Chapter 1

Pricing and why it's super important
to get it right

How you charge is as important as how much you charge. And when you're just starting out, figuring out how much to charge isn't easy either.

The most primitive way to charge, of course, is to add an additional cost on top of how much it costs to provide the service. This is called cost-plus pricing and is barely functional in the SaaS and Services realm. Here's why: what happens when you've identified a marketing channel that works for you and you want to increase your spend on it? What happens when there's a new hire? Your costs are bound to continually increase, and it's hard to tune your pricing proportionally along with it.

Then, there's competitor-based pricing. From spending a couple of minutes on your competitor's pricing page, you can get a ballpark figure of how much you should price your product. The logic behind it, is that if a customer is willing to spend $400 on a similar product, they should be willing to spend the same (if not more) on a better product, right? This is the easiest way to determine your pricing, with no mind-boggling mathematics involved — just logical decisions based on where your product sits in the market.

But basing your pricing on someone else's strategy means you're building on top of a slippery slope. With no real understanding of which customer segment you're selling to and how much they're willing to pay for the value you offer, it's extremely hard to develop a foolproof product and pricing vision.

And then we have a strategy that almost every SaaS pricing connoisseur swears by - value-based pricing. And they all believe that determining the right value-metric is critical to ensure that your pricing will scale with your growth.

This could easily be called "Customer-Based Pricing" because that is effectively what it is. Instead of looking inwardly at your own company, or laterally towards your competitors, with value-based pricing you look outward.
Patrick Campbell, Anatomy of SaaS Pricing Strategy

Patrick Campbell of Price Intelligently, shrinks all of his research on pricing into three digestible points, all of which we agree with.

  • Don't send your customers off to refresh their mathematical skills. Keep it simple and easy for them to understand.
  • Align your pricing with the value your customer receives. Run smart surveys to figure out how customers perceive each feature.
  • Pick a value metric that scales with customer's usage of your product.

Pricing can seem overwhelming. Even more so when you're starting up a business. The rest of the chapter is aimed at sharing simple and hard-hitting pointers on pricing for you to take away. And tips on how you can totally belt out witty pricing experiments in your own personal laboratory that is Chargebee.

Read on to understand the different possible types of pricing models for a SaaS product and how Chargebee can help you implement all of them.

Pricing Models

Freemium model

"Free" draws in users. The freemium model is built on this very idea. Lure in users to try your product, and give them enough reason to stay while also leveraging your product's viral nature to get the word out.

Fictitious scenario: WordBuild, a content management system lets you use their service for free forever. But curbs freemium users from having their own domain and access to 1000+ plugins.

Use it to: Gain market share. Let more customers use your product with essential features and load up premium features in paid plans. Test your product in a new market, by analyzing user behavior.

Use it if: Your product has the seeds of in-built virality and can be used as a branding tool in itself. Or if it's a DIY product/service where the cost of servicing a new customer is close to nothing. Your product caters to a large market with a large number of potential users.

Ex. - Evernote, the note-taking app's Basic plan costs zilch, yet it adds massive value. And for people who go on to become power users, they offer two (Premium and Business) paid plans to serve their growing needs.

The easiest way to get 1 million people paying is to get 1 billion people using.
Phil Libin, CEO of Evernote
How Can Chargebee Help?
With Chargebee, you can easily create a freemium model by setting the Plan price to '0' and billing cycle to 'forever'. Here's how you do it

Pay per quantity model

Price based on a primary metric that represents quantity instead of features, like no. of seats or no. of emails. This one's a favorite in the Helpdesk and CRM space.

Fictitious scenario: TicketIt, a helpdesk ticketing software has Team, Professional, and Enterprise tiers. Their pricing model is designed such that the total cost will depend on the number of seats chosen in each category.

Use it to: Offer customers a predictable cost that scales with their business. Have the customer move up the tiers automatically - where the upsell takes care of itself.

Use it if: There is a clear way for you to scale with the number of users. Your target market is comprised of large organizations that are likely to use multiple units.

