There is a guide about misconceptions of SaaS pricing in startup land. At least, what I learned for B2B SaaS during my short startup journey.
The post will explain
what to do before charging
some pricing misconception
exceptions
Keep in mind, this article is biased: I ran a startup for 2 years and did Techstars, and this only relates to my experience. Take this with a grain of salt.
1. Focus on value first
Always focus on the value of your product. If your users do not find any value in your product, they will not pay for it. It sounds simple and yet, many startups turn on pricing before having any sign of traction or retention.
Ensure your users get value from your product before charging.
You need to understand the value you bring to your user: it directly influences how you charge them. Charging prematurely leads to pricing mistakes that are difficult to recover from.
Your product value can be measured by your users in productivity increase, time saved or just the fun they have (e.g., a video game). Once you know the value, try to translate it into $$$. Your pricing should be based on this number.
Example: your users save about 1 hour per week, which translates to approximately $200 per month. You can try to charge between $40 and $60 per month for this product (price ~= 25% to 30% of value).
2. Measure retention
Use cohort retention analysis (explanation about cohort analysis here or here). Select the retention metric that makes sense for your product. Make experiments, and work on your product until you have a good retention.
Do not turn on pricing until you have good retention for your customer.
The exact retention to reach depends on your product and market. In B2B SaaS, a 5+ weeks retention of 50%+ (e.g., half of your customers who signed up is still using the product past 5 weeks) is considered good. You should show that your product consistently provides value to your users.
No retention → product useless → not going to pay → customer going to churn
3. Pricing unit
Derive the pricing unit to usage. When you go to a bar, you pay for what you consume. The same applies for other products.
Examples
OpenAI API charges based on usage (number of tokens).
AWS charges based on compute and storage used (they sell like plane tickets — they overbook their resources).
You can price like an all-you-can-eat buffet (one price per unit for unlimited usage). This is often valid in consumer land (e.g., Netflix, Xbox Game Pass, Spotify). It is less common in B2B SaaS. For example, OpenAI uses the all-you-can-eat model for their consumer product, ChatGPT ($20/month — more on this later) while they charge per usage for their enterprise product.
Occasionally, you cannot have a good pricing per usage model. This is where you have other models like a seat-based model (such as Slack — you are unlikely to charge per message sent).
4. No race to the bottom
Do not position yourself to be the cheapest on the market. It’s a race to the bottom that typically ends badly. It makes everybody poor. Instead, raise the bar, make a unique product people love and will pay for it.
When you position yourself on price:
you will keep decreasing the price if a competitor reduces prices
reducing price → reduce margin ; therefore
less money for sales/marketing
need to increase sales volumes
have less $$$ to hire and/or make employees happy. It is a vicious circle: employees unhappy → it lowers employees’ morale, and you end up with B players → you end up with a bad product → you do not sale
Many early-stage SaaS startups have very aggressive pricing to displace the competition. This is a typical death trap: customers will not switch for a 10% cost difference. If customers choose you because you are 20% cheaper today, they will leave you tomorrow because your competitor is 10% cheaper than you. If you decide this model, you and your competitors will fight over price, which will ultimately kill both companies.
If you position yourself against pricing, you will not make enough $$$ to justify your valuation and either take a down round or sell for pennies on the dollar. It sucks.
Instead of pricing your product on the low-end, focus on delivering a high-value product. Customers will have no problem paying 10% or 20% more than the competition if you provide 50+% more value. Use a strategy to build a premium product that can displace the competition and/or charge a premium price.
5. Avoid bundles
In the early stage (and often later), bundles are typically used when you are not sure of the value of your product. If your product is premium and has value, there is no need to bundle with a discount.
Bundling is a way to package an A+ product with a B product. Since the B product is not selling well, you attach it to the A+ product with a discount, hoping you will increase sales for the B product.
This is just wrong.
The real solution is to avoid bundles, fix the B product and make it an A+ product that sells by itself. It’s way harder. But this is the right way: build a product that provides value to your users.
Of course, sometimes, it makes sense to bundle (for example, Office is a bundle of a productivity suite) but I have seen startups bundling to try increasing sales of an underperforming product.
6. Exceptions
Taking over a market: when a new market emerges and the pricing/cost is unclear (e.g., no real competition), it may make sense to price low and grab all the market. This is the strategy used by ChatGPT or GitHub copilot — they are unlikely profitable today but are positioned to be a winner take all and be profitable when operational costs (e.g., compute) decrease. Note that this strategy is risky, requires a significant amount of capital, and unlikely to work for early-stage startups.
Consumer apps: what is explained here is what I observed for B2B SaaS apps. It will not apply to consumer apps which have a total different dynamic where consumers are more price-sensitive and want cost predictability.