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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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Selecting the right pricing metric for your SaaS product can be the difference between sustainable growth and stagnation. While many founders focus on building innovative features, pricing strategy often takes a backseat until launch time. Yet, your pricing metric—the specific unit you charge for—is arguably one of the most strategic decisions you'll make. It not only affects revenue but also shapes customer behavior, sales compensation, and product development priorities.
Why Your Pricing Metric Matters More Than You Think
The pricing metric you select is more than just a billing detail—it's a fundamental business decision. According to a study by Price Intelligently, a mere 1% improvement in pricing strategy can yield an 11% increase in profits. That's significantly more impact than a 1% improvement in customer acquisition (3.3% profit increase) or retention (6.7% profit increase).
Your pricing metric determines:
- How customers perceive your product's value
- The scalability of your revenue model
- Your alignment with customer success
- The predictability of your revenue streams
Common SaaS Pricing Metrics and Their Applications
Per User Pricing
What it is: Charging based on the number of individual users accessing your software.
Best for: Collaboration tools, CRMs, and project management software where individual usage is clear.
Example: Slack charges per active user, which makes sense for a communication platform where each additional user represents clear additional value.
Considerations: While simple to understand, per-user pricing can discourage adoption within an organization if customers try to limit licenses to save costs.
Feature-Based Pricing
What it is: Different pricing tiers offering varying levels of functionality.
Best for: Products with clearly differentiated features that appeal to distinct customer segments.
Example: Mailchimp offers tiered pricing with more sophisticated marketing features available at higher price points.
Considerations: Feature-based pricing requires careful product packaging to avoid overwhelming prospects with too many options or undervaluing premium features.
Usage-Based Pricing
What it is: Charging based on consumption (API calls, storage, processing power, etc.).
Best for: Infrastructure services, data processing tools, and platforms with variable usage patterns.
Example: AWS charges based on compute time and storage used, directly tying costs to customer value received.
Considerations: While highly aligned with value, usage-based pricing can create uncertainty for customers regarding their monthly bills.
Value-Based Metrics
What it is: Charging based on business outcomes (revenue generated, cost savings, etc.).
Best for: Solutions with quantifiable ROI that directly impact customer business metrics.
Example: Gong.io, a revenue intelligence platform, bases pricing partly on the sales revenue its customer manages through the platform.
Considerations: While theoretically ideal, value-based pricing can be difficult to implement and track without clear attribution.
Hybrid Models
What it is: Combining multiple pricing metrics (e.g., base fee plus usage).
Best for: Complex products serving diverse customer needs.
Example: HubSpot charges a base platform fee plus additional costs for marketing contacts—combining subscription billing with usage components.
Considerations: Hybrid models offer flexibility but can become complex for customers to understand.
How to Select Your Pricing Metric: A Step-by-Step Framework
1. Start With Your Customer's Value Perception
The most effective pricing metrics align with how customers perceive value from your product. Ask yourself:
- What specific problem does your solution solve?
- How do customers measure success when using your product?
- What unit of value naturally grows as customers get more value?
According to a survey by OpenView Partners, SaaS companies that align their pricing metrics with customer value perception see 30% higher growth rates than those that don't.
2. Analyze Your Cost Structure
Your pricing metric should cover your costs as customers scale their usage. Consider:
- What drives your costs (servers, storage, support, etc.)?
- Are your costs primarily fixed or variable?
- Do costs scale linearly with customer usage?
3. Study Competitive Pricing Models (But Don't Copy Blindly)
While understanding the market is important, copying competitors' pricing metrics might mean missing an opportunity for differentiation. Analyze:
- How do competitors charge for similar solutions?
- Is there frustration with existing pricing approaches?
- Can you create a competitive advantage through a different pricing approach?
4. Test Customer Reactions
Before finalizing your pricing metric, gauge potential customer reactions:
- Present different pricing scenarios in customer interviews
- Run A/B tests with different pricing metrics on your website
- Monitor conversion rates with different approaches
A study by Simon-Kucher & Partners found that companies that test pricing regularly achieve 10-15% higher margins than those that don't.
5. Consider Long-Term Scalability
Your pricing metric should grow naturally with customer success:
- Will this metric still work when customers grow 10x?
- Does it allow for account expansion over time?
- Can it support your customer lifetime value (CLV) goals?
Real-World Examples: Successful SaaS Pricing Metric Transformations
Twilio: From Simple to Sophisticated
Twilio began with straightforward per-message pricing but evolved to a more complex model with volume discounts, committed use discounts, and feature-specific pricing. This evolution allowed them to capture more value from larger customers while remaining accessible to developers.
HubSpot: Aligning With Customer Growth
HubSpot shifted from a purely user-based model to one that incorporates marketing contacts as a key metric. This allowed them to better align with customer growth and capture more revenue as their customers scaled their marketing efforts.
Common Pitfalls in Selecting Pricing Metrics
The "Too Complex" Trap
Complexity is the enemy of conversion. According to a study by the Corporate Executive Board, excessive complexity in B2B purchases can reduce the likelihood of purchase by 18%.
Solution: Ensure your pricing metric can be explained in a single sentence.
The "Race to the Bottom" Mistake
Choosing a pricing metric that's constantly decreasing in cost (like storage) can create downward pressure on your revenue.
Solution: Select metrics that maintain or increase in value over time.
The "Punishing Success" Problem
If your pricing metric increases costs as customers succeed (without corresponding value increases), you're at risk of churn.
Solution: Align pricing increases with clear value delivery milestones.
Implementing Your Pricing Metric: Best Practices
Transparent Communication
When introducing a new pricing metric, clarity is essential:
- Provide calculators to help prospects estimate costs
- Offer examples of what different customer types might pay
- Be transparent about why you've chosen this metric
Grandfather Existing Customers
To reduce churn when changing pricing metrics:
- Allow existing customers to remain on their current plan
- Offer incentives to migrate to the new structure
- Provide ample notice of changes (at least 90 days)
Monitor and Adjust
Your pricing metric isn't set in stone:
- Regularly analyze customer usage patterns
- Monitor how your pricing metric affects gross margins
- Be prepared to evolve as your product and market mature
Conclusion: Finding Your Perfect Pricing Metric
Selecting the right pricing metric is a strategic process that deserves significant thought and testing. The perfect metric aligns with how customers perceive value, scales with their success, and supports your long-term business goals.
Remember that pricing is not just about capturing value today—it's about building a sustainable business model that allows you to continue delivering value tomorrow. The right pricing metric creates a virtuous cycle where customer success drives your success, reducing churn and increasing customer lifetime value.
As you evaluate options, focus on metrics that are:
- Simple for customers to understand
- Aligned with your value delivery
- Scalable as customers grow
- Predictable for forecasting revenue
- Defensible against competitive pressure
With these principles in mind, you'll be well-positioned to select a pricing metric that supports sustainable growth for your SaaS business.