One of the most common value metrics we see in SaaS is the ‘per user’ pricing model.
While it is easy to understand and simple to measure, it’s rarely the most appropriate pricing model for your customers.
4 Per User Problems
Let’s say you’ve got a SaaS product where you’re offering all features to all customers, but with different pricing options based on number of users.
Today I’m looking at four ways that a per user pricing model like this can actually damage your SaaS company’s revenue growth.
1) It Limits Adoption
“Exponential, internal viral expansion is something that’s not possible – or incredibly difficult to achieve – when you have to make a buying decision just to bring another person into the product.” – Lincoln Murphy
A pricing model where number of users is your primary value metric actually disincentivises adoption of your service.
To save costs a customer will aim to use your service with as few user licences as possible. This means your service will only be used by a small number of employees in an organisation, rather than being widely adopted.
Limiting adoption through per user pricing leads to lower revenue generation per customer as they will choose a lower-priced package rather than a higher-priced one that better fits their needs.
2) It’s Easier to Churn
If your service is only being used by five employees in a 100-person company, it’s much easier for the company to switch to a different service than if your service was being used by 95 out of the 100 people.
This can lead to a potentially shorter customer lifecycle as limited adoption makes it easier for customers to churn, and move away from your service in favour of a better-integrated alternative. A shorter-than-anticipated customer lifecycle means a lower CLTV, and in turn, reduced revenue generation.
3) It De-Values Your Service
Per-user pricing positions your service as providing value only at the individual level, rather than being a service that provides value to the business as a whole.
This means that the customer’s perceived value of your service is lower than the value it actually provides – and as such they will be less willing to pay for it.
4) It’s Not Where The Value Is
Does it make a difference to a customer whether they’ve got three users or four? Most of the time, the answer will be ‘no’.
A 1% improvement in price can increase operating profit by 11%, making it the most effective thing you can change to improve revenue generation. In order to improve pricing and in turn boost revenue you need to make sure your primary value metric is aligned with your customers’ perception of where the value is.
Pricing by Perceived Value
With per user pricing you are naturally limiting adoption of your service, which damages revenue generation.
Instead, you want to encourage breadth and depth of use of your SaaS product, rather than limiting its use. To improve revenue generation, you need to align your pricing with the buyer’s perception of the value your service provides – not the value you think it provides.