Pricing is a Product Feature
Most founders treat pricing as an afterthought. They build a product and then slap a price on it. This is a huge mistake. Pricing is a core feature of your product. It communicates your value, defines your target customer, and is the engine of your revenue growth.
Getting it wrong can be fatal. Price too low, and you leave money on the table and signal that your product isn't valuable. Price too high, and you scare away potential customers.
Step 1: Forget Your Costs, Focus on Value
The biggest mistake in pricing is cost-plus pricing (calculating your costs and adding a margin). Your customers don't care about your costs; they care about their problems.
The correct approach is value-based pricing. This means anchoring your price to the value your product delivers to the customer.
Actionable Tip:
- Quantify the value. Does your product save them time? Calculate how much an hour of their time is worth. Does it increase their revenue? Estimate the potential uplift. Does it replace another expensive tool? Your price should be a fraction of the value it creates. For example, if you save a business 20 hours of work a month, and their time is worth $50/hour, you are providing $1000/month in value. Charging $99/month is a no-brainer for them.
Step 2: Choose Your Value Metric
Your value metric is how you charge for your product. It's the "per what" in your pricing. For example, "per user," "per 1,000 emails," "per project."
A good value metric should:
- Be easy for the customer to understand.
- Align with the value they receive. As they get more value, they pay more.
- Grow as your customer's business grows. This creates natural expansion revenue for you.
Common SaaS Value Metrics:
- Per User/Seat: Simple and predictable. Works well for collaboration tools (e.g., Slack, Figma).
- Usage-Based: Direct link to value. Works well for infrastructure or API products (e.g., AWS, Twilio).
- Tiered: Bundling features into different packages (e.g., Basic, Pro, Enterprise). This is the most common model.
Step 3: Create Your Tiers (The 3-Tiered Structure)
The classic three-tiered structure (e.g., Good, Better, Best) is popular for a reason: it works. It leverages pricing psychology to nudge customers towards the most valuable plan.
How to structure it:
- Tier 1 (e.g., "Basic" or "Starter"): Aimed at smaller customers or those just starting out. It should solve the core problem but have limitations on more advanced features or usage.
- Tier 2 (e.g., "Pro" or "Growth"): This should be your target plan. It's designed for your ideal customer profile and offers the best balance of features and price. Use visual cues (e.g., "Most Popular") to highlight it.
- Tier 3 (e.g., "Enterprise" or "Scale"): Aimed at large organizations. This tier often includes advanced features like SSO, dedicated support, and higher security. Often, this tier will have "Contact Us" for pricing, as these are custom deals.
Step 4: Talk to Your Customers
You cannot figure out your pricing in a vacuum. You need to talk to potential customers.
Don't ask: "How much would you pay for this?" Instead, ask:
- "How are you currently solving this problem?"
- "How much are you paying for that solution?"
- "What is the budget allocated for this type of tool?"
- "What would be a price that is so low you'd question the quality of the product?"
- "What would be a price that is too expensive for you to consider?"
Their answers will give you a pricing "zone" to work within.
Conclusion: Pricing is a Process
Your pricing is not set in stone. It's a living part of your product that you should revisit and test regularly (e.g., every 6-12 months). As you add more value to your product, you earn the right to charge more for it.
Start with a simple, value-based model, talk to your customers, and be prepared to iterate.