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Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
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Email delivery is a critical service for businesses of all sizes, but as companies scale, the cost can become substantial. Mailgun, a leading email API service, has implemented an interesting approach to volume discounts that offers customers up to 44% off as they scale. This pricing strategy not only attracts high-volume customers but creates strong incentives for growth. Let's examine how Mailgun structures these discounts and what SaaS companies can learn from this approach.
Mailgun's Tiered Volume Discount Structure
Mailgun uses a tiered usage pricing model where customers receive progressive discounts as their email volume increases. The company's pricing page clearly outlines how costs decrease as usage scales:
- Flex Plan: Starting at $35/month for 50,000 emails
- Foundation Plan: Starting at $80/month for 100,000 emails
- Growth Plan: Starting at $90/month for 100,000 emails (with additional features)
- Scale Plan: Starting at $90/month for 100,000 emails (with premium features)
As customers send more emails, the per-email price drops significantly. For example, when reaching millions of emails per month, customers can see their effective rate drop by up to 44% compared to base pricing.
The Psychology Behind Discount Progression
Mailgun's approach leverages several key psychological principles that make their pricing strategy effective:
Transparency: All volume discount tiers are clearly displayed, allowing prospects to calculate their potential savings as they grow.
Predictability: Customers can forecast costs accurately as they scale, eliminating pricing surprises.
Incentivization: The substantial 44% maximum discount creates a powerful incentive for customers to consolidate their email volume with Mailgun rather than splitting across providers.
Benchmarking Against Industry Standards
According to SaaS pricing benchmarking studies, the average volume discount in the industry ranges from 15-30% for enterprise tiers. Mailgun's maximum discount of 44% positions them as particularly aggressive in this dimension.
When compared to competitors like SendGrid, Postmark, and Amazon SES, Mailgun's discount progression creates a compelling value proposition for high-volume senders. While Amazon SES may offer lower absolute prices for very high volumes, Mailgun's combination of deliverability features and significant volume discounts creates strong retention incentives.
The Business Case for Steep Volume Discounts
Why would Mailgun offer such steep discounts? The answer lies in the economics of email delivery:
1. Economies of Scale
As a usage pricing model business, Mailgun's marginal costs likely decrease as volume increases. The company can pass some of these savings to customers while maintaining healthy margins.
2. Reduced Customer Acquisition Cost (CAC)
A volume discount case study from OpenView Partners found that companies offering steeper volume discounts typically see lower customer acquisition costs relative to lifetime value. By incentivizing customers to grow usage, Mailgun increases customer lifetime value without additional acquisition spending.
3. Competitive Differentiation
In a crowded market of email service providers, Mailgun's pricing structure helps them stand out, particularly for mid-market and enterprise customers who can reach the higher discount tiers.
Implementation Lessons for SaaS Companies
If you're considering implementing a similar volume discount strategy, consider these key factors from Mailgun's approach:
Clear Discount Thresholds
Mailgun clearly communicates every pricing tier, creating transparency that builds trust. Their pricing page shows exact per-email costs at various volume levels.
Meaningful Discount Steps
The discount progression is significant enough at each tier to motivate customers to reach the next level. Small, incremental discounts rarely drive behavior change.
Alignment with Customer Success
Volume discounts align perfectly with email delivery, as higher volumes typically indicate customer success (assuming good deliverability). This creates a win-win scenario where customer growth and Mailgun's revenue growth are positively correlated.
Potential Drawbacks to Consider
While Mailgun's approach offers advantages, there are potential challenges to this model:
Revenue compression: Steep discounts can significantly impact revenue if not properly balanced with cost structures.
Setting expectations: Once steep discounts are established, it can be difficult to adjust pricing upward.
Market positioning: Very aggressive discounting might inadvertently position a product as a commodity rather than a premium solution.
Is Mailgun's Approach Right for Your SaaS Business?
Not all SaaS companies should implement volume discounts at Mailgun's scale. Consider:
- Your cost structure: Volume discounts work best when marginal costs decrease as usage increases.
- Customer segments: Are your larger customers more or less expensive to serve?
- Competitive landscape: How do competitors price for volume?
- Growth strategy: Volume discounts can accelerate growth but may compress margins.
Conclusion: Strategic Volume Discounting as a Growth Lever
Mailgun's approach to scaling volume discounts up to 44% demonstrates how pricing can serve as a strategic growth lever. By creating transparent pricing tiers with meaningful discount progression, they've developed a model that rewards customer growth while likely maintaining healthy unit economics.
For SaaS executives evaluating pricing strategies, Mailgun offers a compelling case study in how volume discounts can be structured to align business goals with customer success. The key is finding the right balance between discount depth and business economics while creating clear incentives for customers to grow their usage over time.
When implemented thoughtfully, volume discount strategies can create powerful growth flywheels where increased customer usage drives both customer success and sustainable business growth.