Try not to price SaaS contracts on a per user basis, or at least don’t show the customer that you’re pricing per user. Instead, use a value-based approach where you can show the customer a 20x+ return on the overall use of your product. Once you’ve set pricing, delight the customer by allowing unlimited users on your platform. Here’s why:
1. More users make you sticky. As one CS professional at our portfolio company Apptopia shared with us: “More users on the platform cost us nothing but make us very sticky. We now have 20 champions at the customer as opposed to just a senior level champion that may not be using the product as much as personnel below them. If we’re in multiple departments in an organization with many users, it becomes much harder to say no one is getting value.”
2. Upsell based on product upgrades. Opportunities for upsells come when you introduce new features and products, not when the customer wants to add seats. If you’re charging the customer for every new seat, your software just became unscalable, whereas the point of software is to allow your customers to scale their workforce exponentially (not linearly) and drive productivity. Charging for each user prevents your customer from improving their margins, makes you a variable cost in the wrong way, and overall makes you far less valuable to the customer.
3. Per user cuts both ways. If you charge per user and your customers are expanding, you benefit. However on the flip side, if you charge per user and your customers shrink, you get hurt. Your dollar retention metrics suffer not because your product is deficient but because your pricing is deficient. In a recession, software companies that price per user see the ugly side of per user pricing.
4. Per user pricing leads to other issues. As one founder shared with me, “Per user pricing incentivizes users to share accounts and passwords with coworkers, which leads to cyber security vulnerabilities and, in healthtech, HIPAA violations.” It also leads to real revenue leakage due to the sharing.
If you’ve got a churn problem, offer your customers unlimited seats. Price based on value to the customer and to you. Said another way, price based per product, not per user. Your gross and net dollar retention metrics should improve markedly. Shoutout to our portfolio company Apptopia.com for inspiring this article.
One last thing: I’m reading ‘Lost and Foundering’ by Rand Fishkin. My favorite quote so far is on pricing: ““Raising prices for your product every year or two and grandfathering in existing customers is a great way to increase loyalty and grow your profit margins (We did this several times over the next few years; worked like a charm).”
Thank you for your readership. See more blogs and SaaS data at blossomstreetventures.com. Email the author at sammy@blossomstreetventures.com.