Chapter 3: Pricing

Core Idea

Pricing is the biggest lever in SaaS, and almost nobody gets it right at first. Set prices to match how you sell, segment customers into tiers, and build in expansion revenue so customers pay more as they get more value. Default to a credit card up front, revisit prices every 6–12 months, and raise them in a way that limits the damage.

Frameworks Introduced

• Price to match the sales process (average revenue per account, or ARPA, per month unless noted):
  • Consumer: $10–15. Expect high churn and little budget for acquiring customers. It works only with no-touch sign-up and a product that sells itself (Castos, Snappa).
  • About $50 or more: more breathing room and less churn.
  • Niche markets, products that need a demo, or longer sales cycles: $250 and up.
  • High-touch sales with several calls: $1,000 and up.
  • True enterprise with several demos and procurement: $30,000 a year and up, into six figures.
  • Look at other SaaS tools for signals: competitors, tools that could replace you, complementary tools, and similar tools in other verticals. Compare how they are sold, not only their features.
• Segment customers into tiers: find out who uses the product, how, and what value they get. SquadCast, a podcast recording tool, illustrates this (the book shows its pricing page):
  • Hobbyist shows pay $10–15 a month and have a consumer mindset.
  • Mid-market shows such as the author’s pay $50–100.
  • Large networks such as NPR pay 20× the base plan.
  • The tiers then were Indie at $20, Pro at $40 (marked most popular), Studio at $80, and Enterprise with a custom quote. Recording hours, shows, seats, and features rose with each tier.
• SaaS Cheat Code: Expansion Revenue: customers pay more as they get more value, by upgrading themselves or being upgraded automatically as usage grows. Two ways to build it in:
  • Value metric: the unit you charge by, such as subscribers (Mailchimp), seats (Salesforce), recording hours (SquadCast), or gigabytes (Dropbox). Tie it to the customer’s success so upgrading means their business is growing. Charge by seat only if two users at the same company see different things when they log in; otherwise they will share a login.
  • Feature gating: higher tiers unlock more features or integrations. It is weaker because it isn’t tied to the customer’s growth. A customer who wants a Tableau export can clearly afford a premium tier.
  • Both: start with one model early. Per-seat pricing with two or three feature levels is a reasonable combination, but mixing the two gets complicated quickly.
• Enterprise pricing: charge 10–20× your standard plan. At 2–3×, you can’t afford the customer success or sales staff that enterprise needs, or the cost of acquiring those customers. Founders from development backgrounds often undercharge because they’ve never seen a $50,000-a-year software purchase.
• Freemium decision: per the State of Independent SaaS Report, 66% of SaaS products offer a free trial but only 17% offer a forever-free plan. Freemium pushes revenue into the future, which hurts bootstrappers who need cash now.
  • It works with a simple product that gives value quickly, low support needs, some built-in virality, and low cost per user. An e-signature app is the example.
  • It doesn’t work with complex setup and onboarding and little virality, such as construction management software.
  • It fails when free users are a different market from paid users or don’t help paid growth.
  • If competitors offer it, consider it only when prospects keep raising it as a sticking point. Bounce Exchange skipped freemium and launched at $2,995 a month, with the software plus a managed service.
• Credit card up front: the author’s default is yes. Dropping the card can bring about 10× more trials, but entering a card shows real interest and filters out tire kickers, whose support costs add up.
  • Ask: how much support does each trial need, and can you handle 10× that?
  • Dropping the card “to learn what people want” brings noise from people who aren’t your core customers.
  • Exception: products adopted by employees who don’t have a company card (Slack, Trello, Dropbox). The champion uses it, then asks their manager to pay.
  • If people won’t sign up with a card, fix the product or the marketing instead of dropping the requirement.
• Opening the floodgates (removing the card later). Founders who did it well were early but established, had more than $20,000 MRR, knew their customers and market well, knew conversion, churn, and LTV by heart, and could handle the extra trials. Castos did it: growth rate didn’t change much, but large organizations could try it more easily, and reading the new numbers took almost two months. Try it for one to two months and watch every metric.
• Golden rule of experimenting: change one variable at a time. Don’t drop the card, raise prices, and add a free plan together. Shorter trials speed up learning: a 7-day trial runs four cohorts in the time of one 30-day cohort, and a short trial pushes users to get value right away.
• When to raise prices: revisit pricing every 6–12 months, because most founders charge too little.
  • Second-order effect: at about $20 ARPA, maybe 5 marketing approaches are affordable; at $500, about 10; at $5,000, all of them. Higher prices give you more ways to grow.
  • Raising prices is technically trivial; the hard part is emotional. You can roll back a mistake.
  • Aspirational pricing: Drip launched at $49 a month and heard it was too expensive. Instead of dropping to $19–29, the author improved the product until it was an easy sale at $49.
• How to raise prices:
  • Reduce the value metric at the same price (3,000 subscribers for $49 becomes 2,500).
  • Hide the lowest tier on the pricing page.
  • Raise prices across the board and watch how new customers respond.
  • Multiply prices by 10 and move upmarket. Gather, an early TinySeed company, went from $29 a month for 1–2-person design shops to 40–50-person firms. It took nearly 18 months of building, doubling prices twice, and losing low-end customers, and it now charges 10× its original price.
• Experiment vs. certainty: if you’re unsure, make a change you can undo and watch the funnel and trial-to-paid daily for a few weeks to a month (the “poor person’s split test”). Zapier ran a true split test by showing two prices inside the app after sign-up. If you’re certain, make the increase a marketing event: announce it ahead of time and let new sign-ups lock in the old price.
• Rob’s Rule of 10: if raising prices for existing customers won’t grow MRR by at least 10% (ideally more), don’t; grandfather them. A large change, such as $9 to $99 a month, makes grandfathering uneconomic; expect cancellations and complaints.
  • Never promise to grandfather customers for life. Lifetime deals belong to one-time sales, not SaaS.
  • Enterprise customers expect 5–10% annual increases; write that into contracts.
• Raising prices well: give 2–4 months’ notice, depending on how hard your product is to leave. Too short feels like a trap; too long and people forget and think it’s a second increase. Never raise prices on existing customers without notice. Use the six-part announcement:
  1. Remind them of the value you provide.
  2. Say plainly, “We’re changing our pricing.”
  3. Give the high-level reason (more value, a different market, new features).
  4. Optionally, say who is affected and when.
  5. Optionally, add more justification.
  6. Invite questions.

