Most founders undercharge dramatically. They fear that higher prices will scare away customers, but the opposite is usually true: higher prices attract more serious customers who are less likely to churn and more likely to derive real value from your product.
Value-Based Pricing vs. Cost-Plus vs. Competitor-Based
Cost-plus pricing (cost + margin) leaves enormous value on the table. Competitor-based pricing commoditizes your product. Value-based pricing -- charging based on the economic value you create for customers -- is almost always the right approach for SaaS. If your product saves a customer $100K per year, charging $10K per year is not expensive -- it is a 10x ROI.
The Pricing Research Process
Use the Van Westendorp Price Sensitivity Meter: Ask prospects four questions about your product: At what price would it be too expensive? At what price would it be a bargain? At what price does it start to seem expensive? At what price does it seem too cheap to trust? Plot the responses to find your acceptable price range.
Packaging and Tiers
Most SaaS companies benefit from three tiers: a self-serve entry tier, a mid-tier with key features and support, and an enterprise tier with customization and dedicated support. Each tier should serve a distinct customer segment with different willingness to pay.
Annual vs. Monthly Billing
Offer both, but incentivize annual billing with a 15-20% discount. Annual contracts improve cash flow, reduce churn, and make revenue more predictable. The discount pays for itself through reduced customer acquisition overhead.
Raising Prices on Existing Customers
You can and should raise prices as your product improves. Give existing customers 60-90 days notice, clearly communicate the additional value they are receiving, and consider grandfathering the earliest customers who took a risk on you.
