How to figure out the best pricing for your SaaS

You just finished building your MVP. Now you’re looking to launch and start getting paying customers. The problem is, you have no idea how you should be pricing your product. You are probably asking yourself:

“Do I create multiple tiers?”

“Should I be charging less than my competitor, or more?”

“Should I gate off specific features, or charge by a metric like number of users — or maybe both?”

And the list of questions goes on…

This article aims to help you find answers to all your pricing questions by asking: Who is your ideal customer? Having a deep understanding of your ideal customer will enable you to build pricing which directly targets them by showing them the value they need to get from your product at a price they feel comfortable with.

You must know your customers to know your pricing

Mailchimp’s buyer personas

A Buyer persona is a representation of who your ideal customer is with as much detail as you can muster. Some of the things you should be thinking about when coming up with your buyer persona are:

  • What is your buyer’s role in their organization
  • Which of your features do they care the most about
  • What marketing channels can you find your buyer in?
  • What value does your buyer hope to get from using your product?
  • What price are they willing to pay?

Ideally, you would research this information by interviewing your customers and giving out surveys asking questions about themselves, and worst-case you just have to make estimates yourself and fill in the blanks as you gain customers. Beware asking non-paying customers for any information — these people are usually not going to be an ideal customer and will affect your strategy by optimizing for people who don’t pay.

The more details you can get, the better; these personas are useful not only for your pricing model but also as a framework for every single decision you make for your product.

What does your customer care about?

One of the most important things to consider when it comes to pricing strategy is what your different customers actually care about when they use your product.

When building buyer personas for Servicebot, we made a spreadsheet mapping value propositions to personas, giving us an understanding of what parts of the product our potential customers care the most about.

A basic mapping of value proposition to buyer persona for Servicebot

By realizing who wants what, you can understand which features all customers should have, and which features can be gated by tiers. If you can figure out that the CFO of a large organization is one of the few that cares about a specific value proposition, you may consider gating that value behind a higher tier because you can expect them to have a larger budget than, say, the bootstrapping startup founder.

Build your pricing strategy on top of your personas

In doing this exercise of fleshing out your buyer personas, you now have the information you need to build a logical pricing strategy. It’s tricky figuring out what your different pricing tiers should look like.

Pricing By Value Proposition

Having more expensive tiers offering more features is a strategy a lot of companies use price their SaaS product. When executing this strategy, you need to pay close attention to which customers care about what features and create a logical progression of company size to the need of a specific value proposition your product offers.

Pricing By Value Metric

Pricing your tiers based on value metric(s) is another common strategy. A great value metric is one that as it increases (causing the cost of the product to increase), will also increase in the value the customer receives from your product. For example Stripe charges based on the amount of revenue processed.

Finding a combination of bundling features with value metrics is the essence of coming up with an effective pricing strategy. The goal is to create a logical, easy to understand pricing model which will allow you to grow as your customers grow.

What prices should you actually be setting?

Now that you have a strategy formulated, we need to finally plug in prices. There are three different approaches pricing models generally take:

Cost-based Pricing

A cost-based approach takes your product’s internal costs and adds a margin on top. For example, if each customer costs you $100/month you could price your product at $120/month, giving you a $20 profit per customer. The problem with this approach is that it only looks at your company’s costs and does not take into account the customer’s feelings about price.

Competitor-based pricing

A lot of startups end up pricing themselves compared to their competitor, which may or may not be effective. Trying to match or undercut your competition’s prices can suffer from problems like a race to the bottom (think of how Uber subsidized their prices to drive out competition). It is generally better to optimize your price for your own value provided to customers, especially if you are offering more value than the competition.

Value-based pricing

Value-based pricing is the most effective (but hardest to implement) type of pricing model because it’s tailored uniquely for your company. You need to understand how much value your customer is getting out of your product and price in accordance to that. Many companies use the “10x rule” when it comes to value pricing: Give your customers value worth 10x the price you are charging them.

How do you figure out what people are comfortable paying?

To figure out what people are willing to pay, you can’t just ask them directly “what do you want to pay.” Dutch economist Peter van Westendorp recommends asking four questions to gather valuable price data from a specific customer segment:

At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)

At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)

At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)

At what price would you consider the product to be a bargain — a great buy for the money? (Cheap/Good Value)

Be wary of freemium

A lot of companies offer a “free tier” which has limited features. The idea is that people will start using the product, get value out of the free tier but see a lot more value if they were to start paying and eventually upgrade. In theory this sounds great and for some companies it is. The problem with the free tier is that you may start running into problems such as the high cost of providing support to the free customers, the free tier bringing in the wrong type of customer, and requiring you to spend resources to try and convert the cheapest customers to actually pay you. Early-stage startups feel this pain the greatest since they can only afford spending resources on critical operations. Look at your buyer personas and product — sometimes the freemium model works well and sometimes it does not.

Pricing your product is an ongoing process

You will never be done with your pricing strategy. As you get more data and feedback from your customers you will change your personas to be more accurate and change your pricing strategy to better target those people.


Trying to sell your SaaS? Servicebot offers extremely simple drop-in components for pricing pages, billing management, and more.

Choosing the Best Pricing Model to Fit Your SaaS

Imagine that you’re at a shoe store. You find a shoe with a color and style that you like, but it’s not available in your size. You try on another shoe that fits perfectly, but it’s in brown and you wanted black shoes to match your suit. Eventually, you get frustrated and leave for another store because there were no options that fit your specific needs.

