Over the last 25 years, I have been fortunate to have been involved in operating several successful growth equity-backed SaaS businesses. While many key elements led to these companies being successful, one integral area that isn’t talked about enough is the power of dynamic pricing strategies.
For a moment, let’s step back and think about the “wild west” phase of an early-stage SaaS business. These ventures often have a trailblazing founder/CEO with a strong vision, creating an exciting, yet intense, environment. Oftentimes, from a pricing perspective, these companies will develop a “whatever it takes” mindset to entice early adopters and gain momentum.
Then, consider the next stage, where venture capital or growth equity investors back the company. This is when things start getting really interesting: the company embarks on new investments in the team, product, go-to-market, and business processes, to help strengthen the foundation for sustainable and predictable growth. However, at this point, it may be the perfect time to take a step back and re-think your pricing model.
It is not a surprise nor a criticism that many companies at this stage are not charging enough for their product, nor that the initial pricing model usually does not include built-in levers to drive upsell and expansion as the initial customers realize increased value. So, where can companies start?
One way to test your SaaS pricing model is by looking at your Net Revenue Retention (NRR). If it is less than 100%, chances are you have an opportunity to improve your recurring subscription pricing with volume tiers to better align with customer value and increased adoption as well as product packaging to drive upsell.
There are various proven pricing and packaging approaches for emerging SaaS companies that can unlock growth for new and existing customers to ultimately increase Annual Recurring Revenue (ARR) and build enterprise value.
Subscription Matrix Pricing
One of the first pricing strategies I advise founders to look into is a tabular pricing grid with volume-based tiers on one dimension and “good/better/best” product modules on the other. This design can provide the structure to help initially “size” a prospective customer subscription based on their projected usage volume and level of initial product requirements.
This pricing framework drives Go-To-Market (GTM) adoption with logical segmentation (SMB vs. Middle-Market vs. Enterprise) while at the same time also giving more flexibility to customers that may want to start with a smaller feature set and expand in the future.
This subscription matrix approach fixes the “one-size fits all” fixed pricing approach that holds down future revenue growth as customer volume and value increases. Additionally, this strategy helps ensure that modules the customer may not initially value are not thrown into the deal, leaving room for meaningful product upsells down the line.
Volume Based Tiers
The first step in creating a tier-based pricing matrix is understanding which key volume metric should be the value driver. The ideal pricing metric should be transparent, measurable, and best aligned with customer value. I have seen companies use a variety of metrics including number of orders, number of users, concurrent open jobs, number of integrations, amount of records managed, and the size of the database. My experience has been that a well-designed pricing framework is appreciated by customers as thoughtful and fair, while also building confidence amongst your sales team.
It is also important to resist the temptation to get too narrow in setting your tier levels because prospects’ desire for budget visibility is a legitimate one. Therefore, your company should establish annual tier levels and ranges that offer appropriate room for growth and give clear foresight and predictability for current and future subscription levels.
Additionally, this type of model gives flexibility to your sales team when discussing a multi-year deal with a new customer with projected growth. The sales team can offer a first-year incentive via a percentage subscription reduction, “or a tier-down” approach, where you offer in Year 1 the higher tier volume level at the lower tier price.
Product Module Based Upsell
A common reality during the early bootstrap days is SaaS companies will “throw in the kitchen sink” to attract early customers. While this feels right in the moment, it leads to very difficult expectation re-setting conversations later. Resist the urge to go down this path.
Instead, prioritize organizing your products into the “good/better/best” pricing structure that provides licensing flexibility and outlines how you want your customers to adopt new products. We want to achieve a balance between allowing prospective customers to “get started” while at the same time ensuring they are committing to enough of our core solutions to be successful.
Going one step further, I’m also a big fan of creating and marketing a “core” platform and base subscription with what we know our customers need at minimum to drive success. Then, I would recommend having up to three additional modules or bundled packages of added product features that may not be required in the initial subscription but offer clear incremental value that many customers will likely want to subscribe to in the future.
This aspect of a pricing strategy requires a very thoughtful understanding of the current and future product roadmap overlayed against the competitive landscape. At the same time, it’s also important to avoid the temptation to over-complicate and turn the SaaS pricing process into a complex “pricing configuration” exercise with too many product modules. Keep it simple and don’t sell cars without wheels.
Focusing on simplicity, transparency, and value alignment is ultimately the key in pricing strategies for all SaaS companies. A strong pricing strategy is integral to efficient growth. Financial executives and founders can benefit by improving their pricing strategy to drive new logos and expansion after milestone events like raising a growth equity round.
