7 ms·

How to price your SaaS product

198 points by samulipehkonen 6y ago

devenblake 6y ago
Easy. Cost of production * 3.14. If that price isn't competitive either take less profit or find a way to limit costs without offering a lesser product than before.
- selcuka 6y ago
  So basically change "cost of production" and "3.14" until it works?
  - devenblake 6y ago
    Only if by "change" you mean reducing them.
    - selcuka 6y ago
      Fair enough, but what if the price is too competitive? You can then increase the quality of your product, or your margin. In any case, that formula doesn't mean much if you need to adjust it to a fixed, competitive price point.
- k3liutZu 6y ago
  How did we arrive at using pi as a multiplier?
  - Bancakes 6y ago
    It's a thing in hardware design when people would make embedded/IoT devices to sell. https://www.youtube.com/watch?v=UwrkfHadeQQ https://www.youtube.com/watch?v=UwrkfHadeQQ
    - devenblake 6y ago
      It's how IBM priced hardware IIRC.
airstrike 6y ago
See also https://www.cobloom.com/blog/saas-pricing-models https://www.cobloom.com/blog/saas-pricing-models Submitted here https://news.ycombinator.com/item?id=26563358 https://news.ycombinator.com/item?id=26563358
bkuehl 6y ago
A lot of this is obvious now but not as much 8-10 years ago. Don't price your SaaS per seat, ever. It will be abused. My tiny, niche SaaS uses X 'resources' configured in the product. If you have X resources configured for your business it means you're big enough to pay more.
- smhg 6y ago
  I agree per-seat is problematic, but (from experience) per-resource-configured is similar. Usage-based sounds like the ideal solution. Although I haven't figured how to set that up yet. Your don't want to encourage low usage.
  - meowface 6y ago
    >usage-based sounds like the ideal solution. Although I haven't figured how to set that up yet. Your don't want to encourage low usage. As an end user of some B2B software priced using this model, I can vouch for this. It's been frustrating for me and my coworkers, and it does do what you say: encourage low(er) usage. (Especially if it's variable pricing rather than being split into different tiers based on usage ranges.) The perspective I and others have felt is that "you're punished for using the product". There are different ways usage could be measured, but for some information security products that process or analyze logs/events, for example, the more things you log, the more your costs increase linearly. There are many instances where a valuable logging initiative could increase costs by 2x - 10x. I remember having to spend time away from actual work in order to find log sources to cut to reduce the extremely hefty costs we were paying.
    - porker 6y ago
      Is this down to who has authority to approve spending, and it's easier to get approval for a larger chunk at once? As a business owner I'm the opposite of you; I want more services to have usage-based pricing like S3. Take your logging example. It seems fair that if I log 2x more I pay 2x more. If there's business value in that logging then it's a no-brainer. With fixed pricing tiers I know that's when I'm at the lower usage end I'm paying over the odds, and when I'm at the upper end I have the problem you describe of not wanting to exceed my usage and move up a tier with a large price increase.
gabaix 6y ago
Pricing should be easy to understand for your target customer. I am surprised the article does not make mention of it. Startups who focus on value metrics too much may lose sight of it.
- hardwaresofton 6y ago
  So I agree with this on a personal level, but I wonder if this is true for certain markets. There are a lot of businesses out there with opaque pricing (AWS is a good example, but there are smaller ones) and it seems like there are some areas where you can get quite far with very opaque pricing as long as the person buying is not the person signing the check, and the product is Mission Critical (tm) (even if it really isn't).
throwaway0x1 6y ago
Someone send this to HashiCorp please.
- gpm 6y ago
  What does HashiCorp's pricing looks like? What do you think they should change to make more money?
  - throwaway0x1 6y ago
    Last time we looked, they charged per seat for Terraform Cloud. Quickly became too expensive.
abhinav22 6y ago
As an end user of SaaS, I hate having to pay per license and would prefer firm wide licenses without too many contrived restrictions. It’s super annoying when vendors try to price gouge you by restricting number of products / databases / etc. A flat fee approach would be most reasonable to me. I don’t mind paying a bit higher but I don’t want to limit how many users I can give access to or how much of the software we can use! The issue I think is sky high valuations are forcing many SaaS to charge very high profit margins to cover their cost of capital.
