Pricing a SaaS App
December 4, 2010 8 Comments
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Pricing is one of the areas that I see first-time entrepreneurs undersell themselves. What I mean is that there’s a tendency to price a product too low. Paul Graham says, “You’ve found market price when buyers complain but still pay.” It’s not that you’re trying to take advantage of customers but rather attempting to determine the optimum price (which often isn’t the highest). Software-as-a-Service (SaaS) is especially interesting due the rental nature of the relationship. The client isn’t buying the software but rather paying a monthly or annual fee for access to the application.
Here are a few things to keep in mind when pricing a SaaS app:
- Under $10/month is generally a consumer app that is fully self-service
- $20-$100/month is more small business and self-service or limited service to get going
- $100-$500/month is no-man’s land where it is too expensive to be self-service and it is too cheap to compensate consultative inside sales reps (the exception is products that replace existing, known quantities like VoIP services replacing phone services)
- $500-$1,500/month is the sweet spot for having a quality inside sales team that is well compensated
- $1,500+/month enters the territory of an expensive field sales force with significant travel and expense costs
Pricing is one of the more difficult things to do early on and I recommend starting two or three times higher than your initial thinking and always remember that it is easier to lower prices that to raise prices.
What else? What are some other considerations when pricing a SaaS app?
About David Cummings
Competitive forces and importance of marketshare vs short term margins. Sometimes marketshare can be more important then margins for early stage companies looking to own a market and can afford to do so and support with strong serive and renewal rates. It really also depends on your customers and the sotware’s importance to margin, operational efficiency and life cycle if the market. Usually early in the life cycle you cam charge more and this gets eroded with competition unless you can maintain a premium leadership positioning.
Thanks Dave. Great point about marketshare vs short term margins potential strategy.
The sales cycle can be closely correlated to pricing as well. The higher the price, the longer it takes to close the sale.
Another thing to think about is that people ascribe value to price. For a non-commodity, the more you charge for something, the more people will think it is worth. Why tell everyone you think your product is crap by pricing it at $9/month?
Thanks Paul. Great point that sales cycle and price are closely related.
Great post David and big fan of the blog. Curious if you have any thoughts on a per transaction model. Increasingly in transportation and logistics environments we are seeing pricing models that are aimed at charging enterprises for each transaction, which could be a number of things including a singular shipment or a shipping event (i.e. pick / pack). Thanks!
Thanks Douglas. Yes, I’m hearing about more and more about per transaction models. Those have been popular in the email marketing and supply chain markets for some time now. I’m a fan of a monthly minimum e.g. $1,000/month plus a bucket of transactions like 30,000 and then a per transaction fee over that amount.
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