How to price your SaaS plans

Pricing Dec 11, 2019

You are building a SaaS, and at some point, you have to decide how you price it. If you look at the overall market, most SaaS businesses offer multiple plans so that there is a fit for everyone. But still–you need a decision which plans you implement and how you price them. This article describes the most important things to consider and my process of doing it.

Free plans

Many people make the common mistake and give away the core feature of their product for free. They only charge for optional features and struggle to get paying customers. Free plans have one reason: Growth–massive growth. This growth requires a lot of funding because free users are pretty expensive–especially in the SaaS context. Running a SaaS costs money because you need infrastructure and time for customer support. Every customer that you acquire is a new user with questions and bugs.

So if you don't have the funding for massive growth at all costs, don't offer a free plan. Only a fraction of your free users will convert into paying customers, and you have to be more expensive for the paying customers. The paying customers have to cover the costs of free users, or you will run out of funding.

Feature locks

I don't like different prices for different feature sets. In general, there are situations where this makes sense, but most of the time, this creates artificial borders. Sure, a small plan for solo developers shouldn't have access to a team management section, and some features are only required by enterprise businesses. Still, as long as you don't target these customer groups, I don't think pricing on features is a good idea. Most of the time, you would like to use an optional feature, but the next price tier is just too high–so you look for a different product without these limits.

Cost based plans

In some scenarios, cost-based plans are a great way to go. For our error tracker Flare, we go this route. All plans have the same feature set, but they scale with the number of errors that you can send. We've chosen this approach because every request costs money. It's easy to understand for our users, and you can always start with the smallest plan. You only need to upgrade if your applications are completely broken regularly.

Bill by user

If there is no cost-based metric that is easy to understand, cost-based tiers are not a good idea. That's the reason why most project management web applications bill by the user. The actual cost per user and their tasks are close to zero–but the value of your application grows with the number of users per team. Being organized is hard, so billing per user makes sense for this type of tool. It's cheap if you have a team of three but gets expensive with 1,000 users.

Competition

One main consideration for your price is the competition. If you sell your product for $200 a month and they do it for $10, it's unlikely that you get a single customer.

Price anchoring

After going through all the considerations above, you likely come up with a base price for your product. So why don't you sell it at a flat fee for everyone? It is easy to understand, and in some scenarios, companies are very successful with this business model.

In many cases, people want to choose from multiple options. This is based on decision strategies that describe how brains work. Too many choices are bad, but no options are even worse. Humans want an offer that is dedicated to them, so your goal is to create additional plans that serve only this purpose. In a best-case scenario, we create a cheaper plan which is missing a critical feature but also a plan that is much more expensive.

The cheap one serves the purpose of being accessible for a fictional amateur user, but as it lacks the most essential feature, real customers will not buy it.

As your customer already goes for the professional option, we need to make sure that he feels right about this one. To verify their thinking on your preferred plan, we can create a costly enterprise or premium option. This option can have a ridiculous amount of users or whatever your most important metric is. This plan should be priced multiple times of your standard plan so that it makes sense if you go through the math. Its main purpose is to make the standard option very accessible. If a small plan costs $29, your standard costs $49, but the enterprisy plan is $249, $49 feels like a good deal, and people will go for it. Likely, you won't have small and enterprise users, but that's fine–your product is built around the $49 target, and this is what is going to sell.

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