- Fordec 6y ago
  Unfortunately it's basic Darwinism. At first there were a mix of companies that did upfront licenses and service based. But over time, the service based companies had more consistent revenue, lock in and faster customer turn around. Then, with their competitive advantages, they either ran rings around the competitors that didn't or bought them with the bigger profits. These days if you go against that grain, unless you are one of those people who are destined to be a household name due to their wild success and domination of anyone doing SaaS right now, you are accepting that a competitor is going to beat you. I don't want to sell a SaaS to my customers. I don't. But my desire to not be eaten by the competition is greater and the game is the game until the meta changes. But boy do I eagerly await for the day the meta changes so we can start making better products for people. But a system that doesn't rely on VCs and their metrics like CAC, CAGR etc. is a prerequisite which demand consistent quarterly or monthly results that indicate hockey stick trajectories, not instant bounces one month of the year on the back of a flat fee. That is the metrics most are playing to get access to capital. To change this we need a post VC economics. But I don't see where that going to come from.
  - abhinav22 6y ago
    Thanks - great to have the perspective on the other side, you have to do what you have to do to survive and as you said, if you don’t play the SaaS game, then you are at significantly more risk because your competitors will.
- JackPoach 6y ago
lmeyerov 6y ago
It's easy to say "value based pricing" and "don't do per-seat pricing", but what are good examples when not directly tied to revenue/savings, and generalize beyond some niche domain? Ex: Analytics tools often charge utility fees along the lines of "per byte", but customers hate it because it prevents passive collection for core business functions (see: Splunk). However, when utility fee are more aligned to active use, e.g., for scaleout tools like Spark, 1:1 match on AWS spend, it seems ok, and closer to perceived value: you're using it. Also, re:seats... in the age of SSO/2fa, doesn't the objection around seat sharing largely go away?
- donw 6y ago
  I think a better answer is to first build a pricing model that your customers can understand. AWS pricing works well, because it aligns with how sysadmins and operations folks used to -- and still do! -- buy hosting space and datacenter resources. It's more granular to be sure, but the model is identical: you're buying so many units of rack or compute space, so much network bandwidth, so much memory, and so on. As such, value-based pricing only works if either the market already understands it, or if you have the sales resources to educate your potential customer base -- which nominally means you're selling to large orgs and enterprises. Which also means you're probably not a startup. Enterprise sales cycles are long. If your product promises to boost sales, revenue-share pricing is a value-based pricing option worth considering. "We don't get paid unless you make more money" is a solid sales tactic, but it also depends on your clients' willingness to share revenue or revenue-proximate data. But if you don't directly add to the bottom line, that's a hard sell. You are much better off with a simpler model (per-seat, per-month, etc.) that aligns with the market and with your customer expectations, and iterating from there with generous grandfathering.
  - yoshyosh 6y ago
    Agreed with this, would not recommend trying to do metered/per unit pricing (that developers may be used to) if your customers aren't familiar with that. We've found that customers readily accept/understand tier based pricing. We literally just changed higher plans from usage based to blocks/tiers of usage based e.g. up to X units per plan
Crazyontap 6y ago
One of the best advice that I've read on this very forum is always make sure that you start at $47 if that makes sense for your product. The logic behind it is that a lot of businesses give employees the power to buy stuff under this $50 limit without having to get it approved from their boss/deptt.
- dataminded 6y ago
  For me, it's about submitting expense reports. No receipt is required for expenses under $50. I'm 1000x more likely to try a tool under $50 than a tool over $50. I want to spend as little time as possible on expense reports and not needing a receipt helps.
- wenc 6y ago
  $50 is not universal though. I’ve worked at orgs where the threshold was under $30.
