The question I hear most from founders during Sequoia Capital's Arc program is about hashtag#pricing.
Pricing is one of the most underutilized levers for startups. Why does it matter so much? It has the most direct impact on revenue, and the moment you establish your pricing, you determine your TAM.
Getting the pricing metric right is, by far, the most important one. The key is to imagine the future: when you are a large and successful company, how have you changed the world, and what metric correlates best with your success? Hitch your financial wagon to that metric!
If you are Figma, success is all designers using the app; therefore, the pricing metrics is per designer seat. If you are VMware, success is all workloads run in virtual machines; therefore, the right pricing metric would have been a virtual machine.
A pricing metric is like the genie in a bottle: once you get it out, it is tough to rein it back or change it.
The pricing model is about when and how frequently you charge. Recurrent subscriptions are the predominant model for SaaS apps, and usage-based pricing is the model for infrastructure solutions.
Usage-based pricing creates a beautiful alignment of incentives but is less predictable. Upfront credit purchases and commitments are efforts to make usage-based practice more aligned with the rigid corporate budgeting processes.
You can be the premium solution or the affordable one. Both are legitimate approaches. But your pricing needs to be consistent with the rest of your strategy: with your product and distribution channels. You can’t have an affordable solution distributed through an expensive enterprise sales force. In this case, you need to sell either online or through inside sales—the product better be simple and the sales cycle quick.
Many technical founders are shy about asking for a lot of money for their product. Don’t be. If customers like the product and it delivers value, they will gladly pay for it. Unless you hear customer complaints that you are expensive, then for sure you are underpricing.
Calculate the ROI of your product, and take 20% of that value as your price point. How much it costs you to build the solution should not guide your pricing. But you should do a sanity check that you have a decent gross margin.
Most companies start by selling a single package. Over time, they realize that different customer segments have different maturity levels and willingness to pay. To price discriminate between these segments, you need to introduce multiple packages. Start by creating a customer maturity curve to inform your decisions on how many packages you need. The trick is to have the smallest number of packages to cover the broadest range of customer needs.
Your packages will change and evolve quickly as your product matures.