Ex. - Help Scout, a helpdesk software limits its free plan for 2 users, after which it starts billing them at $20/user/month.

How Can Chargebee Help?
Chargebee lets you create per-unit subscription models with easy means to add and remove user licenses at any time. Here's how you do it

Pay per active user model

Adding a slight tweak to the pay per user model, charge only for the number of users who've actually used the application at least once during the billing period.

Fictitious scenario: InsideChat, a communication platform that includes messaging, video calls, and voice over IP features charges on a per-user basis taking into account only those users who have been active at least once during this time.

Use it to: Persuade larger enterprise customers to sign up for annual subscriptions by setting an assuring tone that they will only pay for what they use.

Use it if: Your target is large companies with a wide scope for your product's adoption.

Ex. - Slack, a team collaboration tool, has a per active user pricing and merits a mention for its fair billing policy. And if someone who has already been paid for becomes inactive, Slack will even add a prorated credit for the unused time

Flat-fee model

Charge a flat recurring fee for a single plan or product. The simplicity this offers can be an asset for some products and the opposite for others.

Fictitious scenario: SocialGo, a social media management platform, has a very direct pricing model. They charge their customers a recurring fee based on the plans chosen.

Use it to: Generate consistent revenue from customers, which in turn makes sales forecasting simpler. Cater to risk-averse consumers who don't like surprises.

Use it if: You have a product that can be bundled for different customer personas and features, where you can align your bundled offering with different fixed pricing tiers.

Ex. - Hubspot, a marketing automation tool, has three different pricing tiers for Starters ($50/month), Professionals ($800/month), and Enterprises ($3,200/month).

Pay-as-you-go or usage-based model

Charge based on usage. There are three ways to charge when you opt for usage-based pricing - Tiered, Volume, and StairStep models.

Use it to: Make your customers pay the exact dime for what they use (value-based pricing). Have flexibility in your pricing — adjust usage offers according to demand and competition.

Use it if: You can pin your product's value down to exact figures, delivered in terms of, let's say storage capacity, or a similar metric.

Tiered model

The Tiered Model is a means of providing products or services at different price points. In this type of pricing model, the product rates are bundled into separate pricing tiers. Based on the quantity the customer chooses, a different price will be charged depending on the tier that it falls under.

Fictitious scenario: ManageWiz, a product management tool for businesses, offers licenses for small and large teams at flexible prices. The final charge will depend on the per unit price defined for the corresponding license's tier.

Case 1: For a subscription created with just 10 units in the above pricing scenario, an invoice will be generated for $150 (10 x 15$)

Case 2: For a subscription created with 50 units, an invoice will be generated for a total cost of 490$. The breakdown of the charges can be understood like this: (20 x 15$) + (5x 10$) + (5 x 8$) + (20 x 5$)

Volume model

Volume Pricing defines the price of the product with respect to the quantity purchased. Typically, the product price decreases with increase in quantity. The more the merrier (cheaper) holds true here.

Fictitious scenario: DrewCraft, a UX prototyping tool for designers, offers single and multi-user licenses for businesses. When a user signs up for the product, he can choose the number of licenses he wants to subscribe to. The price depends on the pricing tier the total number of licenses fall under.

Unlike Tiered Pricing, where the product price of each unit may differ based on the unit range, in the case of Volume Pricing, all units of the product will cost the same.

Case 1: For a subscription created with 5 units, all units will be charged $10 per unit, as they will fall into the 'volume 1' category. And an invoice will be generated for a total amount of $50 (5 x $10)

Case 2: For a subscription created with 20 units, all units will be charged $6 per unit, as they will fall into the 'volume 4' category. And an invoice will be generated for a total amount of $120 (20 x $6)

Ex - Sketch, a design toolkit, has a volume-based licensing model and charges $89 per license per month for up to 2 licenses and the price drops to $69 per license per month for more than 20 licenses.

How Can Chargebee Help?
Chargebee has the power to take you tiers, volumes and stair-steps closer to flexible pricing. With complete freedom to combine and permute different pricing models for Plans and Addons, if there's a pricing model you have in mind - Chargebee lets you realize it. Here's how you do it

Stair-step model

Assign a price point to a range instead of a unit. A mainstay of the telecom sector, this model's central gift to customers (and business owners) is certainty.