chdaniel 6y ago
As a side-thing, I'm building PriceUnlock, something that would help people price their SaaS products (aimed specifically at SaaS products) Essentially, you'd add a few lines of code and then use our dashboard to: * Set up pricing campaigns (with rules: e.g. show $29/mo for month 1, show $99/mo for month 2 etc) * Set up localised pricing, so you'd stop leaving money on the table by charging US-prices in lower-income countries I've announced it here: https://bychgroup.com/price-unlock/ https://bychgroup.com/price-unlock/ — Would be curious to hear other people's opinions as it relates to Lenny's article
karlerss 6y ago
My quip with value-metric based pricing has always been that by making your user pay for the useful thing, you disincentivize usage since it instantly means a higher cost for them. At an early-stage b2b SaaS catering to a rather cautious clientele, I feel this could affect adoption/activation negatively. Conversely, pricing per-seat creates the "I have paid for this, I should adopt and evangelize this in my org. as deeply as possible". Does anyone have experience with switching from seat-based to value-metric based pricing?
- Silhouette 6y ago
  My quip with value-metric based pricing has always been that by making your user pay for the useful thing, you disincentivize usage since it instantly means a higher cost for them. But this assumes the thing does not offer greater value to you in return. In that case, why are you paying for that service at all? I think the first part of the article made an excellent point about this, which was that if you're going to price based on a value metric, that metric should be tied as closely as you can to the quantifiable value you're providing to the customer, preferably something that is practically measurable or, if that's not viable, a proxy that is a reasonable approximation. I think the bigger problem with value metrics is, as others have already noted, that they have to be readily understandable. I know plenty of people whose businesses no doubt could run on AWS, and possibly cheaper than their current hosting arrangements, but they won't go anywhere near it because of the complex pricing model and/or the lack of facilities to cap the spend in case of accidents or abuse.
  - sunir 6y ago
    AWS prices on a cost basis, not value. That is you only pay for the input, not the output. Value-based pricing works well if your product is aligned to revenue or cost savings, and you can attach a clear business objective to the product. AWS is of course completely horizontal and therefore can serve an infinite number of business objectives excellently; and it does.
    - Silhouette 6y ago
EdwardDiego 6y ago
"Per seat" I can handle, but one Kanban board SAAS we use drives me nuts with its gated features - like many cilummdyou can create 5 "business rules" to move cards automatically, but on the 6th one, someone with no approval to upgrade the licence gets an error message, then a committee in Germany talks about it and decides not to pay more for the "feature" as we're already paying them a goodly sum.
alberth 6y ago
It’s interesting to think about some of these terms in the article and their meaning from the SaaS company perspective or the Customer perspective. Because many times the terms are different based on who you are. Eg “Value based pricing” seems to be a term from the perspective of the Saas company because there’s an unlimited amount your customer can spend with you. From a Customer POV I’d say “seat based pricing” is the true “value” because you have fixed predictable spend.
fnomnom 6y ago
my experience is that is very very hard to actually sell "value metric" SaaS products above 500€/month because charging somethign else every month doesnt fit into most (maybe its a german thing?) companies budget calculations. they dont get "maybe 6000 maybe 12000 euros" for a year to run your software they get an exact budget. unless you are directly involved intro their payment/sales funnel and get a percentage of this i doubt this is applicable for typical B2B SaaS yearly pricings.
- Ironlikebike 6y ago
  When you get into the realm of enterprise sales you have to find a way to predict a fixed top-end price and it has to fit into their perceived value of your product even if they use less of the service than you or they predict. An enterprise customer will tolerate a higher per-unit cost for the assurance that they won't experience cost overruns. This is because they're budgeting large line items once a year and they can not overrun. This would mean that you'd price the product at 12000 euros per year and hopefully the value of the product is still high enough to justify this in their minds.

