There’s a certain type of SaaS company I run from.
This type of company has great customers, a great product, and decent customer acquisition costs, in an interesting space. A true winner if you stop there.
It sells to SMBs for anywhere from $5 to $199 a month.
I sort of run at those price points. Even though all the other boxes are checked.
Why? It’s just too hard.
If you are doing true self-service freemium at say $5 a month, that can work at DropBox scale. But you’ll need over 1,000,000 paying customers just to get to $60m in ARR. One. Million. Paying. Customers. Salesforce doesn’t have 1 million. Very few do. More on that here.
And if you have a sales-driven model, selling to SMBs, at $199 or $299 a month … well … if you really work hard, you can still make the math work even with an inside sales team. But still … the math barely works if you have to have sales folks making $80k or $100k OTE, leaving you little room for marketing spend or really much of anything. More on that math here.
So what do you if you find yourself in either of these scenarios?
You just gotta raise prices. Even if the competition is cheaper. Even if your customers say they can’t afford it.
- First, you may be wrong about price inelasticity. Try to double prices tomorrow and see what happens. Just do it. Figure out how to 2x your pricing per seat. Even if your conversion rates plummet until you roll back, you’ll learn, especially if you ask, what would you need to do to earn this. See, e.g., SurveyMonkey did this well. It ain’t cheap anymore:
- Sell team-based and larger deals. Selling 20 seats at $20 / month in revenue is worth far, far more than 1 seat at $5 / month. Maybe 50x more. And these customers churn less. More on that here:
- Go upmarket if you can. This is one step beyond the prior point. If you can built an “enterprise” package for say $10k or $20k or more a year, do it. Even if it’s just one customer than wants it. Because if you can get 1 customer that wants it, you can get 10. And it can become at least a material percent of your revenues if the ACV is > 5-10x you average ACV. You can keep selling tons of deals at $299 a month and scale nicely if you can also mix in a bunch at $2999 a month.
- Localize. This always seems to pay off.
- Add a second product. We all want to get to $100m ARR with just one product, if we can. But sometimes it takes a bunch. See, e.g., Atlassian.
- Upgrade the team. Do you have an incredible VP of Marketing / Demand Gen? The world’s best customer success team? You need folks that have done this before. They do the above and other creative things when you give them a number to hit. Let them run with it and figure it out with you.
Anyhow $5-$10 a month for self-service and $199-$299 a month for inside sales to SMBs may be a fine place to start. A great place to start, potentially.
But after just a few million in ARR, you’re probably gonna need a new longer term plan. You may even get to $8-$10m in ARR with this sort of pricing. But after that, one way or another … you’re gonna have to raise prices unless organic demand is simply epic.
So at least try some things right now. If you can at least test a few ways to raise prices and learn as early as possible, you can make better roadmap and human capital investments, and grow faster as you turn the corner toward $10m ARR and Initial Scale.
(Cross-posted @ SaaStr)