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Estd 4.22.2023
The Foundation of SaaS Pricing Strategy
In today's competitive SaaS landscape, your pricing strategy isn't just about determining how much to charge—it's about what to charge for. The value metric—the unit of measurement upon which you base your pricing—is perhaps the single most important decision in your monetization strategy, directly impacting both revenue potential and customer perception.
When executives ask what drives SaaS pricing, the answer often begins with the value metric. Will you charge per user, based on data consumption, or aligned with business outcomes delivered? This critical decision shapes your entire business model and growth trajectory.
Understanding the Core Value Metrics
Let's examine the three primary value metrics dominating today's SaaS pricing landscape:
1. Per-User Pricing
The classic approach: Charging based on the number of users or seats.
This model shines in its simplicity and predictability. Companies like Slack, Microsoft, and Salesforce have built empires on per-user pricing. According to OpenView Partners' 2023 SaaS Benchmarks report, approximately 39% of SaaS companies continue to rely primarily on per-user pricing.
Advantages:
- Easy for customers to understand and budget
- Predictable revenue scaling as customer organizations grow
- Simple to implement technically
Challenges:
- Creates friction for customer adoption and expansion
- May incentivize account sharing, reducing revenue
- Often disconnects pricing from actual value delivered
Atlassian's President Jay Simons explained their shift away from pure user-based pricing: "We realized we were essentially penalizing customers for adopting our products more broadly, which ran counter to our mission of helping teams work better together."
2. Data or Usage-Based Pricing
The consumption approach: Charging based on API calls, storage, bandwidth, or transactions.
Companies like Twilio, AWS, and Snowflake have revolutionized SaaS by aligning costs with consumption. According to Battery Ventures, usage-based models have seen a 5-year CAGR of 29.9%, outpacing the broader SaaS market.
Advantages:
- Scales directly with customer usage
- Removes adoption barriers with "pay as you go" models
- Aligns vendor costs with revenue
Challenges:
- Can create unpredictable billing for customers
- May require sophisticated metering infrastructure
- Revenue forecasting becomes more complex
As Twilio CEO Jeff Lawson notes, "Usage-based pricing democratizes access to technology. Our smallest customers can get started for virtually nothing, then grow with us as they succeed."
3. Value-Based or Outcome-Based Pricing
The impact approach: Charging based on business outcomes or value delivered.
This emerging model, pioneered by companies like HubSpot (marketing results) and Veeva (pharma commercialization), ties pricing directly to customer success. According to McKinsey, SaaS companies with value-based pricing achieve an average of 10-15% higher revenue growth compared to competitors using traditional models.
Advantages:
- Creates perfect alignment between vendor success and customer success
- Enables higher prices for high-value outcomes
- Positions the vendor as a strategic partner rather than a tool provider
Challenges:
- Requires sophisticated mechanisms to measure value delivery
- More complex to sell and explain to customers
- Demands deeper industry expertise to implement effectively
The Hybrid Reality: Most Successful SaaS Pricing Uses Combined Metrics
While we've outlined three distinct approaches, today's SaaS leaders recognize that the most effective pricing strategies often combine multiple value metrics. According to Profitwell data, companies with hybrid pricing models have 30% better retention rates than those using a single value metric.
Consider these examples:
HubSpot: Combines contacts (data), users (seats), and features (value tiers)
Salesforce: Primarily user-based but varies by cloud and includes data limits
Snowflake: Usage-based (data processing) combined with storage metrics
Selecting Your Optimal Value Metric
When determining your value metric, consider these five criteria:
1. Alignment with Customer Value
Your pricing should scale with the customer's perceived value. Ask yourself: "When do my customers feel they're getting more value from our product?" That's your value metric.
2. Growth Correlation
The ideal value metric grows naturally with customer success. As Patrick Campbell of ProfitWell states, "Your pricing metric should be a leading indicator of customer growth, not a lagging one."
3. Customer Understandability
Complex value metrics create friction. Can your customers easily understand and forecast their costs? According to Paddle's 2023 SaaS Pricing Report, 67% of buyers report abandoning purchases due to confusing pricing structures.
4. Competitive Differentiation
Your value metric can be a competitive weapon. When Slack charged per active user rather than per provisioned seat like competitors, it created both a differentiated model and a perception of fairness.
5. Implementation Feasibility
Can you reliably measure and bill against your chosen metric? Some value-based approaches require sophisticated tracking systems that may not be feasible for younger companies.
Evolution of Value Metrics Over Company Maturity
Your optimal value metric will likely evolve as your company matures:
Early-stage: Simple metrics (often user-based) to reduce friction and accelerate adoption
Growth-stage: More sophisticated metrics that better align with value and improve monetization
Enterprise-stage: Hybrid approaches with customization for enterprise needs
As Tom Tunguz, partner at Redpoint Ventures, notes: "The most successful SaaS companies I've worked with have evolved their pricing metrics at least twice as they've scaled—usually moving toward more value-aligned approaches."
Conclusion: Your Value Metric Is Your Growth Engine
The value metric you select fundamentally shapes how customers perceive, adopt, and expand their use of your product. It determines not just how much revenue you generate today, but how effectively you can scale tomorrow.
As you evaluate your current or future pricing strategy, remember that the best value metric:
- Aligns with how customers derive and perceive value
- Grows naturally as customer value increases
- Creates the right incentives for both you and your customers
- Differentiates you from competitors
In a landscape where 92% of SaaS companies plan to adjust their pricing in the next 12 months (according to OpenView's benchmark data), your value metric deserves careful, strategic consideration. It may be the most important pricing decision you'll make.
Next Steps
- Audit your current value metric against the five criteria outlined above
- Survey customers to understand how they perceive value from your solution
- Test alternative value metrics with new prospect segments
- Consider hybrid approaches that combine the best aspects of multiple metrics
The right value metric isn't just about capturing revenue—it's about building a sustainable growth engine aligned with genuine customer success.