Easy. Cost of production * 3.14. If that price isn't competitive either take less profit or find a way to limit costs without offering a lesser product than before.

selcuka 6y ago
So basically change "cost of production" and "3.14" until it works?
- devenblake 6y ago
  Only if by "change" you mean reducing them.
  - selcuka 6y ago
    Fair enough, but what if the price is too competitive? You can then increase the quality of your product, or your margin. In any case, that formula doesn't mean much if you need to adjust it to a fixed, competitive price point.
k3liutZu 6y ago
How did we arrive at using pi as a multiplier?
- Bancakes 6y ago
  It's a thing in hardware design when people would make embedded/IoT devices to sell. https://www.youtube.com/watch?v=UwrkfHadeQQ https://www.youtube.com/watch?v=UwrkfHadeQQ
  - devenblake 6y ago
    It's how IBM priced hardware IIRC.

airstrike 6y ago

See also https://www.cobloom.com/blog/saas-pricing-models https://www.cobloom.com/blog/saas-pricing-models Submitted here https://news.ycombinator.com/item?id=26563358 https://news.ycombinator.com/item?id=26563358

bkuehl 6y ago

A lot of this is obvious now but not as much 8-10 years ago. Don't price your SaaS per seat, ever. It will be abused. My tiny, niche SaaS uses X 'resources' configured in the product. If you have X resources configured for your business it means you're big enough to pay more.

smhg 6y ago
I agree per-seat is problematic, but (from experience) per-resource-configured is similar. Usage-based sounds like the ideal solution. Although I haven't figured how to set that up yet. Your don't want to encourage low usage.
- meowface 6y ago
  >usage-based sounds like the ideal solution. Although I haven't figured how to set that up yet. Your don't want to encourage low usage. As an end user of some B2B software priced using this model, I can vouch for this. It's been frustrating for me and my coworkers, and it does do what you say: encourage low(er) usage. (Especially if it's variable pricing rather than being split into different tiers based on usage ranges.) The perspective I and others have felt is that "you're punished for using the product". There are different ways usage could be measured, but for some information security products that process or analyze logs/events, for example, the more things you log, the more your costs increase linearly. There are many instances where a valuable logging initiative could increase costs by 2x - 10x. I remember having to spend time away from actual work in order to find log sources to cut to reduce the extremely hefty costs we were paying.
  - porker 6y ago
    Is this down to who has authority to approve spending, and it's easier to get approval for a larger chunk at once? As a business owner I'm the opposite of you; I want more services to have usage-based pricing like S3. Take your logging example. It seems fair that if I log 2x more I pay 2x more. If there's business value in that logging then it's a no-brainer. With fixed pricing tiers I know that's when I'm at the lower usage end I'm paying over the odds, and when I'm at the upper end I have the problem you describe of not wanting to exceed my usage and move up a tier with a large price increase.

gabaix 6y ago

Pricing should be easy to understand for your target customer. I am surprised the article does not make mention of it. Startups who focus on value metrics too much may lose sight of it.

hardwaresofton 6y ago
So I agree with this on a personal level, but I wonder if this is true for certain markets. There are a lot of businesses out there with opaque pricing (AWS is a good example, but there are smaller ones) and it seems like there are some areas where you can get quite far with very opaque pricing as long as the person buying is not the person signing the check, and the product is Mission Critical (tm) (even if it really isn't).

throwaway0x1 6y ago

Someone send this to HashiCorp please.

gpm 6y ago
What does HashiCorp's pricing looks like? What do you think they should change to make more money?
- throwaway0x1 6y ago
  Last time we looked, they charged per seat for Terraform Cloud. Quickly became too expensive.

abhinav22 6y ago

As an end user of SaaS, I hate having to pay per license and would prefer firm wide licenses without too many contrived restrictions. It’s super annoying when vendors try to price gouge you by restricting number of products / databases / etc. A flat fee approach would be most reasonable to me. I don’t mind paying a bit higher but I don’t want to limit how many users I can give access to or how much of the software we can use! The issue I think is sky high valuations are forcing many SaaS to charge very high profit margins to cover their cost of capital.

