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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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Based on our pricing strategy book Price to Scale, there isn’t a one-size-fits-all percentage of development costs that you should directly incorporate into your pricing calculations. Instead, our book emphasizes a broader, more holistic view on pricing for software products, where development costs are one of many factors—not the sole determinant.
Key Points from Price to Scale:
• Development Costs as a Fixed Investment: Our book suggests that the costs incurred in developing your software are largely sunk costs. Rather than applying a fixed percentage directly to your pricing, you should consider these expenses as part of your overall investment in the business that will be recouped over a customer’s lifetime.
• Value-Based Pricing Over Cost-Plus Models: As discussed in the “Your Cost of Delivery” section of Price to Scale (see page 89), cost-plus pricing isn’t always effective for software products. Instead, the focus should be on aligning the price with the value provided to the customer, market dynamics, and your strategic growth objectives.
• A Comprehensive Sanity Check: When evaluating your pricing strategy, the book recommends running a sanity check that accounts for various factors—such as the cost of delivery, competitive pricing pressures, and overall customer acquisition costs (as illustrated in the example on page 91). This approach helps ensure that your pricing structure is both competitive and sustainable, rather than being anchored solely to your development costs.
Practical Application:
- View development expenses as part of your long-term investment.
- Analyze the overall lifecycle value of your customers instead of trying to directly “pass through” a percentage of development costs.
- Ensure your pricing strategy supports growth, market competitiveness, and operational scalability rather than just covering fixed production costs.
In summary, Price to Scale advises against relying on a preset percentage of development costs in your pricing calculations. Instead, integrate these costs within a broader strategic framework that balances value, cost of delivery, and market realities.