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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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In the competitive SaaS landscape, pricing strategy isn't just about setting dollar amounts—it's about aligning your revenue model with the core value you deliver to customers. The most successful SaaS companies have discovered that anchoring pricing around a North Star Metric (NSM) creates powerful alignment between customer success and business growth. According to OpenView Partners' 2023 SaaS Benchmarks report, companies that align pricing with their NSM see 32% higher net revenue retention compared to those using traditional pricing models.
This strategic approach ensures your pricing directly reflects the value customers receive, facilitating clearer communication, more predictable revenue, and stronger customer relationships. Let's explore how to effectively design your pricing strategy around your North Star Metric.
Understanding Your North Star Metric
Your North Star Metric represents the single most important measurement of value delivery to your customers. As Amplitude CEO Spenser Skates notes, "A proper North Star Metric measures the moment when your customer achieves the core value of your product."
Examples of powerful North Star Metrics include:
- Slack: Daily active users and messages sent
- Hubspot: Number of marketing qualified leads generated
- Shopify: Gross merchandise volume processed
- Dropbox: Number of files stored and shared
The ideal North Star Metric should be:
- Value-focused: Directly tied to the value customers receive
- Growth-oriented: When it increases, your business grows
- Actionable: Your team can influence it through product and service improvements
- Measurable: Easily tracked and quantified
The Business Case for NSM-Based Pricing
Before diving into implementation, let's understand why this approach works. ProfitWell research shows that value-based pricing models deliver 30% higher average revenue per user (ARPU) compared to cost-plus or competitor-based pricing.
When you align pricing with your North Star Metric, you create:
- Perfect value alignment: Customers pay based on the exact value they receive
- Scalability: As customer value grows, so does your revenue
- Reduced friction: Pricing becomes intuitive and justifiable to customers
- Better customer segmentation: Different usage tiers naturally emerge
- Predictable expansion revenue: Usage growth translates directly to revenue growth
Steps to Design NSM-Based Pricing
1. Confirm Your North Star Metric
Start by validating that your NSM truly reflects customer value. Interview your most successful customers and ask:
- "What specific outcome drives the most value for your business when using our product?"
- "How do you measure success with our solution?"
- "What metrics do you report to your leadership about our partnership?"
According to research by First Round Capital, companies that interview at least 30 customers before finalizing their NSM are 65% more likely to achieve product-market fit.
2. Map Pricing Components to Your NSM
Once you've confirmed your NSM, determine how pricing can directly reflect it. Consider these approaches:
Direct Correlation:
- Example: If your NSM is "documents processed," charge per document
- Benefit: Perfect alignment between usage and cost
Tiered Approach:
- Example: 0-100 documents: $X/month, 101-500: $Y/month
- Benefit: Predictable costs for customers while maintaining value alignment
Hybrid Model:
- Example: Base fee + per-document fee after threshold
- Benefit: Ensures minimum revenue while capturing upside from heavy users
3. Build in Value Accelerators
The most sophisticated NSM pricing models account for value accelerators—factors that multiply the value of your core metric. According to a study by Simon-Kucher & Partners, incorporating value accelerators can increase willingness to pay by up to 40%.
For example, if your NSM is "campaigns created":
- Basic campaigns might be priced at $X per campaign
- Campaigns with advanced targeting could be $1.5X
- Campaigns with AI-driven optimization could be $2X
This approach recognizes that not all instances of your NSM deliver equal value.
4. Test with Cohort Analysis
Before rolling out NSM-based pricing broadly, test it with specific customer cohorts. Atlassian found that A/B testing pricing models with 10% of new customers provided statistically significant data for decision-making within 60 days.
Track key metrics during your test:
- Conversion rates
- Initial contract values
- Expansion rate
- Churn rate
- Customer satisfaction
5. Build a Migration Path
For existing customers, create a thoughtful migration plan. According to Gainsight, companies that provide at least 6 months' notice for significant pricing changes maintain 92% of their customer base through the transition.
Consider these migration approaches:
- Grandfathering existing customers permanently
- Phased migration with price increases spread over time
- Optional migration with incentives
- Account-by-account migration through renewal conversations
Real-World NSM Pricing Success Stories
Twilio: API Calls as the NSM
Twilio built their entire pricing model around API calls—their North Star Metric. As customers send more messages and make more calls, they pay more. This model helped Twilio grow to over $2.8 billion in revenue by 2022, with a dollar-based net expansion rate consistently above 130%, according to their investor reports.
Snowflake: Compute Resources as the NSM
Snowflake's pricing is based on actual computation resources used—the key metric that reflects value delivery in data warehousing. This model has contributed to their exceptional 158% net revenue retention rate, as reported in their Q4 2023 earnings call.
HubSpot: Contacts as the NSM
HubSpot identified that the number of contacts in a customer's database was their true NSM—it directly correlated with marketing impact. They designed their pricing tiers around contact volumes, with additional features at higher tiers. This approach has helped them achieve a $1.7 billion run rate with 35% year-over-year growth.
Common Pitfalls to Avoid
Choosing a manipulation-prone NSM: Ensure your metric can't be easily gamed by customers
Overcomplicating the model: IBM found that pricing models with more than 3-4 variables reduce conversion rates by 23%
Ignoring price sensitivity thresholds: Every NSM has natural breakpoints where willingness to pay changes dramatically
Failing to communicate value: McKinsey research shows that clear value communication can increase conversion by up to 20% without price changes
Implementing Your NSM Pricing Strategy
To successfully implement NSM-based pricing, follow these best practices:
Start with new customers: Minimize disruption by applying new models to new customers first
Create clear documentation: Develop transparent pricing pages, calculators, and ROI tools
Train your sales team: Ensure they can articulate the value connection between your NSM and pricing
Establish monitoring systems: Build dashboards that track NSM consumption patterns to identify upsell opportunities
Regularly review and adjust: Schedule quarterly pricing reviews to ensure your model remains optimized
Conclusion: Pricing as a Strategic Advantage
When executed thoughtfully, NSM-based pricing transforms pricing from a necessary business function into a strategic advantage. It creates perfect alignment between your customers' success and your revenue growth.
The most successful SaaS companies understand that pricing isn't just about capturing value—it's about reflecting and reinforcing the core value your product delivers. By designing your pricing around your North Star Metric, you create a virtuous cycle: as customers derive more value, your revenue grows accordingly, enabling you to invest in delivering even more value.
For SaaS executives, the message is clear: if you want pricing to be a growth lever rather than a necessary evil, start by aligning it with the metric that matters most to your customers' success.