the following reasons:
- 100% alignment — customers pay when they benefit from your service, and you make money when you provide value (or trigger a direct cost)
- No ‘shelf-ware’\low churn — consumption based billing requires customer usage. This forces your org to center on providing tangible value (vs. some future promise)
- Higher ARR — as your customers succeed usage models more directly correlated to their success
Minimums and Long Term Commitments
Higher minimums and longer commits mean more friction in the buying\sales process.
That’s not always a bad thing. A couple scenarios I’ve found friction helpful to both the customer and the vendor:
- Customers procurement process is heavy (i.e traditional enterprise buyer) — requiring significant upfront legal, financial, and technical due diligence investment by both parties before the service can be used. Low friction won’t help this segment of customers.
- Longer Technical Integration\ Time to Value — If you’re investing non-trivial technical pre-sales efforts to help your customers realize value from your product, a minimum charge that aligns to this will allow you focus on the right places to invest.
These scenarios aside — removing every possible friction point for your customers to try your product is the higher order operating principle.
If you have reason to believe customers will love your product, the integration or usage of product will be much sticker than any long term commitment you’ve signed up for. Combine this with the consumption based billing model above — you have a recipe for long term healthy mrr per customer.
Trials
In your brand building phase, you need to give yourself every possible chance to prove your worth. Depending on the complexity of your solution — this could mean a free trial period, or it could mean some limited subsidized trial period.
While it will vary by business, give every reason for your customers to experience your products magic. Don’t over optimize for first month billing. If you fulfill your promise , you will have many years ahead to recapture that trial period revenue.
Volume Discounts
The more customers spend with you, the better deal they should get. I’m a big fan of signaling this benefit through volume pricing tiers publicly shared.
If you’re on consumption based billing, make the pricing segments true tiers (i.e. the lower price point kicks in for just the transactions above that tier). This will prevent the odd scenario where you have a disincentive for a customer to grow because the next tier will cause their overall bill with you to drop (which will be a problem for your account teams). Instead, stick to your principles of giving customers lower overall average unit price as they grow with you — while not shooting yourself in the foot.
Summary
You’ll note I don’t touch on how to decide on an actual price point for your product. That part is more straight forward, as it will be dictated by your cost structure, competitive environment, and positioning strategy (i.e. value based pricing). Instead, I highlight principles of pricing that have served some of the fastest growing cloud platforms well over the last decade.