Fordec 6y ago
Unfortunately it's basic Darwinism. At first there were a mix of companies that did upfront licenses and service based. But over time, the service based companies had more consistent revenue, lock in and faster customer turn around. Then, with their competitive advantages, they either ran rings around the competitors that didn't or bought them with the bigger profits. These days if you go against that grain, unless you are one of those people who are destined to be a household name due to their wild success and domination of anyone doing SaaS right now, you are accepting that a competitor is going to beat you. I don't want to sell a SaaS to my customers. I don't. But my desire to not be eaten by the competition is greater and the game is the game until the meta changes. But boy do I eagerly await for the day the meta changes so we can start making better products for people. But a system that doesn't rely on VCs and their metrics like CAC, CAGR etc. is a prerequisite which demand consistent quarterly or monthly results that indicate hockey stick trajectories, not instant bounces one month of the year on the back of a flat fee. That is the metrics most are playing to get access to capital. To change this we need a post VC economics. But I don't see where that going to come from.
- abhinav22 6y ago
  Thanks - great to have the perspective on the other side, you have to do what you have to do to survive and as you said, if you don’t play the SaaS game, then you are at significantly more risk because your competitors will.
JackPoach 6y ago

lmeyerov 6y ago

It's easy to say "value based pricing" and "don't do per-seat pricing", but what are good examples when not directly tied to revenue/savings, and generalize beyond some niche domain? Ex: Analytics tools often charge utility fees along the lines of "per byte", but customers hate it because it prevents passive collection for core business functions (see: Splunk). However, when utility fee are more aligned to active use, e.g., for scaleout tools like Spark, 1:1 match on AWS spend, it seems ok, and closer to perceived value: you're using it. Also, re:seats... in the age of SSO/2fa, doesn't the objection around seat sharing largely go away?

donw 6y ago
I think a better answer is to first build a pricing model that your customers can understand. AWS pricing works well, because it aligns with how sysadmins and operations folks used to -- and still do! -- buy hosting space and datacenter resources. It's more granular to be sure, but the model is identical: you're buying so many units of rack or compute space, so much network bandwidth, so much memory, and so on. As such, value-based pricing only works if either the market already understands it, or if you have the sales resources to educate your potential customer base -- which nominally means you're selling to large orgs and enterprises. Which also means you're probably not a startup. Enterprise sales cycles are long. If your product promises to boost sales, revenue-share pricing is a value-based pricing option worth considering. "We don't get paid unless you make more money" is a solid sales tactic, but it also depends on your clients' willingness to share revenue or revenue-proximate data. But if you don't directly add to the bottom line, that's a hard sell. You are much better off with a simpler model (per-seat, per-month, etc.) that aligns with the market and with your customer expectations, and iterating from there with generous grandfathering.
- yoshyosh 6y ago
  Agreed with this, would not recommend trying to do metered/per unit pricing (that developers may be used to) if your customers aren't familiar with that. We've found that customers readily accept/understand tier based pricing. We literally just changed higher plans from usage based to blocks/tiers of usage based e.g. up to X units per plan

Crazyontap 6y ago

One of the best advice that I've read on this very forum is always make sure that you start at $47 if that makes sense for your product. The logic behind it is that a lot of businesses give employees the power to buy stuff under this $50 limit without having to get it approved from their boss/deptt.

dataminded 6y ago
For me, it's about submitting expense reports. No receipt is required for expenses under $50. I'm 1000x more likely to try a tool under $50 than a tool over $50. I want to spend as little time as possible on expense reports and not needing a receipt helps.
wenc 6y ago
$50 is not universal though. I’ve worked at orgs where the threshold was under $30.

