TL;DR – User-based pricing indicates a lack of customer empathy, frustrates everyone, and costs you money.
One of the most commonly used pricing mechanisms in SaaS is ‘user-based.’
I understand, but my experience tells me it’s the least effective pricing concept available. Let me explain.
In my previous job, I was responsible for pricing – and, like all our competitors, we applied user pricing in different flavors: Employee Self Service, Professional users, and Enterprise users.
In short – always debates. No one understood it.
Let me illustrate: We sold to the services industry, Organizations that delivered their value through people, not products. Think about Government, education, not-for-profit, management consultancies, engineering companies, etcetera.
A small local authority typically employed 1000 employees – the same as a mid-sized professional service company. Both required +900 self-service licenses to enter time, expenses, their absence, and what have you.
As you can imagine, that same license had a different perceived value for Local Government than for a professional service firm. For one, it was a cost of doing business. For the other one, it was their primary source of income (time tracking).
Now you can imagine the endless debates….
The solution: Price context.
Context your ideal customer understands, relates to, and trusts. That way, you can speak the correct language for each customer segment, charge a price that’s perceived fair and valuable, and speed up the sales cycle.
For us, this meant we started pricing professional services based on # of FTE, Local Government based on # of Citizens, and Education based on # of Students.
It allowed us to bundle functionality properly and grow with the customers’ core business. And this is a crucial point. Local Government f.ex. will often develop in # citizens, but decline in # of employees. With user-based pricing, you’re stuck.
Context-based pricing model remains fair and provides an incentive to leverage the power of the software even more.
A question for you to reflect upon
Is your user price perceived of similar value for each customer segment? If not – you might have a context problem.
Like this message?
Every day I send out a short 2 min reflection on shaping a B2B SaaS business no one can ignore. Join the 1,000+ subscribers that have become fans.
Not sure? Browse the archive