Most founders obsess over product features and user growth. Meanwhile, pricing sits in a dusty corner of a spreadsheet, hastily decided in an afternoon and rarely revisited.
This is backwards. Your pricing model is your business model. It determines which customers you attract, how you sell, what features you build, and ultimately whether your company survives.
Let’s fix that.
Why Pricing Terrifies Founders
Before we get tactical, let’s acknowledge why this is hard. Pricing feels arbitrary. You’re putting a number on something you built, knowing that number will seem too high to some people and suspiciously low to others.
New founders make two predictable mistakes. Either they underprice dramatically (because they’re grateful anyone will pay at all) or they pick a number that “feels right” without testing whether it actually works.
Both approaches leave massive amounts of money on the table. More importantly, they prevent you from learning what customers actually value.
The Fundamental Truth About Pricing
Here it is: customers don’t buy features. They buy outcomes.
Your pricing should reflect the value you create, not your costs. This seems obvious but most founders do the opposite. They calculate their costs, add a margin, and call it a day.
A consultant who saves a company $500,000 annually should charge based on that outcome, not on the 20 hours it took to identify the problem. Software that helps sales reps close 30% more deals is worth a percentage of that revenue increase, not some arbitrary per-seat fee.
Start every pricing conversation with this question: what specific, measurable outcome does our product create for customers?
Pricing Models That Actually Work
Your pricing model (how you charge) matters as much as your price (what you charge). Let’s break down the main models and when each makes sense.
Per-Seat/Per-User Pricing
This is the SaaS default for good reason. It’s simple, scales with customer growth, and aligns incentives. As your customer’s team grows, your revenue grows.
The downside? It can discourage adoption. Customers might limit rollout to control costs, which hurts your expansion and their results.
Works best for: collaboration tools, communication platforms, productivity software. Think Slack, Zoom, or Asana.
Usage-Based Pricing
You charge based on consumption: API calls, gigabytes stored, emails sent, whatever metric matters. Customers pay for exactly what they use.
This model has exploded recently (AWS, Snowflake, Twilio). It reduces friction for new customers (they can start small) and automatically captures value as usage grows.
The catch: revenue becomes less predictable. A customer might spike one month and drop the next. Your sales team also loses clarity on deal sizes.
Works best for: infrastructure services, APIs, data products, anything where usage varies significantly between customers.
Tiered Pricing
Good, Better, Best. Three packages at different price points, each unlocking more features or higher limits.
This works because it gives customers choice while anchoring them to the middle option (which is usually where you want them). The basic tier qualifies leads, the middle tier drives volume, and the enterprise tier captures high-value customers.
Common mistake: making the tiers too similar. Each should have a clear use case and target customer. The differences should be obvious, not a spreadsheet comparison exercise.
Works best for: most B2B SaaS, especially when you serve different customer segments with different needs and budgets.
Freemium
Free basic version, paid premium version. Sounds great in theory. In practice, it’s incredibly hard to execute.
The problem: most users never convert. Conversion rates of 2-4% are typical. That means you’re supporting 96-98 free users for every paying customer. Can you afford that?
Freemium works when: (1) your marginal cost per user is near zero, (2) free users create value for paid users (network effects), or (3) you have a massive addressable market and conversion rate isn’t critical.
Works best for: consumer products, developer tools, platforms with network effects. Dropbox, Spotify, and Calendly make it work. Your B2B SaaS probably shouldn’t try.
Value-Based Pricing
This is the gold standard but requires the most sophistication. You price based on the economic value you create for customers.
If your software saves a manufacturer $100,000 annually in waste, you might charge $30,000 per year. The ROI is clear and compelling.
The challenge: you need deep understanding of customer economics and strong sales capabilities to articulate value. This typically works better in enterprise sales with longer sales cycles.
Works best for: high-value B2B products with clear ROI, especially in industries with established cost structures (manufacturing, logistics, finance).
How to Actually Set Your Prices
Enough theory. Here’s the process for determining what to charge.
Step 1: Understand Your Costs (But Don’t Price From Them)
Calculate your fully loaded cost per customer. Include infrastructure, support, success, sales allocation, everything. This is your absolute floor. Charge less than this and you’re subsidizing customers.
But this number should be way below your actual price. If your costs are $50 per customer and you’re charging $60, you have a business problem.
Step 2: Research Competitive Benchmarks
What do alternatives cost? This includes direct competitors, substitute products, and the status quo (hiring someone, using spreadsheets, doing nothing).
You don’t need to match competitor pricing. In fact, you probably shouldn’t. But you need to understand the range customers expect.
If competitors charge $10-50 per user monthly and you want to charge $500, you’d better have a compelling story about your differentiated value.
Step 3: Quantify Customer Value
This is the hard part. Talk to potential customers about their current costs and the value they’d get from solving their problem.