chdaniel 6y ago

As a side-thing, I'm building PriceUnlock, something that would help people price their SaaS products (aimed specifically at SaaS products) Essentially, you'd add a few lines of code and then use our dashboard to: * Set up pricing campaigns (with rules: e.g. show $29/mo for month 1, show $99/mo for month 2 etc) * Set up localised pricing, so you'd stop leaving money on the table by charging US-prices in lower-income countries I've announced it here: https://bychgroup.com/price-unlock/ https://bychgroup.com/price-unlock/ — Would be curious to hear other people's opinions as it relates to Lenny's article

karlerss 6y ago

My quip with value-metric based pricing has always been that by making your user pay for the useful thing, you disincentivize usage since it instantly means a higher cost for them. At an early-stage b2b SaaS catering to a rather cautious clientele, I feel this could affect adoption/activation negatively. Conversely, pricing per-seat creates the "I have paid for this, I should adopt and evangelize this in my org. as deeply as possible". Does anyone have experience with switching from seat-based to value-metric based pricing?

Silhouette 6y ago
My quip with value-metric based pricing has always been that by making your user pay for the useful thing, you disincentivize usage since it instantly means a higher cost for them. But this assumes the thing does not offer greater value to you in return. In that case, why are you paying for that service at all? I think the first part of the article made an excellent point about this, which was that if you're going to price based on a value metric, that metric should be tied as closely as you can to the quantifiable value you're providing to the customer, preferably something that is practically measurable or, if that's not viable, a proxy that is a reasonable approximation. I think the bigger problem with value metrics is, as others have already noted, that they have to be readily understandable. I know plenty of people whose businesses no doubt could run on AWS, and possibly cheaper than their current hosting arrangements, but they won't go anywhere near it because of the complex pricing model and/or the lack of facilities to cap the spend in case of accidents or abuse.
- sunir 6y ago
  AWS prices on a cost basis, not value. That is you only pay for the input, not the output. Value-based pricing works well if your product is aligned to revenue or cost savings, and you can attach a clear business objective to the product. AWS is of course completely horizontal and therefore can serve an infinite number of business objectives excellently; and it does.
  - Silhouette 6y ago

EdwardDiego 6y ago

"Per seat" I can handle, but one Kanban board SAAS we use drives me nuts with its gated features - like many cilummdyou can create 5 "business rules" to move cards automatically, but on the 6th one, someone with no approval to upgrade the licence gets an error message, then a committee in Germany talks about it and decides not to pay more for the "feature" as we're already paying them a goodly sum.

alberth 6y ago

It’s interesting to think about some of these terms in the article and their meaning from the SaaS company perspective or the Customer perspective. Because many times the terms are different based on who you are. Eg “Value based pricing” seems to be a term from the perspective of the Saas company because there’s an unlimited amount your customer can spend with you. From a Customer POV I’d say “seat based pricing” is the true “value” because you have fixed predictable spend.

fnomnom 6y ago

my experience is that is very very hard to actually sell "value metric" SaaS products above 500€/month because charging somethign else every month doesnt fit into most (maybe its a german thing?) companies budget calculations. they dont get "maybe 6000 maybe 12000 euros" for a year to run your software they get an exact budget. unless you are directly involved intro their payment/sales funnel and get a percentage of this i doubt this is applicable for typical B2B SaaS yearly pricings.

Ironlikebike 6y ago
When you get into the realm of enterprise sales you have to find a way to predict a fixed top-end price and it has to fit into their perceived value of your product even if they use less of the service than you or they predict. An enterprise customer will tolerate a higher per-unit cost for the assurance that they won't experience cost overruns. This is because they're budgeting large line items once a year and they can not overrun. This would mean that you'd price the product at 12000 euros per year and hopefully the value of the product is still high enough to justify this in their minds.