SaaS pricing strategy, from value metric and packaging to price increases

Pricing strategy is mostly four decisions

A SaaS pricing strategy can look complicated from the outside: tiers, seats, add-ons, discounts, annual plans, regional prices. Underneath, almost every pricing page is the result of four decisions.

1. Value metric. What does the customer pay more for?
2. Packaging. Which features and limits sit in which plan?
3. Price level and change. What does each plan cost, and how do you move it over time?
4. Billing term. Monthly, annual or both, and at what discount?

Get the first two right and the price level is relatively easy to tune. Get them wrong and no price level works for everyone. If you are still deciding between flat, tiered, seat and usage models, our guide to SaaS pricing models covers that choice first.

Choosing the value metric

The value metric is the unit on which your price scales. Common choices include seats, contacts, projects, locations, documents, API calls, transactions, revenue processed and storage.

A good value metric passes three tests:

• It grows with customer value. A customer using more of it should be getting more out of the product.
• The customer understands it. They can predict next month's bill without a spreadsheet.
• You can measure it reliably. If you cannot meter it cleanly, you cannot bill on it.

Testing candidate metrics against your data

Take a hypothetical customer support tool that charges per agent seat. The team is considering a switch to pricing by resolved conversations, because its new automation lets customers handle more conversations with fewer agents.

Customer D pays the least and gets the most value. Customer C pays four times what customer B pays for less work done. A seat metric tracks how the customer staffs, not what the product delivers. That is a strong sign the metric is drifting away from value, and the automation makes it worse every month.

A hybrid answer, such as a platform fee per seat plus a price per resolved conversation above an allowance, often fits better than switching entirely. Our guide to usage based pricing explains how to design the allowance and the overage.

Packaging plans around segments

Packaging decides which features and limits go into which plan. The most common mistake is building tiers from the feature list ("we have 30 features, let us split them into three groups") rather than from customer segments.

Start instead with two to four distinct customer types. For each, write what they need, what they would pay for and what they would never use. Then build each plan for one segment.

Fences that make upgrades natural

A fence is the reason a customer moves from one plan to the next. Good fences match a real change in the customer's situation:

• Limits that a growing customer naturally hits, such as projects or contacts
• Collaboration features that only matter once a team forms
• Security and admin features that larger organisations require
• Integrations that matter once the tool is central to a workflow

Weak fences frustrate customers, for example withholding a basic export from the entry plan when everyone needs it. They create resentment rather than upgrades.

Setting and raising prices

Most SaaS companies set their first prices too low and leave them there for too long. Raising prices feels risky because the cost of churn is visible and the cost of underpricing is not.

Sizing a price increase

Take a hypothetical SaaS with 1,200 customers on a 60 USD plan, 72,000 USD a month. Consider a 20 percent increase to 72 USD.

• Revenue if nobody leaves: 1,200 x 72 = 86,400 USD, a gain of 14,400 USD a month.
• Break-even churn: the business can lose 72,000 / 72 = 1,000 customers and still earn the same, which means 200 customers or about 17 percent.

Very few well-run increases cause anything like 17 percent extra churn. If the increase causes 4 percent extra churn, 48 customers leave, revenue is 1,152 x 72 = 82,944 USD, still about 10,900 USD a month more than before. The exact figures for your business depend on your customers, so treat this as the shape of the calculation, not a prediction.

Grandfathering without leaving money forever

Grandfathering means existing customers keep their current price when new customers pay more. It is fair and it reduces churn from the change, but permanent grandfathering means your oldest customers pay the least forever, often while using the product most.

Three common approaches:

Time-limited grandfathering is often the best balance. Customers get notice and time, and the business does not carry two price levels indefinitely.

