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A Summary of

How to price your SaaS product

by
Lenny Rachitsky
Lenny's Newsletter
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Pricing is an issue that is often ignored and under-analyzed for companies. The best companies review their monetization every quarter going beyond the actual price and focusing on value created by the company’s product.  Monetization strategy is shaped by the segment and vertical that is being targeted, the product itself, customer perception and the price of the product.

The following are two of the most important elements of determining a monetization strategy.

Determining the value metric

  • Value metric is what the buyer perceives as what they are paying for. For example, the value metric of a tire company could be “per tire”
  • The best monetization strategies scale price as value metric changes. This improves expansion revenue and lowers churn by fitting price to the value each customer receives. This would mean scaling the price as the “per tire” value metric changes
  • To determine value metric, it is best to find quantifiable units that the customer sees as valuable and worth paying for

Identifying Customer Profiles and Segments

  • Create a table with customer size and role on one axis and a list of characteristics of your product on the other
  • This table is a tool to isolate which parts of your product and pricing are most important to which customer profiles.

After finding Value Metric and Customer Profiles

Monetization never stops. It is the continual matching of value to target customer segments. Other issues like the actual price point, packaging and finally smaller optimizations like add-on strategies and contract term decisions can be focused on.  Something is better than nothing and fitting your monetization strategy to your customers through research will allow for more informed decisions when pricing and targeting market segments. Knowing your customer quantitatively is essential to any SaaS pricing strategy.

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