Pricing Insights from 2,200 SaaS Companies
January 19, 2021
A few years back, we launched a tool for SaaS companies to assess their pricing maturity and get advice on how to take their pricing to the next level. Now we’ve had more than 2,200 SaaS companies participate. This dataset offers a unique vantage point into how SaaS companies approach their pricing and packaging including who is responsible for it, how frequently they revisit pricing, and how much they charge.
Participants were primarily from companies in the seed / pre-revenue (46%) or expansion stage (42%); however, we also had more than 200 responses from growth stage companies ($20-100M ARR) and more than 50 from companies with >$100M ARR. They represent a diverse section of target customer types and average deal sizes.
After crunching the numbers, here’s what we learned.
There’s still untapped opportunity to improve pricing
Our pricing calculator graded companies on a scale from 0 to 100 based on their pricing capabilities. To achieve an Excellent score of 80 or above, companies needed to hone their target market and buyer, conduct pricing research and/or testing, and have a process for revisiting pricing over time.
Only 4% of companies actually received an Excellent score. Later stage companies were a bit better than their early and expansion stage peers, but even the vast majority of those more mature companies haven’t figured it out. 13% of later stage companies received an Excellent score.
After creating this calculator, we thought it would be difficult to get a Failing score. To do so, a company needed to seriously underinvest in their pricing function. But it turns out, 44% of companies failed, including 26% of later stage companies.
In the early days, most companies are under-priced
Early stage companies don’t want anything to get in the way of attracting new customers, especially not price.
By the time a company has moved into the expansion stage, they’ve increased their average deal size by about 50% compared to their seed stage pricing. This increases by another 40% in the growth stage and then another 18% going from the growth stage to later stage (>$100M ARR).
Pricing should evolve as your company evolves and as your product matures. Remember: pricing has an extremely powerful impact on revenue growth. Two-in-five companies that alter their pricing report a 25% higher increase in ARR as a result. Don’t procrastinate on revisiting your pricing.
Why haven’t you adopted value-based pricing?
SaaS companies have nearly limitless flexibility around how they package and price their products, unlike, say, consumer product companies. SaaS companies could choose anything from a low priced, seat-based model to a highly granular, usage-based model.
To capitalize on this flexibility, SaaS companies must take a value-based approach to how they come up with pricing. In the words of Patrick Campbell, Founder and CEO of ProfitWell, “Your price is an exchange rate on the value you’re providing.”
But fewer than two in five companies (39%) actually do that. The rest make a judgement call (27%), copy from competitors (24%), or take a cost-plus approach (10%). If you want to build pricing capabilities, step one is to reorient pricing around value.
Interestingly, there was a direct correlation between average deal size and likelihood of adopting value-based pricing. Only 35% of those with an average deal size below $5,000/year price based on value compared to 51% of those with deal sizes above $100,000.
Usage-based pricing is taking on seat-based pricing
The value metric is one of the most important building blocks of pricing. It is the main unit that defines how much a company charges and how much a customer pays. The value metric could be based on users (named users, concurrent users, active users), usage (transactions, storage, computing, servers), or something else entirely.
Historically, user or seat-based pricing has been most popular with usage-based pricing a distant second. A Pacific Crest study from 2014 found that 37% of companies primarily charged based on users while 23% charged based on usage.
Well, it looks like usage-based pricing is finally catching up. In our latest survey, 39% of companies charged based on usage. This has real advantages for SaaS companies:
- It reflects the business value being unlocked by the product
- It allows customers to start small and trial a product
- It provides a seamless expansion path as customers get hooked on a product
Our survey adds data to back this up: companies with usage-based pricing are more likely to say that their pricing aligns ‘perfectly’ or ‘pretty well’ with value compared to per user pricing.
For more insights on usage-based pricing, make sure to join the conversation on LinkedIn.
Pricing is never 100% done
We asked SaaS companies how regularly they revisit and change their pricing. Nearly four-in-five said that they change their pricing at least once per year, and most of those change pricing multiple times per year. Later stage companies do tend to revisit pricing less frequently than earlier stage ones, but even they still revisit it once per year on average.
If you haven’t changed pricing in the past year, now’s the time to assess whether it’s working or if there are opportunities to improve what you’re doing.