Worked example. Using the same 1,200 customers, suppose new customers pay 72 USD immediately and existing customers keep 60 USD for 9 months. Over the first year, existing customers contribute 9 months at the old price and 3 months at the new one. If 3 percent of them (36 customers) leave at the switch, the 1,164 who stay pay 12 USD more for 3 months, which is 1,164 x 12 x 3 = about 41,900 USD. The 36 who left would have paid 36 x 60 x 3 = 6,480 USD in those months, so the net first year gain from existing customers is about 35,400 USD, plus the full increase on every new customer from day one. In the second year, existing customers bring 1,164 x 72 = 83,808 USD a month, about 11,800 USD more than before.

Communicating an increase

A clear message reduces churn more than any discount:

• Explain what has improved since the last price change.
• Give a date at least one billing cycle away.
• Offer the option to switch to annual billing at the current price before the change, which turns some of the increase into retention.
• Make sure support can answer questions without improvising.

Annual plans and the right discount

Annual plans lower churn, bring cash forward and simplify planning. The discount is the price you pay for those benefits, and many companies set it by habit rather than by arithmetic.

Sizing the annual discount

Take a hypothetical plan at 100 USD a month with 4 percent monthly churn. The expected life of a monthly customer is about 1 / 0.04 = 25 months, or about 2,500 USD. In the first 12 months, a monthly customer pays on average roughly 100 x (1 - 0.96^12) / 0.04 = about 968 USD, because some leave during the year.

An annual plan at 20 percent off costs 960 USD up front. Within the first year, that is almost exactly what an average monthly customer would pay anyway, so the business gives up very little and gains a customer locked in for 12 months with the cash in hand. At 2 percent monthly churn, the first year value of a monthly customer is about 1,077 USD, and the same 20 percent discount costs roughly 117 USD per customer in year one.

The lesson: the higher your monthly churn, the more you can afford to discount annual plans. Our page on annual plan optimization shows how to size this from your own billing data.

Making annual the default

On a pricing page with a monthly and annual toggle, the default matters. Showing annual prices first, as a monthly equivalent, typically raises the annual share. Keep the monthly option one click away so nobody feels trapped.

Discounts as part of the strategy

Discounts given by sales habit or by default coupons erode pricing quietly. A quarterly look at discount usage often finds that a large share of new revenue arrived with a discount nobody needed to give. Our guide to discount leakage explains how to measure it.

A disciplined discount policy has three rules: a short list of allowed discounts, each with an owner and an end date, and a monthly report of discounted revenue as a share of new revenue.

Testing pricing changes

Pricing changes are easier to test than most teams think. Two common methods:

• Pricing page variants with a holdout. Show a share of new visitors a different price or package, keep the rest on the current one, and compare conversion and revenue per visitor.
• Dated intervention against a baseline. For changes applied in billing, such as a new price for all new customers, compare the period after the change with the trend before it, and accept a wider uncertainty.

Either way, decide in advance what counts as a win, a loss, a flat result and not enough data. This is the work pricing optimization software exists to do.

Pricing for different regions and currencies

Selling internationally raises the question of whether to charge the same price everywhere. Many SaaS companies keep one price in USD and add local currencies for the largest markets. Converting at the exchange rate and rounding to a clean local price is usually enough to start. Consider separate regional price levels only when conversion rates in a region are clearly lower and the region is large enough to justify the extra complexity.

A pricing strategy checklist

• The value metric grows with customer value, and you have checked this against real customer data.
• Each plan is built for a named customer segment.
• Fences match real changes in customer needs.
• Prices have been reviewed in the last 12 months.
• Existing customers have a clear, time-limited path to new prices.
• The annual discount is sized from churn, not habit.
• Discount usage is measured monthly.
• Every pricing change has a baseline and a verdict rule.

Next steps

Pick the weakest item on the checklist and size it with your own numbers. Monetisation is a monetization platform that reads Stripe, analytics and your pricing page read-only and lists pricing opportunities such as underpriced tiers, annual plan discounts and discount leakage, each with an estimated range and the method in plain words. Estimates are estimates, not a guarantee of results. Run a sample audit on your site to see the first three opportunities for your business.