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Strategies for pricing software products in a down market

Strategies for pricing software products in a down market

Per-seat pricing has been an obvious and simple standard for B2B SaaS.

It’s simple to understand and looks fair (the more users, the higher the bill) to the buyer. On the SaaS’ side, revenue grew as the customer grew… provided the headcount increased linearly with the company’s revenue growth.

And this is precisely where the shoe pinches, because of the current downturn.

As Sam Blond (the newest partner at Founders Fund, ex CRO at Brex) explained in a SaaStr’s interview, the new reality is ‘your existing accounts might be growing less fast, especially if your growth was headcount driven’. And what’s more headcount driven than a ‘per-seat pricing’?

Massive layoffs impacts the total number of addressable seats

The wave of layoffs of the past month mechanically reduces the number of ‘seats’ that a SaaS can sell to. If you’re Front or Intercom, you’ll have fewer Customer Success representatives that can potentially use you, same if you’re Salesforce or Hubspot, as the Sales teams were the first impacted by the downturn.

In addition, teams will increasingly ‘hack around’ your per-seat pricing in this economic climate, i.e. share their passwords across the organization to avoid buying additional seats. If you’re selling something like Slack, it doesn’t matter - each team member needs their own account -, but if you’re offering a social media management platform like Buffer, or a research tool, be prepared for this.

Beyond that, expectations have changed too. During the past years, headcounts have grown linearly with the company growth, this is unlikely to come back any time soon, as the wounds of the downturn are still fresh.

Per-seat pricing limits long term value creation & value capture

Does your product’s impact compound when a critical mass of users has adopted it? Then, per-seat pricing is undermining or cannibalizing your growth, big time.

Two megatrends are amplifying this effect.

First, most B2B SaaS ambition to become a ‘collaboration layer’ within the organization. This is where the grail is: very high stickiness and increasing contract value. For instance, once your whole sales and revenue operations rely on Salesforce suite, even if you hate it and think it’s not ‘worth it’, you’ll likely stay for the next decade.

That’s why most B2B SaaS sooner or later launch premium offers such as : data synchronization, advanced user right management, and workflows. Retool is a textbook example, expanding from the initial promise of ‘build internal tools faster’, to becoming the ‘Zapier of developers’ with their workflow feature.

Second, machine learning - or the most disruptive and funded technology of the past and future decades - thrives with network effects.

In other words, the more data an application that uses machine learning has, the most accurate it becomes… and the more efficient their users are bound to be.

Therefore, pricing per seat becomes a bottleneck for AI’s:

  • Value creation: whether you help Fintechs’ decision making algorithms more efficient like Taktile, or you intelligently remove and replace the backgrounds of millions of pictures, like Photoroom, the larger your dataset, the better
  • Value capture : making users more efficient, can… limit the number of users, at some point

Jake Saper’s (Partner at Emergence) analysis, published in Techcrunch three years ago, is even more relevant today: "As such, seat counts should not need to grow linearly with company growth, as they have in the era of static software. Tethering yourself to per-seat pricing will make contract expansion much harder. Indeed, it could result in a world where the very success of the AI software will entail contract contraction."

New models are becoming mainstream

Hybrid models are the ‘new black’

Some companies might want to introduce other ‘billable metrics’ in their pricing, to reduce their dependance to ‘per seat growth’. Intercom introduced ‘add-ons’, for instance:

intercom-pricing

Another option to explore is ‘fair billing’ like Slack’s. Slack will only bill based on ‘active users’, which removes the psychological barrier of buying a set number of seats in advance, and being very careful about who can use a new tool.

slack-pricing

With a fair pricing like Slack’s, a tool can be tried out by a whole organization, while costs remain controlled. Implementing such pricing can be tricky on the engineering side, and we had a lot of fun designing a specific template to make it simpler with Lago.

For specific industries, like Application Tracking Systems, a per-seat pricing has been the norm in the bull market. The downturn has made companies re-think their ‘value metric’, and switch from a per-seat pricing, to a hybrid structure, with ‘per-job’ and ‘per talent’ dimensions. Crew, the CRM for recruiting backed by Y Combinator has been creative on this side, for instance:

crew-pricing

A similar approach can be conducted on a case by case basis. Highly recommended frameworks are: Sequoia’s guide ‘Pricing your Product’, and Bowery Capital’s ‘ROI Calculator’. Both highlight two different approaches: Sequoia’s is more focused on perception (and the irrational purchasing behavior), i.e. ‘right brain’, and Bowery’s capital is more ‘left brain’ and deeply analytical.

No buyer is purely logical or emotional, and pricing is an art that improves with iteration. If you want a full 101 on SaaS pricing, the ‘Principles of Pricing’ by Notion Capital might be useful too.

Lastly, another important trend of the past decade is the emergence of vertical SaaS.

This is not new, Veeva, or nCino (both IPO’ed) have been examples of highly verticalized CRMs built on top of Salesforce. Because they catered to the very needs of the Pharmaceutical and Financial Services industries, they sold themselves for a huge premium vs Salesforce, and suffered less from the competition.

A newer trend though is to monetize payments as well: a vertical SaaS like Toast would earn revenue from subscriptions paid by restaurants and a payment percentage based on the payment volumes that transact through them, which is directly proportional to revenue.

With the current downturn and its aftermath, it’s highly likely that B2B SaaS will deeply audit their revenue models and pricings, to be able to keep capturing value as they embrace the new economic reality and the opportunities created by AI. The only sure thing is: sitting on your per-seat pricing (pun intended) won’t lead you anywhere, in a world where your users have a very important chance to be laid-off soon.

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