Pricing Strategy

Also known as: Pricing ModelPrice StrategySaaS PricingValue-Based PricingPricing Tiers

Optimal Price ≈ 10–20% of the $ value your product creates for the customer

💡The Concept

Pricing strategy determines how much you charge customers and directly impacts revenue, positioning, and perceived value. The three primary approaches: (1) Cost-Plus: price = cost + margin (lazy, leaves money on the table). (2) Competitor-Based: match or undercut competitors (race to the bottom). (3) Value-Based: charge 10-20% of the value you create for the customer (optimal). If your product saves a customer $50,000/year, charging $5,000/year (10% of value) is the sweet spot. The customer gets 10x ROI, and you capture meaningful revenue. Pricing is the fastest lever for revenue growth — a 1% price increase typically adds 11% to profits.

⚠️The Trap

The biggest trap is pricing based on cost ('it costs $10 to deliver, so I'll charge $15'). This leaves massive value on the table. If your product saves a customer $10,000/year, charging $50/month ($600/year) captures only 6% of value — criminally underpriced regardless of your costs. The second trap: not testing prices. Most SaaS companies set pricing once and never change it. You should test pricing quarterly. The third trap: too many tiers. More than 3-4 tiers creates decision paralysis. Dropbox went from 4 tiers to 3 and saw conversion increase 15%.

🎯The Action

Use value-based pricing: (1) Interview 10 customers and ask: 'How much money or time does our product save you?' (2) Calculate the average value created. (3) Price at 10-20% of that value. (4) Create 3 tiers (Starter, Pro, Enterprise) with clear feature differentiation. (5) Test annually: A/B test pricing pages, conduct Van Westendorp surveys, and monitor win rates by price point.

⚡Pro Tips

Pricing is the single most impactful lever for revenue growth. A 10% price increase at constant volume adds 10% to revenue with zero additional cost. In contrast, 10% more customers at the same price requires hiring, marketing, and support — the margin impact is much smaller.

Never compete on price. Companies that win on price attract price-sensitive customers who churn at the first discount from a competitor. Compete on value, and price becomes a secondary consideration. Slack doesn't compete with free chat tools on price — it competes on integration depth and searchability.

Anchor pricing high. If your 'Enterprise' tier is $499/month, the $99/month 'Pro' tier feels cheap by comparison. This is the 'decoy effect.' The most expensive tier is often there to make the middle tier look reasonable, not to sell itself.

🚫Common Myths

✗Myth: “Lower prices attract more customers”

✓Reality: Lower prices often attract WORSE customers — ones with less budget, higher support needs, and higher churn. Basecamp raised prices from $29 to $99/month and saw conversion rates stay flat while revenue per customer tripled. Higher prices signal quality and attract customers who take the product seriously.

✗Myth: “Customers will leave if you raise prices”

✓Reality: Studies show that only 1-4% of customers churn due to price increases of 10-20%. The rest either accept it or have never priced the alternatives (switching costs are higher than the price increase). A 20% price increase with 4% churn yields a net 15.2% revenue increase — almost always worth it.