Pricing for Calm SaaS Businesses — TBF #159

Dear founder,

One of the biggest points of confusion for any software business is pricing. It often takes months, if not years, to find a working way to charge your customers, and even then, you'll need to adjust it over time. Pricing is never done, and often, it doesn't work.

But fortunately, there are a few foundational choices you can make to keep your pricing efforts calm and manageable.

Today, we'll look at what dimensions to price along, what kinds of subscriptions to offer, and which pricing models to avoid.

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Price-Value Alignment

People pay no more than what they think your service is worth. It’s all about their value perception. And that’s something you can influence in two ways: you can promise them an incredibly impactful solution or let them see it for themselves and realize how valuable it is. As a self-funded business owner, spending your focus on allowing your customers to use the perfect product will be much easier than spending thousands of dollars on advertising and other pay-to-play kinds of marketing.

By no means does this suggest you shouldn’t do any marketing. If you don’t tell people what you offer, they can’t find you. But the actual value of a self-funded business lies in its product, not its promises. The thing you offer will either convince a prospect to pay or it won’t. And you set the price.

But you’re not the only entity determining how much you can charge. Your customers have a certain expectation of acceptable prices for a product in your space. Those numbers don’t come out of thin air: they were established by your direct and indirect competitors. Direct competition is the “business next door” that builds a similar product to yours, likely the company that people are using right now to (mostly) solve their problems. Indirect competitors are generic tools, often so generic that you might not expect them to be a competitor: a Notion template, Google Docs, or pen and paper. Those solutions set the expected prices in the minds of your prospects.

The question is now: can you charge as much as your competitors, or maybe even more?

The Value Metric

One metric impacts the answer to this question like no other: the value metric. In the most basic terms, it’s the number that goes up for your customer when they experience success. If you serve restaurant kitchens, it might be the number of meals they can serve in an hour. Are your customers editors? Then it’s probably the number of words they can go through and fix on any given day.

There are two price alignments you should consider here. The first is to align your most vital value metric with your prices. If you offer multiple tiers —and you probably should— your customers should be encouraged to buy the more expensive tier whenever their value metric figures increase significantly. They win, you win.

The Cost Metric

The other alignment is with your cost metric —your expenses— so that users who incur a lot of cost for you also get charged appropriately. If you’re an Email Service Provider, you’ll want to charge per email sent, as every new email costs you a tiny amount of money to send. A video storage platform might charge per gigabyte downloaded —or uploaded— as they likely pay more for streaming data than for storing it. Whatever increases your expenses the more it’s being used should be aligned with how much you charge the people using it.

In either case, you’re looking at a price-value alignment: the price has to take into account the value metric to benefit from customer success and the cost metric to not be hindered by customer usage.

Purchasing Agency, Budget, and Permanence

Of course, you can’t just put up random prices. Beyond your customers’ expectations, they also (hopefully) have purchasing agency. There is a lot of nuance in this. Before you come up with prices, you should ask yourself if there is a budget or at least the interest to create one for your solution, who sets that budget, and who has the power to make a purchasing choice. Often, those positions are filled with different people, and even more often, you’ll likely build a product that is being used by people without that purchasing agency. Remember that you’ll have to price for those with the final say in that chain of operations. A team lead might be more willing to pay $200 monthly for a tool that a single developer might never purchase. But you’ll have to convince both.

The calm approach here is to spend a lot of time understanding the motivations and existing approaches to solving the problem you set out to build a business around. Find the people who buy things in your industry, and figure out what and why they buy. Figure out who has the potential to convince them to purchase and how you can support their argument. If you build for developers but sell to team leads, give your developer prospects a guide to encourage their team leads to buy. Make it easy for them to sell your product to the people with purchasing power.

When in doubt, be inspired by the pricing spectrum of your competitors. They have done that research already, and people in the industry are used to it.

And one thing about the permanence of prices. Your initial pricing will likely not be what you charge after a few years. Your product will grow, and you’ll have found a specific niche or even expanded to other industries. Price acceptance in a field might also change as new technologies become commonplace and people get used to paying for them. Things change, and you should revisit your prices regularly. Once or twice a year is usually a good idea.

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Doing Pricing the Calm Way

Calm pricing is resilient to the ups and downs of daily operations. After all, that’s what creating recurring revenue through monthly subscriptions is all about. But a lot can happen from one month to another. A calm founder seeks more stability.

One of the best ways of implementing that into your pricing strategy is to offer annual plans in addition to your monthly subscription tiers. Yearly plans, annual plans, 12-month plans, whatever you call them, are a way for your customer to invest long-term into your service —for a small or substantial discount— and for you to frontload revenue.