Fictitious scenario: Trellio, an API platform for WhatsApp messaging, has categorized pricing into different ranges. Every range is tagged at a fixed price. And the plan chosen will reflect that price, irrespective of the usage.

Ex - Postmark, a transactional email service's pricing starts at $10 for up to ten thousand emails sent, and goes as high as $400 for the range between 300,000 - 700,000 emails.

How Can Chargebee Help?
Chargebee's metered billing feature lets you add a non-recurring charge at the end of each billing period for the quantity used. Which then automatically gets added to the invoice. Here's how you do it

'Name your price' or custom pricing

Ever stumbled upon a 'Get a Quote' CTA on a pricing page? This model entails a custom price for each customer and is especially prominent in companies where the sales touch is high.

Fictitious scenario: SalesMachine, an enterprise-class CRM software urges its customers to 'Talk to Sales' before they make a purchase. They do this to tailor pricing according to the enterprise's needs.

Use it to: Hand-hold bigger prospects with deals that are negotiated especially for them. Unlock value from the bigger enterprises and pitch these folks a higher value plan.

Use it if: Your buying process is less self-serve and more sales-driven. You bundle and configure your features in a bespoke manner such that it meets the customer's requirements.

Ex - Chargebee offers custom deals for customers in the enterprise plan. And follows a hybrid model in the Scale and Rise tiers meant for other smaller customers.

How Can Chargebee Help?
Chargebee's one-click price override lets you override a subscription's price. Let sales-negotiated deals effortlessly translate into subscriptions. Personalize offers that let customers derive the utmost value from your service. Here's how you do it

Hybrid model

Anchor your pricing on more than one value metric, rendering a combination of two (or more) different pricing models. This multi-dimensional model is a godsend way of extracting the full revenue potential of your product

Fictitious scenario: Knowall, a vendor management tool, has three plans: Starter, Growth, and Scale. These plans are differentiated based on the features, as well as the size of the company. They also choose to have a flat-fee charge for the first two plans and per-employee charge for the topmost plan.

Use it to: Let users derive value from your product in more than one way. Create upgrade opportunities as and when any one of the chosen 'metrics' scales.

Use it if: You can differentiate your offering by a number of factors.

Ex - DocuSign, an eSignature solution, bases its pricing bundles on the number of users and at the same time, restricts the number of documents for the smallest plan.

À la carte model

A customizable pricing model that puts the power in the hands of the customer to choose their own features/services. A very open-ended approach towards pricing - make your own plan, and pay for what you need.

Fictitious scenario: Securno, a security log management company, has insider threat detection, cybersecurity, predictive analysis, and other features under their kitty. Each comes with a fixed price and is not grouped under any overarching plan.

Use it to: Observe buying patterns of customers and arrive at effective pricing bundles later in your journey.

Use it if: Your product touches upon many use cases and has a wide range of target audience. You're constantly shipping features in a new market and you're trying to evaluate their value addition.

Ex - Exponea, a B2C customer data platform's 'Every business is different' perspective has led them to bucket features into different packages, which can be mixed and matched by the customers to solve their specific business needs.

How Can Chargebee Help?
Chargebee's recurring and one-time addons give you the flexibility to package your offering and to push the needle on upsells. You can map addons with particular plans, choose a pricing model on the addon level and do so much more. Here's how you do it

Perpetual license model

Charge a 'traditional' one-time fee for a license that never expires. Along with an additional subscription fee for support, maintenance, and updates.

Fictitious scenario: LegacyAdmin, an on-premise ITSM provider, lets their customers use their licensed software indefinitely for a one-time fee. An annual maintenance and support assistance fee is what customers additionally (and inevitably) pay for on a recurring basis, apart from their forever lasting license.

Use it to: Give ownership of licenses which cannot be opted out of, regardless of usage.

Use it if: You sell to large (or legacy) companies who cannot bank on renewing subscriptions. Your product is on the brink of maturity and does not require hotfixes and patches.

