Why user-based
pricing sucks for SaaS
Introduction
User-based pricing is one of the most popular pricing strategies in SaaS. It’s easy to see why. Because you don’t have to put much effort into creating packages and it’s easy to understand for your customers. Calculating the price, however, is not. At first, everything looks great. But if you look closer there is another attribute to describe this pricing strategy – inflexible. And this inflexiblity is the reason why user-based pricing sucks for SaaS. The details:
Features are not getting used
It’s an undeniable truth that different businesses have different needs. The first reason why user-based pricing sucks is because it does not care about that. Even when your market segmentation and targeting operates in god mode your customers are centered about a common need but not necessarily everyone needs the same functional depth.
The marketing strategy behind the single user-based price is obvious. Pay one single price and get access to everything. At first this sounds great but what happens when the customers do not need everything? The product becomes unnecessarily complex and they end up paying for features they don’t use. Why would they stick (or sign-up to begin with) with a product that obviously does not fit their needs?
Capacities are not getting used
Closely related to unused features are unused capacitities. A marketing keyword often connected with is „unlimited“. Send unlimited E-Mails to unlimited recipients, connect unlimited data sources etc. A flat rate for unlimited use is great for the heavy users. Because they will get a highly favorable ratio between value and price.
But for the soft users the exact opposite happens. If they have a small list of recipients, have only a few data sources to connect etc. unlimited does not give them an advantage. Again, they will end up paying for something they don’t use.
Pricing for soft users
How can you keep the heavy and the soft users happy? How do you make everyone feel like they made a great deal and get a ton of value for what they pay? Let’s take a deeper look. While pulling off a pricing strategy with one single price per user is easy, coming up with the number behind is not.
How exactly do you calculate a flat user price? Most likely you are guessing what your product is worth. The problem, again, it has a different value to different kinds of customers. The only solution in this scenario: Setting the price based on the value the soft users get. Which translates to killing your margins and hurting your growth.
Customer acquisition costs are not considered
The final reason why user-based pricing sucks. Not considering the customer acquisition costs when determining the pricing strategy is in fact a general issue. But it does not hurt more than when you are stuck with a single user-based price. Because you have little means to „correct“. What does that mean?
Customer acquisition is an investment with an amortisation time (CAC payback period). The more you spend and the lower your price the longer it takes to reach the profit zone. The risk of never getting there at all is skyrocketing. Certainly not what you want.
With the user-based prices there are no powerful means of upselling and compensate higher customer acquisition costs. And there is a good chance that the accounts on whom you spent most have the highest upselling potential. All you’ve got left is signing-up more users which is very limited for most products. Companies don’t have an infinite number of marketers, accountants, salespeople etc.
The solution
User-based prices themselves are not bad at all. It’s all about the package design. If they are combined with different functional depth, a value metric (e.g. the number of contacts) or both they create a true win-win situation. Customers pay for the value they get and you get paid for the value you created.
Key takeaways
- Unused features and capacities make your product overpriced for soft users
- User-based prices have to be calculated on the soft users and generate low profits
- Higher customer acquisition costs can not be corrected via upselling
- The solution is to create packages that include different functional depth, a value metric or both