What are the key areas to consider when pricing a SAAS product?
I think the #1 thing to think about is context.
Software all sort of all, rough-and-tough, costs the same to build and ship. Why is DropBox $5 a month, when Salesforce is $200 a month per user? Why can Workday charge $20,000,000 a year for something that might be the same amount of work to build, ship, and serve as something that costs $20,000 a year?
It’s not just value. It’s not just how big a problem you are solving — although that’s a very large part of it. It’s not just competition and costs.
It’s the context. If your product is like Salesforce, but 5x more important — you probably can charge 5x as much as Salesforce, once you figure out how to really sell.
And context is also budgets. There are often rough fixed budgets for certain product categories. You can get more than this if you truly redefine a category. But otherwise — it’s tough.
Most first-time SaaS CEOs price too low and don’t drive ACVs up quickly enough because they don’t quite yet understand the context of the product. E.g.,:
- Don’t be scared of competition if you provide more value than them. In fact, “overprice” versus them.
- If you are changing a paradigm, it may be OK to charge 10-20x more than what people are paying for a simple tool in that paradigm today.
- On the other hand, if there’s only budget for $Xk for your product, as it’s defined today, you ain’t gonna get more until you redefine the category.
And as your product gets better, and more valuable — and you get better at selling that value — redefine the context. At least annually.