V
Vivek Kumar
Author
May 5, 202513 min read
Business
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Pricing is the most impactful and most neglected lever in SaaS businesses. As Vivek Kumar, our CEO, notes: "A 1% improvement in pricing has 3-4x the revenue impact of a 1% improvement in customer acquisition. Yet most SaaS companies set pricing once and forget it."
1%
Price Increase = 11% Profit Gain
80%
SaaS Companies Underprice
3
Optimal Tier Count
6-12mo
Review Cadence
Pricing Models
Per-Seat/Per-User
Simple, predictable, scales with organization size—ideal for collaboration tools
Usage-Based
Pay for what you use—aligns cost with value, ideal for APIs and infrastructure
Feature-Based Tiers
Good/better/best—clear upgrade path, works for broad-market products
Hybrid Models
Combine approaches—base + usage, seats + features for flexibility
Per-Seat/Per-User Pricing
| Aspect | Pros | Cons |
|---|---|---|
| Predictability | Revenue scales with customers | Discourages adoption |
| Simplicity | Easy to understand and sell | Seat counting friction |
| Value alignment | Larger teams pay more | May not reflect value delivered |
Works best for: CRMs, collaboration tools, productivity software, communication platforms.
Watch out for: Credential sharing, adoption ceiling, SMB price sensitivity.
Usage-Based Pricing
- How it works:
- Pay for API calls, storage, compute, events, etc.
- Cost directly tied to value received
- Scales naturally with customer growth
Usage-Based Success Factors:
• Clear, measurable usage metric that aligns with value
• Predictable pricing calculator for customers
• Alerts and controls to prevent bill shock
• Floor pricing for minimum revenue guarantee
• Clear, measurable usage metric that aligns with value
• Predictable pricing calculator for customers
• Alerts and controls to prevent bill shock
• Floor pricing for minimum revenue guarantee
Works best for: Infrastructure services, API products, data platforms, observability tools.
Challenges: Revenue unpredictability, forecasting difficulty, complex billing infrastructure.
Feature-Based Tiers
The classic Good/Better/Best model:
code
┌─────────────┐ ┌─────────────┐ ┌─────────────┐
│ Starter │ │ Pro │ │ Enterprise │
│ $29/mo │ │ $99/mo │ │ Custom │
│ │ │ ★ Popular │ │ │
│ Core │ │ Core + │ │ Everything │
│ features │ │ Advanced │ │ + Support │
│ │ │ features │ │ + SLAs │
└─────────────┘ └─────────────┘ └─────────────┘- Principles:
- Core value available in lowest tier
- Clear differentiation that matters to target segments
- Obvious upgrade triggers (not artificial limitations)
- Enterprise tier for negotiation and customization
Value-Based Pricing
"Price based on value delivered, not cost incurred. If your product saves a customer $100,000/year, capturing $10,000 is reasonable—regardless of what it costs you to deliver."
Determining Value
1
Quantify Customer Value
Calculate time saved, revenue generated, costs reduced, risks mitigated. Use customer data and interviews.
2
Research Willingness to Pay
Van Westendorp surveys, conjoint analysis, direct customer interviews. Don't guess—measure.
3
Analyze Competitive Positioning
Map competitors' pricing. Position based on value differentiation, not just feature parity.
4
Set and Test
Set initial pricing capturing 10-30% of value delivered. Test and iterate based on conversion data.
Research Methods
- Van Westendorp Price Sensitivity:
- At what price is this too expensive?
- At what price does this seem like a bargain?
- At what price does this seem expensive but worth it?
- At what price does this seem cheap and low quality?
Conjoint Analysis: Trade-off analysis to understand feature vs. price preferences.
Customer Interviews: Deep conversations about budget, alternatives, and value perception.
Tier Design Psychology
The Anchoring Effect
code
Enterprise: $499/mo ← Anchor (makes Pro look reasonable)
Pro: $99/mo ← Target tier (most customers land here)
Starter: $29/mo ← Entry point (low barrier)The expensive option makes the middle tier look like great value. Design your pricing page to drive customers toward your target tier.
Feature Allocation Strategy
- Core value available in all tiers—don't cripple lower tiers
- Differentiation based on scale, not artificial limits
- Clear upgrade triggers tied to customer growth
- Enterprise features: SSO, audit logs, SLAs, dedicated support
- Avoid resentment-inducing limitations ("5 reports/month")
Decoy Pricing
Add a tier that exists primarily to make another tier look better:
| Tier | Price | Users | Features | |------|-------|-------|----------| | Basic | $29 | 1 | Core | | Pro | $79 | 5 | Core + Advanced | | Team | $99 | 5 | Core + Advanced + Priority |
Team tier exists to make Pro look like better value (same features, lower price).
Pricing Metrics
Key Metrics to Track
ARPU
Average Revenue Per User—track trends, segment by cohort and plan
Price Elasticity
How conversion changes with price—find optimal point on demand curve
Expansion Revenue
Revenue from upgrades and seat additions—healthy pricing drives this
Win/Loss by Price
Track why deals are lost to price vs. competitors vs. budget
Analysis to Perform
- Upgrade/downgrade analysis:
- What triggers upgrades? (Users, features, usage?)
- Why do customers downgrade? (Budget, value perception?)
- What's the path from free to paid?
- Competitive win/loss:
- Lost to price vs. lost to product?
- Budget objections vs. value objections?
- Price sensitivity by segment?
Optimization Strategies
Testing Approaches
A/B Testing Pricing is Risky: Showing different prices to different visitors can damage trust and create PR problems. Instead, test with new segments, geographic markets, or sequential cohorts.
- Safer alternatives:
- Cohort-based testing (new signups vs. existing)
- Geographic pricing (different markets)
- Grandfather existing, test new pricing on new customers
- Survey-based willingness-to-pay research
Price Increases
1
Communicate Value First
Announce features and improvements before announcing price changes. Lead with value.
2
Grandfather Existing Customers
Lock existing customers into old pricing for 12-24 months. Reduces churn risk.
3
Gradual Increases
5-15% increases every 12-18 months is less painful than 50% jumps every 5 years.
4
Monitor Closely
Watch churn, NPS, and support tickets after changes. Be ready to adjust.
Discounting Strategy
- Strategic use of discounts:
- Annual prepay (15-20% discount for cash flow)
- Launch/promotional pricing (time-limited)
- Volume discounts (encourages larger commitments)
- Avoid:
- Habitual discounting (trains customers to wait)
- Discounts as default close tactic (devalues product)
- Different discounts for similar customers (creates resentment)
Common Pricing Mistakes
The 5 Pricing Sins:
1. Too complex - If it takes 5 minutes to explain, it's too complex
2. Too low - Most SaaS underprices by 50%+ (fear of losing customers)
3. Feature gating resentment - Blocking core value creates churn
4. No testing - Set-and-forget leaves money on the table
5. Copying competitors - Your value proposition is different
1. Too complex - If it takes 5 minutes to explain, it's too complex
2. Too low - Most SaaS underprices by 50%+ (fear of losing customers)
3. Feature gating resentment - Blocking core value creates churn
4. No testing - Set-and-forget leaves money on the table
5. Copying competitors - Your value proposition is different
Implementation Checklist
Billing System Requirements
- Support for multiple pricing models (seats, usage, tiers)
- Usage metering and tracking
- Subscription management (upgrades, downgrades, cancellations)
- Invoice generation and payment processing
- Revenue recognition compliance
- Analytics and reporting
Pricing Page Best Practices
Related Resources
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