Stop pricing per user
In our view, it’s wrong to price SaaS contracts on a per user basis. Instead, a value based approach should be taken whereby the customer will see a 20x+ return on your software while you also earn 3x to 5x on your S&M spend to acquire the customer. Once you’ve figured out the price, delight the customer by allowing unlimited users on your platform. Here’s why:
1. More users make you sticky. As one CS professional at our portfolio company Apptopia shared with us: “More users on the platform cost us nothing but make us very sticky. We now have 20 champions at the customer as opposed to just a senior level champion that may not be using the product as much as personnel below them. If we’re in multiple departments in an organization with many users, it becomes much harder to say no one is getting value.” Shameless plug: Apptopia is a phenomenal company that provides mobile data on every app out there.
2. Upsell based on product upgrades. Opportunities for upsells come when you introduce new features and products, not when the customer wants to add seats. If you’re charging the customer for every new seat, your software just became unscalable, whereas the point of software is to allow your customers to scale their workforce exponentially (not linearly) and drive productivity. Charging for each user prevents your customer from improving their margins, makes you a variable cost in the wrong way, and overall makes you far less valuable to the customer.
3. Per user cuts both ways. If you charge per user and your customers are expanding, you benefit. However on the flip side, if you charge per user and your customers shrink, you get hurt. Your dollar retention metrics suffer not because your product is deficient but because your pricing is deficient. In a recession, software companies that price per user are see the ugly side of per user pricing.
If you’ve got a churn problem, offer your customers unlimited seats. Price based on value to the customer and to you. Said another way, price based per product, not per user. Your gross and net dollar retention metrics should improve markedly. Shoutout to our portfolio companies Apptopia.com (mobile data on every app) and Divvyhq.com (content marketing collaboration software) for inspiring this article.
Visit us at blossomstreetventures.com and email me directly at sammy@blossomstreetventures.com. All founders and funds welcome! We invest in companies with run rate revenue of $1mm to $30mm, with year over year growth of 20% to 50%+ depending on revenue. We lead or follow in growth rounds and special situations like inside rounds, small rounds, rushed rounds, corralling investors with our term sheet, bridges, inbetweeners, cap table clean up, and extensions. We can commit in 3 weeks and our check is $1mm to $3mm. Also visit https://blossomstreetventures.com/metrics/ for always up-to-date SaaS metrics.
