The Strategic Questions Behind Saas Pricing For Startups

I heard from three new SaaS entrepreneurs this week who each had the same question: How should we price our software now that we have our first 5-10 happy customers?

First, congratulations on getting that far. Most savvy people who find problems and set out to solve them with software never get to their first paying customer.

Software pricing is not a quick tactical hack. It’s a reflection of your deepest strategies.

It’s partly an art with some proven structure and part science that requires running unbiased experiments.

Your pricing strategy DEPENDS on the answer to business strategy questions like these:

  • Who specifically is your target customer? Pricing is different for big companies and small businesses. Each market segment has some pricing expectations.
  • How much value do you provide for this specific customer? Are you solving million-dollar problems or $100 problems?
  • Do you have direct competitors? Crowded and competitive markets already have price expectations, but new things for new markets can be priced relative to the value provided.
  • What’s your customer acquisition model? No-touch purchase and onboarding can have lower prices, but high-touch complicated systems that require people are more expensive. Product-led, marketing-led, or sales-led?
  • What’s your funding strategy? Some free or low prices are subsidized by big funding, but you need to cover your costs sooner if you are boostrapping.
  • What’s your position in the market? Are you the premium high-end one or the cheap and easy one?
  • What options, upsells, editions, services, and add-ons will you sell eventually? Don’t overcomplicate pricing at first, but you’ll probably sell more than one thing as customers grow with you.
  • What credibility and proof do you have of the value that you provide? This is a big one for new startups with unproven products. How can you show more credibility and proof right now?
  • What others costs will your customers incur besides your software? Switching costs, time, services, integration setup or training should also be considered.

“What’s my pricing strategy?” depends on deeper questions like those.

None of those questions are simple and tactical. Or easy to answer at first.

Generally, first products are underpriced because they aren’t full-featured, you don’t have leverage in your market yet, and you are selling to smaller companies first.

Most software companies raise prices as they grow as they discover their best-fit customers, gain confidence, and move upmarket. It’s generally easier to go up than go down.

Pricing decisions are usually a forcing function for these strategic decisions when your startup starts moving. You can’t stay flexible and undeclared for too long.

Show me a SaaS pricing strategy that is working and I’ll show you their business strategy.

What other underlying questions does your software pricing depend on? What SaaS pricing lessons have you learned?

#practicalfounders

Get the weekly Practical Founders email and podcast update.

Share Practical Founders

FREE 60-PAGE EBOOK

Win the Startup Game Without VC Funding

Learn how all 75 founders on the Practical Founders Podcast created an average founder equity value of $50 million.