The two axes of SaaS pricing
When we talk about how to price SaaS products most often the conversation turns to how much the end user pays. How expensive is it per month? How does that compare to alternatives? Is this value for money? What does the price say about our positioning (bargain vs. premium, etc)?
These are all important questions, but there is another equally important axis in your pricing decision — customer acquisition cost. You need to price your product or service high enough that you can afford to spend money to acquire customers.
Let’s say you have a service for business users that costs $ 100/ month and that you keep your customer for 40 months (implying a $4,000 lifetime value). A good rule of thumb says that you should not spend more than 1/4 of lifetime value to acquire a customer.
In this example the most you could spend per subscriber is $ 1,000. This assumes some maturity in your product and goto market. And assumes you have known, predictable churn (subscription cancellation) rates.
At the earlier stages as you are still assessing product/ market fit you should be spending way less. Over time, you can up your budget to spend up to 1/4 of LTV.
To be clear, on some channels you will spend a lot more. But on an overall blended basis, you should never spend more than the 1/3 threshold.
Its important to think about acquisition spend not just at today’s smaller volumes but at scale. AdWords as an example will go up over time as you buy more volume. And you will be going after different channels if you need 10,000 subscribers per month than you do when you’re looking for 100 subs per month.
One final thought on this: the value of your business in the eyes of investors and acquirers is heavily influenced by how fast you are growing. So, the more you can invest in customer acquisition, the more valuable your company will be. A company doing $ 5M in sales is worth more if its new subscribers are growing at 3x vs. 2x. So, even though it means more burn in the short term it pays to invest.
This is just one more important reason to ensure your pricing plan leaves enough room to invest heavily in driving subscription growth.