If you do change pricing regularly, you should reflect on your pricing process and whether that’s optimal. When you made pricing changes in the past, what impact did it have on different KPIs? Are you collecting the right customer and pricing data to make smart decisions? Do you have a way to synthesize feedback from the field?
But companies aren’t talking to their customers about pricing
A critical step in revisiting pricing is to collect feedback from customers on value and willingness-to-pay. Without this information, you end up guessing how the market will respond to pricing changes rather than knowing how they’ll respond.
It turns out that only 6% of SaaS companies have done sophisticated pricing research on buyer needs and willingness to pay. Meanwhile, 45% say they’ve done “cursory market research” on the subject and another 48% haven’t done any pricing research.
Later stage companies are only slightly better than their early stage peers. 17% of them have done in-depth pricing research compared to 5% of expansion stage companies.
They aren’t testing their pricing, either
Another way to de-risk a pricing change is to test or pilot pricing before going live. The data show that fewer than half (48%) have had the opportunity to do that yet.
While true A/B testing of pricing is notoriously difficult—and full of risks—most SaaS companies can pilot out new pricing via their sales team or via small scale pricing experiments. It is easiest to run these tests in the early days before you have a sizable sales team and install base.
In the words of Front CEO and Co-Founder Mathilde Collin, “Never experimenting with your pricing means you may never learn the value of your product and its potential for growth.” She recommends iterating on pricing more frequently via small adjustments and then monitoring how new cohorts compare to past cohorts with the old pricing. This cadence has allowed Front to have more confidence in their pricing without significant downside.
SaaS companies are becoming less reliant on discounting
When people think about buying software, the conventional wisdom is to never pay full price. I’m sure everyone’s had some baffling experience where they somehow received a 70% or 80% “discount” without very much effort, especially when buying right at quarter close.
The survey revealed that today’s SaaS companies are increasingly moving away from this discounting mentality. 29% of companies surveyed said that they do very little discounting (‘the price is the price’) and another 39% do only occasional discounting (10-25% of deals).
Deal size does matter when it comes to discount expectations. 48% of companies with <$1k ACV do “very little discounting” compared to only 19% of companies with >$25k ACV.
Later stage companies are hiring pricing pros
Early and expansion stage companies tend to have a major blind spot with pricing, as I wrote last year. Most of these companies have no one in their organization who handles pricing even as just a part of their job description.
With growth and later stage companies, on the other hand, we’re seeing the emergence of a dedicated pricing professional. 20% of growth stage ($20-100M) and 47% of later stage ($100M+) had a pricing manager or pricing team. A quick search for “pricing” and “software” on LinkedIn, returned 2,800+ results representing companies such as Adobe, Akamai, Anaplan, AppDynamics, athenahealth, Box, DocuSign, Dropbox, HubSpot, Informatica, Kronos, LinkedIn, LogMeIn, Medallia, Nuance, PagerDuty, Salesforce, Snowflake, Splunk, Sprinklr, Stripe Workday, Zendesk, Zoom and many more.
The job responsibilities and requisite skills for this job are still in flux, and are defined differently across SaaS companies. When hiring for this position, you’re likely to find candidates who fit these three archetypes, based on TeamFit’s survey of 274 pricing professionals:
- Analyst (50%): Skilled in data analysis, statistics, optimization
- Coach (33%): Excellent at working with and coaching sales teams
- Strategist (14%): Work with C-level to develop a go-forward strategy; great at recognizing patterns, structuring choices, and handling ambiguity
Companies are split on whether to publish pricing
It’s an old debate: should you publish pricing online or should you be more opaque with pricing? In our survey, 45% of companies do publish pricing while 55% do not.
As one might suspect, deal size is a major driver of whether companies publish their pricing. Among companies with average deal sizes below $1k per year, 84% do publish their pricing. Meanwhile, 33% of companies with $5-25k deals publish pricing and only 17% of companies with >$25k deals do so.
There are a host of benefits and drawbacks to publishing pricing. All else being equal—and for companies in that gray area with deals between $5-25k—I have a personal bias towards greater transparency (which you can read about here). That’s because I think buyers are doing more and more research before talking to vendors, it provides a better buying experience, and helps qualify deals that come in.
How does your pricing stack up?
Note: This post was first published in June 2018 and updated in January 2020.