In the competitive landscape of SaaS, your pricing strategy can make or break your business. At the heart of this strategy lies your pricing metric — the unit by which you charge customers. But what makes a good pricing metric? How can you ensure it drives growth while aligning with the value you provide?
Let’s explore the six key characteristics that separate effective pricing metrics from ineffective ones, with practical ways to test your own approach.
1. Value Alignment: Charge for What Matters
The most successful pricing metrics directly correlate with the value customers receive. When customers derive more benefit, they should pay more — creating a fair and scalable model.
Good Example: A data analytics platform charging based on the number of data points processed, as this metric directly relates to the insights customers gain.
Bad Example: The same data analytics platform charging based on the number of user accounts, regardless of how much value each customer extracts from the platform. A customer processing millions of data points pays the same as one barely using the system, creating a disconnect between price and value delivered.
How to test it: Analyze customer usage patterns and outcomes to identify which aspects of your product contribute most to their success. Survey customers about their perception of value and how it aligns with your current pricing metric.
2. Predictable: No Surprises
Customers should easily understand and predict their costs based on usage. This transparency builds trust and helps customers budget effectively — leading to longer-term relationships.
Good Example: A project management tool charging per active user per month provides clear, predictable pricing that scales with team size.
Bad Example: A project management tool charging based on a complex formula that factors in number of projects, storage usage, API calls, and time spent in the app. Customers have no way to predict their monthly bill and are constantly surprised by unexpected charges.
How to test it: Ask potential customers to estimate their costs based on your pricing model. If they struggle or frequently miscalculate, your metric may be too complex.
3. Scalable: Grow As They Grow
Your pricing metric should allow revenue to grow as your customers’ businesses expand. This ensures your pricing model supports both their growth and yours.
Good Example: Customer support software charging based on the number of tickets handled can scale its pricing as the customer’s support needs increase.
Bad Example: Customer support software with a flat monthly fee regardless of usage. When small customers grow into large enterprises with 10x the support volume, they’re still paying the same price – preventing the SaaS company from capturing additional value as customer usage increases.
How to test it: Model how your revenue would change with different customer growth scenarios. Ensure your pricing metric allows for significant revenue expansion without forcing customers to switch plans too frequently.
4. Measurable: Clear and Verifiable
The chosen metric should be easy to measure and verify for both you and your customers. This reduces disputes and simplifies the billing process.
Good Example: An email marketing platform charging per email sent provides a clear, measurable metric that both parties can easily track and verify.
Bad Example: An email marketing platform charging based on “marketing reach potential” – an internal, proprietary formula that combines email sends, list size, and engagement rates without transparent calculation. Customers can’t independently verify if they’re being billed correctly.
How to test it: Implement tracking for your proposed metric and run a pilot with a few customers. Ensure both you and your customers can easily access and understand the usage data.
5. Customer Success Alignment: Win When They Win
Your pricing metric should encourage customers to use your product in ways that lead to their success. This alignment improves retention and can drive expansion revenue.
Good Example: A sales CRM tool charging based on the number of closed deals rather than the number of leads, incentivizing effective use of the platform to drive sales outcomes.
Bad Example: A sales CRM tool charging based solely on the number of contacts stored in the system. This encourages customers to delete contacts to save money, reducing their chances of success with the platform and potentially damaging their sales pipeline.
How to test it: Analyze the correlation between your pricing metric and customer retention or Net Revenue Retention (NRR). A strong positive correlation indicates good alignment with customer success.
6. Market Competitiveness: Differentiate Without Alienating
Your pricing metric should be competitive within your market while still allowing you to differentiate. A good pricing metric helps you stand out from competitors without being so unfamiliar that it confuses prospects or makes comparison shopping impossible.
Good Example: A video conferencing platform that charges per host account while competitors charge per meeting or attendee, offering a simpler, more predictable pricing model that resonates with a specific customer segment.
Bad Example: A mainstream accounting software that charges based on “financial complexity units” – a proprietary metric no other competitor uses – making it impossible for prospects to compare costs and creating a high barrier to adoption.
How to test it: Conduct competitive analysis to understand standard industry pricing models. Then run focus groups with potential customers to gauge their reaction to your pricing metric compared to competitors. Monitor conversion rates when A/B testing different pricing metrics against your competition.
Putting It Into Practice
To implement effective pricing metrics and test their effectiveness, consider these actionable steps:
- Conduct customer interviews to understand how they perceive the value of your product and what metrics they use internally to measure success
- Analyze usage data to identify patterns that correlate with customer success and retention
- Run pricing experiments with a subset of new customers to gauge effectiveness before a full rollout
- Monitor key performance indicators like Customer Acquisition Cost (CAC), Lifetime Value (LTV), and Net Revenue Retention (NRR)
- Review and adjust regularly as the SaaS market evolves rapidly
Remember, there’s no one-size-fits-all pricing metric. The ideal approach will vary based on your specific product, market, and customer base. Continuous experimentation and adaptation are key to finding and maintaining the most effective pricing strategy for your SaaS business.
What pricing metrics have worked well for your SaaS business? Share your experiences in the comments below!
