Startups | 3 min read

Picking your pricing model

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Sticking a $5/month price tag on your product might lead you to believe it is affordable for everyone. Far from it.

Low pricing rules out lots of potential customers, in the same way serving $3 steaks in a restaurant actually restricts your clientele.

Whether it’s a SaaS app or a restaurant, you first understand what it takes to attract your target customer, and decide how much revenue you want to earn from them. Plotting these two decisions gives you three options…

A complex sales process for low value customers is never a viable business, no matter how many start-ups try it. It’s like selling $2 hot dogs in a world-class high maintenance dining room. The numbers won’t add up. As we’ve covered before, low pricing alone isn’t disruptive, it’s just cheap. Your competitive advantage has to scale as you move upmarket.

Joel York coined the above axes to define the three key sales models for SaaS businesses. Many start-ups drop themselves in the lower left quadrant, often without understanding exactly what decisions they’ve made. Here’s some companies you’ll find in each quadrant…

Which Quadrant you Choose

Going for the lower left means you usually end up with a high amount of low value customers. This limits how you can acquire customers. Dropbox, for example, learned the hard way that they could never afford to acquire customers by advertising. Low pricing also limits how much support you can offer. Woothemes learned they can’t afford to support certain customers. The trade-offs are numerous…

None of these trade-offs are inherently bad, but they must be conscious decisions based on your strategy. Depending on the industry, customer type, and addressable market at your disposal, picking the wrong quadrant can leave you dead before you get started. Three examples:

  • Some industries are notoriously hard to reach, e.g. content marketing isn’t as effective on dentists as it is on developers. This means you might need to pay to acquire customers.
  • Some industries deal in annual contracts, NDAs, and SLAs. This means you need to invest in a sales process.
  • Some industries are used to Powerpoint sales presentations, handheld on-boarding, and onsite training. This means you need a high contract value to profit on a customer.

Picking More Than One

It’s common for companies to have two different pricing models to address two ends of the market. Github, for example, compete at the $7/month price point, but also sell Enterprise Github at $1K per month to big companies. To service the high-end Github employ a VP of Sales, sales managers, account managers, and account executives.

Transactional pricing lets start-ups go upmarket without having to change their product or business model. By ensuring there’s no limit in how much your customers can pay, transactional pricing avoids the common pitfall of price plans. Making your top plan “unlimited” ironically places a hard limit on how much you’ll ever earn from a customer. As Joel Spolsky points out, unlimited plans give an amazing discount to your least price-sensitive customers, who need it the least, and will barely appreciate it. It’s easy to add an unlimited plan without thinking this through, and once offered, it’s very hard to take it back.

One advantage of sticking with a set of price plans is that you’re never beholden to any one customer, as Jason Fried notes, but once again this should be a conscious decision you make, not the result of an unquestioned default.

As with all matters of pricing, there’s no “one true way”, but there are lots of wrong turns and dead ends. Avoid those and you’re in good shape.


Read more: 4 pricing principles to never forget.