FinanceNov 29, 2023

How Does Your Growth Strategy Impact Your Pricing Strategy?

Pricing can be a puzzle. In Todd Gardner's latest blog, he digs into the often overlooked factor in pricing—your company's growth strategy.

Todd Gardner
Todd GardnerManaging Director, SaaS Advisors
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Pricing is complicated, and there is a lot to consider when setting your pricing strategy. High on the list of considerations are your product's functionality, its value drivers, and what your competition is doing. That said, an often overlooked vector in structuring pricing is the fundamental growth strategy of your company.

Is your SaaS company focused on achieving or maintaining growth of 40% or higher with less concern for profitability? (Still being efficient, but not necessarily profitable.) If so, new customer acquisition will be your main growth lever, and you will need a pricing strategy to optimize attracting new customers. If your growth plans are more modest, and profitability is your mantra, then pricing structured to optimize net revenue retention and customer lifetime value will be more important.

High-growth mode

High-growth SaaS businesses are driven by new customer acquisition -- expansion revenue from existing customers simply can’t generate growth above 30% to 40% per annum. With this in mind, pricing should be optimized to reduce friction in new customer acquisition.

Low friction strategies supporting new customer acquisition favor simple pricing that can be easily explained or posted on the website. Per-seat pricing, or an easily understood usage-based metric that is simple and familiar to customers, reduces friction. Streamlining the product into just a few tiers or packages is an additional level of simplification that reduces friction. Unity software is a great example of a high-growth company executing low-friction pricing. Unity sells a platform for game developers offered on a per-seat basis with only three tiers: student, pro, and enterprise.

Friction can also be reduced by lowering financial barriers. This might involve lower per-seat pricing or, if you have a product-led growth strategy, implementing free trials or usage-based pricing.

In addition, optimizing for new customer acquisition can pay dividends in the long run. As James explains:

James Wood, Product and Pricing Strategy Lead at m3ter

High-growth subscription companies break the typical concept of price elasticity because subscriptions can expand over time. Pricing too high too soon can reduce long-term revenue opportunities because you’ll lose a lot of customers that could have had high lifetime value as they grew their spend.

James Wood, Product and Pricing Strategy Lead at m3ter

Efficient mode

It’s well documented that expansion revenue has significantly lower acquisition costs than new customer acquisition, so the most profitable growth comes from existing customers. Pricing strategies optimizing net revenue retention (NRR) and lifetime value (LTV) optimize profitability. Generally, usage-based pricing delivers higher NRR over time. As underlying usage grows, revenue increases with virtually no incremental costs. Hybrid pricing is also highly effective here. Hubspot is a good example -- they use seat-based pricing for sales enablement while leveraging a more scalable metric, number of contacts, for marketing automation. 

And instead of bundling functionality into one or two packages, which optimizes new customer acquisition, NRR-focused pricing strategies favor segmenting the product into more granular modules, allowing for additional expansion revenue through ongoing upselling.

The accompanying chart graphs public SaaS companies (blue dots) based on their revenue growth vs. profitability and segments them into zones. Those with high growth and low profits, the Max Growth zone, tend to favor pricing strategies that streamline new customer acquisition. In contrast, those in the Max Profit zone favor expansion-oriented pricing strategies. To be clear, however, there are some outlier performers in each group as pricing strategy only accounts for a portion of overall company performance.

The chart also highlights many public SaaS companies that are struggling with the growth/profit mix and need to find an overall strategy, including pricing, to break out in one direction or the other. Refer to my post “Pick a Lane” for more details.

Pricing is complicated, and there are many factors to consider– but one that should not be overlooked is your company's growth and profit profile. This is not one size fits all, but it’s a critical framework when setting, negotiating, and structuring pricing.

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