Key Concepts

• ARPA: average revenue per account, usually monthly.
• Value metric: the per-unit measure of value you charge by.
• Grandfathering: keeping existing customers on their old price after an increase.
• Trial-to-paid: the share of trials that become paying customers.

Mental Models

• “If no one’s complaining about your price, you’re probably priced too low.”
• Price follows the sales process: the more human effort each sale needs, the more each customer must pay.
• Hearing “too expensive” doesn’t mean you should cut prices. It may mean the product isn’t yet worth the price, so build until it is.
• Most founders err low, not high.

Anti-patterns

• Confusing tiers that don’t match the value customers get.
• Seat pricing when every user sees the same thing.
• Enterprise priced at 2–3× the standard plan.
• Copying competitors’ freemium without knowing why they offer it. Many founders launch freemium and shut it down later.
• Changing several pricing variables at once.
• Unannounced price increases and lifetime grandfathering promises.

Rules of Thumb (author’s wording)

• “If no one’s complaining about your price, you’re probably priced too low.”
• Freemium “is like a samurai sword. If you know what you’re doing, it’s powerful. If you don’t, you can cut your arm off.”
• “Only change one variable at a time.”
• Rob’s Rule of 10: if raising prices for existing customers won’t grow MRR by at least 10%, it’s rarely worth considering.
• Charge enterprise 10 to 20 times your standard plan.

Worked Example

Gymdesk’s price increase (from the book). Gymdesk sells management software to fitness and wellness businesses. In early 2021 its founder, Eran Galperin, decided it was underpriced. He had priced it below competitors at launch six years earlier and no longer wanted it seen as a budget product.

Step	What he did	Book principle
Decide	Raised prices considerably, by more than 50% for some customers	Revisit pricing every 6–12 months; most founders are too low
Existing customers	Grandfathered them for a few months, then moved them to a discounted plan	Rule of 10; never grandfather for life
Announce	Sent an email explaining the increase	Six-part announcement, advance notice
Result	Only a few of more than 600 customers left. MRR rose 25%, MRR growth rose about 70%, and ARPA kept climbing. Some customers replied, “Congrats, you deserve a raise.”	Fear of angry customers is usually larger than the real effect
Use of money	More aggressive marketing and four full-time hires for what had been a one-person company	Higher prices give you more growth options

Key Takeaways

1. Match your price to your sales process. Aim for $50 or more ARPA, and much higher when demos or enterprise sales are involved.
2. Segment customers and design tiers that rise with the value they get.
3. Build in expansion revenue with a value metric tied to customer success.
4. Charge enterprise 10–20× the standard plan.
5. Use freemium only for simple, viral, low-support products. Ask for a credit card by default.
6. Revisit prices every 6–12 months. Raise them with notice, one change at a time, using the Rule of 10 to decide on grandfathering.

Connects To

• Ch 2: underpricing as a siren song.
• Ch 4: higher ACV opens more marketing approaches; low-touch vs. high-touch funnels.
• Ch 6: expansion revenue as a High metric; net negative churn; churn segmented by pricing tier.