Pricing

What is Pricing?

Pricing is the process of determining what a company charges for its products or services. This involves analyzing production costs, market conditions, competitive positioning, and the value delivered to customers. For SaaS and usage-based billing companies, pricing extends beyond setting a number—it's a strategic decision that affects revenue, customer acquisition, market positioning, and long-term profitability.

Unlike simple retail pricing, modern software pricing often involves complex structures with multiple components: base subscription fees, usage-based charges, per-seat pricing, and feature-based tiers. The challenge is finding a pricing structure that captures value fairly while remaining simple enough for customers to understand and sales teams to communicate.

Why Pricing Matters

Pricing directly impacts several critical business outcomes:

Revenue Generation: Price is the most immediate lever for revenue. Small changes can significantly affect total revenue and profitability without requiring proportional increases in costs or customer acquisition.

Market Positioning: Your price signals product positioning. Premium pricing suggests superior quality or capabilities, while lower pricing positions products as accessible or value-focused alternatives.

Customer Selection: Pricing naturally filters your customer base. The price point you choose attracts certain customer segments while discouraging others, shaping who you serve and how you grow.

Resource Allocation: Pricing decisions determine which customer segments and use cases are profitable to serve, guiding product development and support investments.

Core Pricing Approaches

Cost-Based Pricing

Cost-based pricing starts with production costs and adds a markup for profit. Calculate your total costs—including infrastructure, development, support, and overhead—then add a margin.

This approach is straightforward and ensures profitability, but it ignores market dynamics and customer value perception. Two products with identical costs might deliver vastly different customer value, yet cost-based pricing would price them identically.

Value-Based Pricing

Value-based pricing sets prices according to the perceived value customers receive. If your product saves a customer $100,000 annually, you can price based on a portion of that value rather than your costs.

This approach typically yields higher margins than cost-based pricing, but requires deep understanding of customer outcomes and clear communication of value delivered. It also varies by customer segment—enterprise customers often extract more value than small businesses using the same product.

Competitive Pricing

Competitive pricing uses market rates as reference points. You can match competitors (parity pricing), price above them (premium positioning), or undercut them (penetration pricing).

Market-based pricing helps you stay competitive but can lead to commoditization and margin pressure if you're not careful about differentiation.

Pricing Structure Components

Modern software pricing combines several elements:

Base Fees: Fixed subscription charges for platform access, typically billed monthly or annually. Annual contracts often include discounts to secure longer-term commitments.

Usage-Based Charges: Pricing tied to consumption metrics like API calls, compute time, storage, or transactions processed. This aligns costs with value received and scales naturally with customer growth.

Per-Seat Pricing: Charges based on the number of users accessing the system. This works well when value scales with team size but can create friction when companies want to expand usage.

Feature Tiers: Different pricing levels unlock different capabilities. This allows customers to start small and upgrade as their needs grow, though it requires careful decisions about which features belong in which tier.

Volume Discounts: Progressive pricing that reduces unit costs as consumption increases, rewarding larger customers while maintaining profitability.

Implementation Considerations

Understanding Your Costs

Before setting prices, know your unit economics. For usage-based models, calculate the actual cost to serve each unit of consumption. Infrastructure costs, payment processing fees, support expenses, and allocated overhead all factor into profitability.

Many companies discover that their heaviest users are unprofitable because pricing doesn't cover marginal costs. Billing systems like Meteroid help track usage and costs granularly, enabling accurate profitability analysis.

Market Research

Effective pricing requires understanding customer willingness to pay and competitive alternatives. This means talking to customers about budget constraints and priorities, analyzing competitor pricing structures, and testing different price points with small customer cohorts.

Customer research should focus on value perception, not just price sensitivity. Understanding what customers value most helps you structure tiers and features effectively.

Pricing Communication

How you present pricing affects conversion rates and sales efficiency. Clear, simple pricing that customers can understand without sales calls reduces friction. Complex pricing with many variables and conditions slows sales cycles and creates confusion.

Your pricing page should answer basic questions immediately: what does it cost, what do I get, and how do I upgrade as I grow? Save complexity for enterprise deals where custom structures make sense.

Technical Infrastructure

Implementing modern pricing requires systems that can handle:

• Real-time usage metering and aggregation

• Flexible pricing rules that accommodate different structures

• Accurate invoice generation across multiple pricing components

• Multi-currency support for international customers

• Automated payment retry and dunning for failed transactions

Revenue operations teams rely on billing platforms to execute pricing strategies reliably without manual intervention.

Common Pricing Challenges

The Underpricing Problem

Many companies underprice initially to gain market share, then struggle to increase prices later. Existing customers resist increases, and the company leaves substantial revenue on the table.

The solution is testing higher prices with new customer cohorts before broad rollouts. If customers aren't pushing back on pricing or attempting to negotiate, you may be underpriced.

Complexity Overhead

Overly complex pricing confuses buyers and requires extensive explanation. When customers can't quickly understand what they'll pay or how to estimate costs, they hesitate or request custom quotes for standard packages.

Simplifying to three or four clear options with transparent value differences improves conversion. Complexity should only exist where it genuinely serves customer needs.

Misaligned Value Metrics

Pricing metrics that don't correlate with customer value create friction. Charging per seat when value scales with usage volume punishes adoption. Setting usage caps too low forces customers to restrict beneficial product usage.

The best pricing metrics grow as customers extract more value, aligning your interests with customer success.

Geographic Variations

Pricing strategies that work in one market may not transfer globally. Different regions have varying purchasing power, payment preferences, and expectations around pricing transparency. European customers, for example, expect VAT-inclusive pricing and often prefer SEPA payments over credit cards.

Measuring Pricing Effectiveness

Monitor these metrics to evaluate pricing success:

Average Revenue Per Customer: Growth here indicates you're capturing more value over time, either through price increases or customer expansion.

Win Rate by Segment: Consistently losing deals in a segment suggests pricing or value misalignment for that audience.

Churn by Price Point: If specific pricing tiers show elevated churn, those price points may not match delivered value.

Expansion Revenue: Healthy expansion revenue from existing customers validates that your pricing model scales as customers grow.

Discount Frequency: Heavy discounting suggests list prices don't match market willingness to pay or sales teams lack confidence in value positioning.

Review pricing metrics quarterly to catch trends early. Major pricing strategy changes typically happen annually, though market disruptions or competitive moves may trigger more frequent adjustments.

When to Revisit Pricing

Pricing isn't a one-time decision. Consider pricing reviews when:

• Launching new features or capabilities that shift value delivered

• Entering new market segments with different value perceptions

• Experiencing significant cost structure changes

• Facing new competitive pressure or market consolidation

• Preparing for funding rounds where revenue metrics matter

• Customer feedback consistently mentions pricing as a friction point

Finance teams and RevOps professionals should build pricing analysis into regular business reviews rather than treating it as a one-off exercise.

Related Topics

• Value-Based Pricing

• Usage-Based Billing

• Price Optimization

• Revenue Recognition

• Subscription Management

• Pricing Analytics

• Quote-to-Cash