Main illustration: Becky Simpson
Choosing the correct pricing for your product is a daunting task – particularly if you’ve never priced anything before.
But there are some simple techniques to get you started. Whether you’re a SaaS product like Intercom, or a restaurant, you first need to understand what it takes to attract your target customer. Then you need to decide how much revenue you want to earn from them. Plotting these two decisions gives you three pricing strategies – transactional, enterprise and self-service.
A complex sales process for low value customers is never a viable business, no matter how many startups try it. It’s like selling $2 hot dogs in a world-class, high-maintenance dining room. The numbers won’t add up. As we’ve covered before, low pricing alone isn’t disruptive, it’s just cheap. Your competitive advantage has to scale as you move upmarket.
Joel York coined the above axes to define the three key sales models for SaaS businesses. Many startups drop themselves in the lower left quadrant, often without understanding exactly what decisions they’ve made. Here’s some companies you’ll find in each quadrant.
What pricing strategy is right for your product?
Going for the lower left means you usually end up with a high amount of low value customers. This limits how you can acquire customers. Spending $300 to acquire customers for your $49 product is never a strategy worth pursuing.
A low pricing strategy also limits how much support you can offer (we discuss this in detail in our book on customer support). For example, you might have to decide free customers won’t get a response until all support queries from your paid customers are dealt, which will probably see your free-to-paid conversion rates drop off. The tradeoffs are numerous.
None of these tradeoffs are inherently bad, but they must be conscious decisions based on your pricing strategy. Depending on the industry, customer type, and addressable market at your disposal, picking the wrong pricing model can leave you dead before you get started. For example:
- Some industries are notoriously hard to reach, e.g. content marketing isn’t as effective on dentists as it is on developers. This means you might need to pay to acquire customers.
- Some industries deal in annual contracts, NDAs, and SLAs. This means you need to invest in a sales process.
- Some industries are used to PowerPoint sales presentations, handheld onboarding, and onsite training. This means you need a high contract value to profit on a customer.
Picking more than one pricing strategy
It’s common for companies to have two different pricing models to address two ends of the market. Github, for example, compete at the $7/month price point, but also sell Enterprise Github at $2,500 per month to big companies. To service the high-end Github employ a VP of sales, sales managers, account managers, and account executives.
Transactional pricing lets startups go upmarket without having to change their product or business model. By ensuring there’s no limit in how much your customers can pay, transactional pricing avoids the common pitfall of price plans. Making your top plan “unlimited” ironically places a hard limit on how much you’ll ever earn from a customer.
As Joel Spolsky points out, unlimited plans give an amazing discount to your least price-sensitive customers, who need it the least, and will barely appreciate it. It’s easy to add an unlimited plan without thinking this through, and once offered, it’s very hard to take it back.
One advantage of sticking with a set of price plans is that you’re never beholden to any one customer, as Jason Fried notes. But once again this should be a conscious decision you make, not the result of an unquestioned default.
As with all matters of pricing, there’s no one perfect pricing strategy, but there are lots of wrong turns and dead ends. Avoid those and you’re in good shape.