Ask questions like: How much time does this problem cost your team? What’s their hourly rate? What revenue opportunities are you missing? What’s the risk cost of getting this wrong?
Build a simple ROI model. If customers can’t achieve 3-5x ROI at your price, you’re probably too expensive or targeting the wrong customers.
Step 4: Test Multiple Price Points
Pick three price points: one conservative (you’re confident customers will pay), one aggressive (pushes the boundary), and one in between.
Test them with real prospects. Not surveys. Actual buying conversations. The only data that matters is whether people pull out their credit cards.
Pay attention to the objection patterns. If everyone says “that’s expensive” but still buys, you’re probably underpriced. If they say “interesting, let me think about it” and disappear, you might be overpriced or have a value communication problem.
Step 5: Start Higher Than Feels Comfortable
Here’s a secret: it’s much easier to lower prices than raise them. Start at the top of your range.
You can always offer discounts, run promotions, or introduce cheaper tiers later. Raising prices on existing customers is painful and churns accounts.
Early customers expect to pay more. They’re getting a less mature product and taking a risk on an unproven vendor. That risk premium should be reflected in your pricing.
Pricing Psychology That Moves the Needle
Small changes in how you present pricing can dramatically affect conversion. Here are tactics that consistently work.
Anchoring
The first number someone sees becomes their reference point. If you show a $999/month enterprise plan first, your $299/month professional plan suddenly looks reasonable.
This is why so many pricing pages list the most expensive option on the left. It anchors high.
Decoy Pricing
The classic: Good ($29), Better ($49), Best ($89). Most people pick Better. Now add a decoy: Good ($29), Better ($49), Best ($89), Enterprise ($299).
Suddenly Best looks like a bargain compared to Enterprise. Your average deal size just increased without changing your core offerings.
Remove Friction From Saying Yes
Annual plans paid upfront are better for your cash flow but worse for conversion. Monthly plans lower the commitment threshold.
Free trials outperform freemium for many B2B products because they create urgency. The trial clock ticking pushes people to evaluate seriously.
Credit card required versus not required at signup: depends on your sales motion. Product-led growth usually works better without credit card upfront. Sales-led usually wants credit card to qualify intent.
Price Ending in 9
Yes, this still works. $99 converts better than $100. It’s silly but true. The effect diminishes at higher price points but still shows up in the data.
Yearly Discounts
Offer 15-20% off for annual commitments. The discount improves cash flow and reduces churn. A customer who prepays for a year is much stickier than one on month-to-month.
The calculation: if your monthly churn is 5%, annual plans lock in customers who might have churned months 2-12. The discount pays for itself in retained revenue.
Revenue Models Beyond Subscriptions
Not every business should be subscription-based. Consider these alternatives.
Transaction Fees
Take a percentage of transactions you facilitate. Marketplaces (Airbnb, Uber), payment processors (Stripe), and e-commerce platforms (Shopify) use this model.
The beauty: your revenue scales automatically with customer success. The challenge: you need volume to make the math work at reasonable take rates.
License Fees
One-time payment for perpetual access. This used to be standard for software (remember buying Windows?). It’s rare now but still works for certain products.
Consider this when: customers strongly prefer capex to opex, your product doesn’t require ongoing updates, or you’re selling into industries resistant to subscriptions.
Professional Services
Implementation, customization, training. This isn’t product revenue but it can subsidize early product development and provides deep customer insight.
The trap: services revenue is linear (doesn’t scale) and can distract from building product. Set clear boundaries. Services should support product adoption, not become your main business.
Hybrid Models
Combine multiple revenue streams. Base subscription plus usage fees. Core product plus professional services. Free product plus take rate on transactions.
Shopify nails this: monthly subscription for the platform, transaction fees on sales, revenue from payment processing, and app ecosystem where they take a cut.
The Metrics That Actually Matter
You can’t improve what you don’t measure. Track these pricing and revenue metrics religiously.
Average Revenue Per Account (ARPA)
Total monthly recurring revenue divided by number of customers. This should trend up over time as you optimize pricing and expand accounts.
If ARPA is flat or declining, you have a problem. You’re either attracting smaller customers or failing to expand existing ones.
Customer Acquisition Cost (CAC)
Fully loaded cost to acquire a customer. Sales salaries, marketing spend, tools, everything divided by new customers.
CAC should decrease over time as you optimize channels and improve conversion. If it’s increasing, your growth is unsustainable.
Lifetime Value (LTV)
The total revenue you’ll generate from a customer over their entire relationship. Calculate this as: ARPA × gross margin / monthly churn rate.
The golden rule: LTV should be at least 3x CAC. Better companies hit 5-7x. Below 3x means you have a business model problem.
CAC Payback Period
How many months to recover acquisition cost? Calculate: CAC / (ARPA × gross margin).