When you are trying to sell your SaaS, you don’t want potential customers to leave because your pricing model doesn’t “fit,” but one-size-fits-all is an impossibility for both shoes and SaaS pricing. We can, however, compare and contrast five of the most commonly-used models to help you come to a decision on which may be better for your product, and why your pricing table might be causing your customers to look at other options.

1. Flat Rate

A single, flat subscription rate is the simplest way to communicate your pricing to potential users, but it’s also a bit like opening a shoe store that only sells one type of shoe in one size. Charging all of your users $50 a month for the same service might work for a lot of people depending on what service it is, but there will be potential customers that would be willing to pay $100 based on how much they will use your service, as well as users that would only get $20 worth of usage out of your product each month.

The shoes might not fit for everyone.

Pros: It’s simple, easy to communicate, and potential users won’t have to spend time reading complex pricing tiers overburdened by options.

Cons: One size rarely fits all. The lack of flexibility or customization not only prevents potential users from adopting your product, it also could be stifling your own profits when you can’t charge “heavy” users more based on their usage.

2. Usage-Based

Also known as “pay as you go,” usage-based pricing has seen success in billing platforms where, for example, users are charged a percentage based on the number of transactions they complete. Another example is seen with cloud computing, where the metric is based on gigabytes transferred or API requests.

Stripe Billing uses usage-based pricing.

Pros: Removes barriers for small startups interested in your service; users will not feel over- or undercharged for your service. Also compensates for larger businesses that will get a lot of use out of your service, and be charged accordingly.

Cons: You may as well hire a fortune teller to predict your revenue because the SaaS market is capricious; you can always make estimations but you will never truly know how much you will be making per month as your customers will fluctuate in their usage.

3. Freemium

Adopting a freemium model is a great way to get your name out there in a cutthroat SaaS market by offering a bare-bones version of your product at no cost, with the ability to pay to upgrade or add more features. Freemium has been used by Google Drive, which offers free storage for the first 15 gigabytes, and communication platform Slack, which has a free version for small teams. While going freemium can lead to explosive success, keep in mind that you still need to support those free users, and you don’t want to exhaust all of your team’s resources on a customer base when the majority of them aren’t even paying for your service! Giants like Google Drive can afford it, but Average Joe’s Cloud Services can’t. And we all know that nobody likes being forced to pay for a service they were previously able to get for free, especially when it comes as an unwanted surprise. Be mindful of letting users know upfront the limitations of the free version and the point they will have to start paying — for example, Google Drive has a constant reminder on its sidebar how much free storage you have remaining.

 Bitbucket offers a freemium price tier for small teams.

Pros: Everyone likes free! Opening the freemium gates is almost guaranteed to get your name out there and garner a respectable user base. It allows you to stay competitive when another SaaS offers a freemium model. Also, when free users grow too big for the free version, they can upgrade to the paid version if they liked your service.

Cons: Providing support to free users exhausts your resources and affects your profit. Users might not be inclined to pay for a service they once were able to get for free.

4. Tiered Pricing

Whenever freemium is mentioned, tiered pricing often follows. This is one of the most commonly-used pricing model by SaaS companies. By offering multiple packages with fixed pricing, you can attempt to sell the best fit to each customer. Freemium is often used in conjunction with tiers, where the most basic tier is free, followed by one or more upgraded versions with the price defined by your company.

Tiered pricing gives your customers more options.

Pros: Easier to predict revenue than a fickle usage-based model, and also offers more options than a single flat-rate price. With tiered pricing, customers can find the package that is just right for their needs. Also gives users the option to upgrade or downgrade to different tiers.

Cons: The more tiers that you offer, the more complicated your pricing table becomes. However, if you don’t include enough tiers, you not only run the risk of turning away potential customers, but also undercharging “heavy” users.

5. Feature-Based

This is the most flexible and dynamic of all the pricing models. Users can essentially customize their own package by choosing which features they need, with the price adjusting based on what features they add “a la carte” rather than selecting a fixed tier. In a market shifting rapidly to value flexibility and customization more and more, feature-based pricing can make your SaaS stand out above the others. However, by giving users the option to pick and choose which features they want, you may be giving them an incomplete product. Worse, they may cherry-pick features from your product, while going to a free or cheaper service for other features. Another thing to keep in mind — users don’t want to feel as if they’re paying more for a service because they want more features. Imagine we’re at the shoe store again, and there’s a sign saying that shoelaces are $4 extra. Some people might have plenty of extra laces and would be happy not to have to pay for something they don’t need, but others would feel as if they’re paying extra for what they believe is a crucial feature — even if the bundled cost would be the same, it’s about perception.

Feature-based pricing allows users to choose which features they want, but others might see it as paying extra for vital components.

Pros: Offers flexibility and customization. Users get exactly what they want to pay for, and nothing else.

Cons: Cheapens the value of your service as a software made of completed parts. Users don’t like feeling they are “paying extra” for components.

 —

In conclusion, there are many ways you could price your SaaS, and like Goldilocks, you must find the one that fits it “just right.” What works for your company may not work for another, just as you probably can’t fit into your friend’s favorite shoes.

If you need help creating a pricing page for your SaaS, ServiceBot makes it easy to generate a pricing table using any of the five models discussed here, giving you the code to embed it on your own website. You can schedule a consultation with the ServiceBot team here.

An example of a user-generated pricing table made with ServiceBot.

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