Pricing & Monetization

What Is Easy to Get Wrong

Thinking You Have a Business When Users Don't Pay the Full Price

When your goal is to prove that you have a business (that the Four Fits work), you can't offer big discounts. You might get every business on earth as a "customer" if you offer them the service for free. You'll only learn if the value is there, if you charge accordingly. To verify that you've got channel-model fit and model-market fit, you need to charge market prices. Otherwise you're just deceiving yourself.

Not Raising Prices

Your product changes over time and the value you provide increases. Not raising prices frequently means you are leaving a lot of money on the table. So, don't be afraid to raise prices each year - in accordance with the value you provide.

“Price is the easiest lever to improve in a SaaS business.” — Patrick McKenzie, Stripe

Grandfathering Prices

A similar mistake involves grandfathering prices. You might have a bunch of customers to whom you promised very low prices just to get them as customers. If you don't end grandfathering, you will pay for it from your own pocket both in hard cash and in complexity (product, pricing, support etc.).

If they are happy with the value you provide, they will not complain to pay the regular price.

If they are not happy with the value you provide, they are not real customers anyway.

To end grandfathering properly, it's good to know exactly what was promised to those customers - using a good CRM from the start helps with that.

Doing Lifetime Deals

Never ever make any lifetime discount deals. Supporting those customers will become more expensive over time.

Not Researching Payment Methods

Just because you enable customers to pay in a certain way, doesn't mean they want to or can pay that way. Enterprise customers, for example, will never use PayPal to buy from you. Nor do they want to pay monthly - they usually prefer yearly payments which may be part of multi-year deals.

Payment methods also differ a lot by country (even within the EU).

Not Offering Yearly Discounts

Money in the pocket now is better than hypothetical money in the pocket later. You can invest it into more growth right now.

Users tend to convert better as well. They’ll get a discount (so, it's a more attractive deal). Which means more of them go for the yearly deal. It’s a commitment and it acts as a forcing function - they’ll take using your product more seriously.

Pricing Too Low

Pricing depends heavily on the marketing channels. If the distribution is expensive, the prices should be higher as well.

Pricing is also a signal for quality. The lower the price, the lower the perceived value. Read more about it below under Veblen’s Goods.

Lower prices can sometimes also hinder buy-in and therefore user activation. If you buy crackers but also a nice piece of tenderloin, you’ll damn well make sure that you’ll eat the tenderloin cause it’s expensive. You’ll probably forget about the crackers altogether when you’re already busy with tenderloin.

Not Pricing Different Regions Differently

What is too low for one country, is too high for another one.

Geographic pricing makes sense from everyone’s perspective - you will have different costs associated with each country (salaries and growth loops have different costs) and the buying power of different countries varies as well.

How To Set the Price?

The pricing model is one part of the Four Fits. Essentially, monetization is the output of usage. So, the starting point should always be the use case:

Persona - who has the problem?
Problem - what is the problem you are solving?
Frequency - what is the frequency of the problem you solve?
Alternatives - what are the alternatives?
Why us - why would they choose your product over alternatives?

But pricing is also affected by the channels you use to get your customers. You need to make 3x more during customer's lifetime than what it costs to serve them.

Research

There are three main ways to research what the price should be:

Ranking surveys - easy to use but useless
Max diff survey - gives a good overview of what's valued and what's not but doesn't cover all the options
Conjoint analysis - simulates the actual behavior but very hard (and expensive) to do

Dimensions For Scaling Price

There are four ways to do it:

By features
By # of users
By usage
By outcome value metric (sometimes the same as usage)

Outcome value metric means you are charging based on the outcome the user is looking for - how much money they made, how many views they got etc.

Usually, products make use of a combination of ways to scale pricing. The most desirable way is to charge based on the outcome value metric but it's not always possible.

Veblen Good's Demand Curve

Economics has traditionally assumed that as the price rises the demand decreases. This is not true for all goods. People wouldn't think of Rolex as a status symbol if it cost 10 euros.

Another example is SaaS for enterprises. When the prices are too low, potential customers become suspicious of the quality. Higher prices signal higher quality (whether that's objectively true or not).

The goods where demand increases with price increases are called Veblen goods.

By SweetSweetPassionCocktail - Own work, CC BY-SA 4.0,

This is why you see enterprise plans sometimes priced 10x higher than other plans. It's often more about signaling quality (and increasing customer numbers) than improving margins (though that inevitably happens as well).

A similar concept is called the ARPU-CAC Danger Zone. However, the driver for the danger zone is channel cost, not demand.

Friction

There's almost always some friction built into the monetization model. Here’s how to minimize it:

Make sure that feature names are well understood.
Make sure that the pricing is understood and it's predictable for the customers.
Make sure that customers pay the way they want to (but that also enables your growth).

Freemium vs Trial vs Reverse Trial

Trials are great at converting users to pay but you’ll lose a big portion of potential customers.

Freemiums retain a lot of users by letting them get into habit loops but it’s hard to convert them to paying customers later.

Reverse trials combine the best of both trials and freemiums - high conversion rates (to paid customers) along with bigger growth loops. Reverse trials let users access the full feature set during the trial. This lets users build habits with paid features from the start. When the trial ends, users either have to start paying or continue with a freemium version where they might lose some features they’ve been using already.