Aim for under 12 months. Longer than 18 months and you’ll struggle to raise capital or self-fund growth.
Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR)
The lifeblood metrics for subscription businesses. Track total MRR, new MRR, expansion MRR, contraction MRR, and churned MRR.
This decomposition tells you whether growth is coming from new customers or existing ones, and whether you’re losing ground to churn.
Net Revenue Retention (NRR)
The percentage of revenue you retain from a cohort over time, including expansion. 100% means you’re treading water. 120% means customers are expanding enough to offset churn.
The best SaaS companies hit 120-150% NRR. It means you could stop acquiring new customers and still grow revenue. That’s the holy grail.
Common Pricing Mistakes to Avoid
Learn from others’ expensive mistakes.
Underpricing to Win Customers
You can’t make it up in volume. Customers acquired on cheap pricing expect cheap pricing forever. They’ll churn when you raise rates.
Worse, low prices attract the wrong customers. Price-sensitive customers are higher maintenance, slower to adopt, and quicker to leave.
Too Many Pricing Tiers
More than 3-4 tiers creates decision paralysis. Customers can’t figure out which to choose so they choose nothing.
Each tier also multiplies complexity. Sales needs different pitches. Marketing needs different messaging. Support needs to know feature differences.
Feature-Based Instead of Value-Based Differentiation
Tiers based on “5 users vs 25 users vs unlimited users” optimize for your costs, not customer value.
Better: tier based on customer segments and use cases. Startup tier, growth tier, enterprise tier. Each optimized for what that segment actually needs.
Discounting Too Easily
Every discount trains customers that your price isn’t real. They’ll wait for sales. They’ll negotiate harder. They’ll tell other customers who’ll demand the same deal.
Discount strategically: for annual commitments, large deployments, or competitive displacements. Not because a prospect pushed back once.
Ignoring Willingness to Pay by Segment
Different customers will pay different amounts for the same product. Enterprise companies have bigger budgets than startups. Healthcare has different economics than e-commerce.
One-size-fits-all pricing leaves money on the table. Segment your pricing to capture more value from customers who can afford it.
When and How to Raise Prices
You should increase prices regularly. Here’s how to do it without destroying your business.
Grandfather Existing Customers (At First)
When you raise list prices, let current customers stay at their old rate. This avoids churn and rewards loyalty.
Over time, you can migrate them to new pricing through expansion, contract renewals, or by adding enough new value that the increase is justified.
Tie Increases to Value
Never raise prices in a vacuum. Launch new features, improve performance, or add integrations first. Then the increase is “we added X, Y, and Z, so pricing is adjusting.”
Customers accept price increases when they see value increases.
Give Plenty of Notice
90 days minimum. 180 days better. This gives customers time to budget and reduces sticker shock.
Communicate clearly: what’s changing, when, why, and what they need to do (usually nothing).
Test With New Customers First
Don’t change pricing for your entire customer base at once. Start with new signups. Monitor conversion rates, feedback, and win rates.
If the new pricing works, gradually migrate existing customers. If it hurts conversion, you’ve only affected new business.
Building a Pricing Experiment Culture
Your initial pricing won’t be perfect. That’s fine. The goal is to build a system for continuous improvement.
Run Pricing Tests Quarterly
Test new tiers, different packaging, various price points. A/B test on your website. Run offers with different segments.
Track not just conversion but quality of customers acquired. Sometimes lower prices attract worse customers who churn faster.
Talk to Customers Who Churned Over Price
Exit interviews reveal your pricing ceiling. If lots of customers leave citing cost, you’re either overpriced or under-delivering value.
Dig deeper: was it absolute price or ROI? If they loved the product but couldn’t justify the cost, you have a value communication problem.
Monitor Competitor Pricing
Set up alerts for competitor price changes. Review their pricing pages monthly. Understand how your positioning shifts as the market evolves.
You don’t need to match competitors. But you should know when you’re 2x or 5x more expensive and have a clear justification.
Calculate Price Elasticity
How does demand change when you adjust price? Raise prices 10% and track conversion impact. Lower them 10% (for a segment) and measure uptake.
Most founders assume they’re more price sensitive than they actually are. Testing reveals what customers will actually pay.
The Long-Term Pricing Strategy
Your pricing should evolve as your company matures.
Early stage: premium pricing to maximize learning and revenue per customer. You’re resource-constrained so focus on high-value customers.
Growth stage: introduce lower tiers to expand market. Your brand and product can now support higher volume at lower price points.
Scale stage: sophisticated packaging with many tiers, add-ons, and enterprise custom pricing. Maximize revenue extraction across all customer segments.
The companies that win don’t just build great products. They build great business models. And pricing is the lever that turns product value into business value.
Start treating it like the strategic decision it is.