The money you have today is money you can immediately invest into your business. Not offering a 12-month option means that you’ll be defenseless against any kind of churn that might come your way. If you can convince your customers to pay up-front for a year, your runway to deal with any change in your business is so much longer.

Yet, where there is a long-term commitment, there is a problem: what if you change your pricing along the way? What do you do with your legacy customers?

There are many schools of thought. Some founders keep their old prices around for these customers indefinitely, showing their gratitude for being early adopters. Other founders phrase their Terms and Conditions so that they can arbitrarily adjust prices for annual subscriptions to match current rates. Most founders are in between these two extremes.

Here is what we did at FeedbackPanda when we increased our prices by 50%: we allowed our legacy customers to keep their old prices for a year and then adjusted them to the new price. We also used that announcement as a last-minute opportunity for monthly customers to upgrade to annual pricing, locking in the previous lower price for a year. This way, we showed gratitude and had a substantial influx of expansion revenue at the same time.

And while this time-limited legacy pricing might cause a few old customers to churn, I recommend framing this as a good thing. Your software gets better over time, so you should be able to adjust your prices without having people threaten to cancel. Those who do that don’t see the value in your work. It’s a good thing to let demanding customers go.

A quick side note here about adjusting plans over time and what that means for how you build your product. When it comes to implementing pricing, many inexperienced founders make the mistake of hard-coding each pricing plan’s limits and permissions into the software itself. You’ll find specific numbers and feature flags in many beginner SaaS codebases. I made those mistakes myself, and when I implemented new plans or wanted to allow for custom permissions, I had to completely rebuild the implementation of my pricing tiers. You can solve this from day one by making limits and permissions configurable options of the account level. Instead of checking their subscription plan, set a few sane defaults and then have a nested object or keyword list of limits and allowed behaviors in the account data. This way, you can manually adjust them on a per-account level and introduce new pricing plans (with new capabilities) without having to remove or migrate the old ones.

Preparation is key when it comes to your long-term pricing strategy.

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Problematic Pricing

If you want a calm business from day one, you’ll have to implement annual plans and configurable account permissions. If you want a calm business a few years from now, you must avoid pricing time bombs. Several pricing strategies look lucrative but come with time-delayed risk.

The “freemium” model is relatively popular among Software-as-a-Service businesses. It makes sense: offering a thinned-down version of your service for free will eventually attract customers who need more and are willing to pay for it. But the key word here is “eventually.” The most considerable risk of a freemium SaaS is that the number of free users can overwhelm you. If you can’t produce the necessary conversions, the cost of keeping free users around might turn your business into a financial disaster. The solution here is to set extremely strict limits and start charging the moment someone uses your product professionally. It might be a nice idea to hope for word-of-mouth marketing to happen, but if your business drains your bank account while you’re hoping, it’s not a business but a really badly-run charity.

Similarly, be extremely careful with lifetime deals. They can sabotage your future revenue. If too many of your customers snag such a deal and stick with using your service, their loyalty can be your downfall. At some point, the money they paid will be “used up,” as you have recurring monthly expenses when using your product. If you can’t compensate for those costs with equally recurring revenue from other customers, your business will be in negative revenue quickly.

Consider that “lifetime” might mean something different to you than what your customer expects. Is it the lifetime of the product? The business? Just the current version? Maybe even the lifetime of your customer themselves? This needs to be communicated clearly ahead of time so that once that lifetime has expired, you can move your customer to a recurring plan — or have them stop using the product. Unlimited usage of a product that costs you money to maintain is dangerous.

Similarly dangerous is charging too little. Underpricing is self-sabotage. It reduces the quality perception of your prospects. If something is too cheap, they’ll consider it a sub-par product. That usually leads to lower price acceptance, which will bite you when it’s time for customers to upgrade. It’s generally a good idea not to engage customers who don’t value your work.

It never ends

Pricing is complicated, and you can’t ever really “get it right.” Most businesses out there constantly experiment with their prices and the ones that don’t are either dead or quickly overtaken. Now, for a bootstrapper, this is one more thing that has little to do with actually solving the problem they set out to, but it needs to be on your radar most of the time. Fortunately, there are tools like ProfitWell and Baremetrics out there that give you data-driven insights into your subscriptions. These services even offer analysis and cohort ranking tools from which you can infer certain things about your customers that can lead your price exploration.

This is something you’ll need to return to every now and then. After all, if you could charge twice as much and only have 20% of your customers churn, you are currently leaving money on the table that should be yours and would even ultimately increase the perceived value of your services.

So charge what you’re worth.

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