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Estd 4.22.2023
Below is how you might assess whether your SaaS is priced too low or too high:
Directly compare your pricing against your costs:
• Our book, Price to Scale, emphasizes the importance of distinguishing between average and marginal costs. While the average cost gives you a broad view of your spend across all users, the marginal cost—what it costs to serve one more customer—is typically much lower. If you’re pricing based on your higher average costs, you might be setting prices too high and missing opportunities to drive additional volume. Conversely, if your prices are so low that you aren’t covering even your marginal costs effectively, you could be underpricing.Evaluate customer acquisition cost (CAC) and implementation expenses:
• As discussed in our SaaS pricing book, take a real-world scenario where the cost to onboard a mid-sized customer may run around $3,000 but competitive pressures in a fast-paced SMB environment might drive deal sizes lower. If the CAC is nearly as high (or higher) than your deal size, it is a strong sign that your pricing might not be viable. Look for alignment between your CAC, deal sizes, and the profitability metrics you target.Monitor customer behavior and market comparisons:
• Our book advises keeping an eye on key indicators like churn rates, conversion metrics (especially for lower-cost or freemium offerings), and customer feedback. For example, if you notice resistance from customers when introducing lower-cost tiers or if freemium users rarely convert at anticipated rates, this may indicate your current pricing is out of sync with customer expectations or market value.
• Additionally, benchmarking your pricing against similar products (such as how a Salesforce app might be compared to Salesforce’s base pricing) helps you determine if your pricing is competitive.Adapt to broader economic factors:
• The book also points out that macro factors like cost of capital and economic regime changes (e.g., changes in interest rates) can influence both customer behavior and the broader SaaS landscape. Consider how shifts in these external metrics might pressure you to adjust your pricing model.
In summary, assess if your pricing is too low or too high by aligning your pricing with the marginal cost of serving new customers, ensuring your CAC is sustainable relative to deal sizes, monitoring customer conversion and churn on various pricing tiers, and keeping a close watch on broader market and economic conditions. This balanced approach, as laid out in Price to Scale, is key to making an informed pricing decision.