Ex - Modo, a 3D modeling tool, offers a perpetual license (in addition to their subscription licenses) for a fixed price. Maintenance for subsequent years is offered at an additional price per year.

How Can Chargebee Help?
Easily set up a one-time setup fee when you create a Plan, along with a subscription component. The setup fee occurs in the invoice only once during the start of the subscription. Here's how you do it. Here's how you do it

Setting up Plans and Pricing in Chargebee

Your products and services are what translate into Plans in Chargebee Glossary. Plans along with other components within our Product Catalog (like addons and coupons) give you enough flexibility to model any kind (and any number) of products and services as you wish.

Give a Plan name and a befitting description, choose a pricing model along with a recurring price, (and a setup fee if there is one) and your Plan is now good to go. The way Plans are structured within Chargebee makes launching pricing changes and new pricing tiers so much faster.

This is how simple creating a new Plan inside the Chargebee can be:

Here's how your Plans will be listed inside the Chargebee App:

To learn more about how Plans work in Chargebee, here's our extensive documentation on setting up your products and services as Plans within Chargebee.

How Can Chargebee Help?
There's zero friction between setting up plans and collecting payments. With Chargebee's range of checkout options, drop in the right scripts and immediately get the checkout process started. Here's how you do it
No dev-time?
Have a checkout in mind but worried about PCI compliance? Think retrofitting embeddable widgets might save you time and get you the look and feel you're hoping for? Choose from JS-powered secure Payment Fields, reusable Widgets, or ready-made Checkout to craft lasting checkout experiences with Chargebee Moments. Learn more

Metrics You Need to Watch

How do you know if you're getting the hang of whether or not you're making smart pricing decisions? Sometimes, numbers are your harshest reality checks. But if you're not looking at the right metrics, you'll just stand there waiting for reality to hit you. And it never will quickly enough.

Look out for these possible red flags on your dashboard, for which a pricing problem is the most likely villain.

Is this a problem you're facing?

You have no problem acquiring customers but your LTV/CAC ratio falls below the bare minimum.

Simply put, you are spending more money getting a new customer through your door than the customer will pay you in their lifetime. In other words, you're losing out on money with every new customer.

Then, monitor this:

  • LTV to CAC Ratio

Is this a problem you're facing?

Irregular high-volume churn/downgrades: You may be looking at a recent pricing change and one that didn't bode well. On the other hand, the downgrades could be because you recently moved the features important for those customers to a lower plan.

Then, monitor this:

  • Gross MRR churn To ensure your churn doesn't become a long-term trend.

  • Churn breakdown by time To understand if customers are churning earlier in their lifecycle or later.

  • Plan movement report To see how customers are migrating between your higher and lower tiered plans.

How Can Chargebee Help?
If you believe your existing customers shouldn't be affected by your pricing changes, Chargebee lets you grandfather them. Here's how you do it

Is this a problem you're facing?

Low expansion MRR due to customer stagnation in one plan: Your higher plans aren't providing enough value for money.

Then, monitor this:

  • Expansion MRR An increase in this number indicates that the revenue generated from your existing customer base is growing.

  • Upgrade MRR Increase in upgrade MRR indicates your product is scaling as your customers scale.

  • Subscription breakdown This chart shows the number of subscriptions that got added, upgraded, downgraded, cancelled, or reactivated in the last 12 months.

How can RevenueStory help?
We have a dedicated dashboard called "Subscription Watch" to monitor all subscription-related metrics.

Is this a problem you're facing?

New MRR leakage: The least-expensive paid plan could be too steep a jump for the user in terms of cost. And/or the free plan has more incentives in terms of features and capability than the paid plans.

Then, monitor this:

  • Free to paid MRR: If this is low, it could mean that users think your product is priced too high.

  • Free to paid evolution cohort: This cohort shows how a group of customers move from free to paid in a span of 12 months.

Try your hand at RevenueMD, a revenue diagnosis tool we've built for subscription businesses, and nail down what's affecting your revenue now