The problems with relying on a single value metric to determine SaaS & service pricing

A company asked me if their reliance on a single value metric – to determine their customers’ pricing – is a mistake. There was a lot of context behind this question, but it got me thinking about a rule of thumb to answer it. Value metrics are a cornerstone of software pricing strategies. But what happens when you rely too heavily on a single metric?

What is a value metric?

In pricing, a value metric is a unit of something you can measure or meter, and use to determine the price your customers pay. E.g. seats (users), number of transactions processed, API calls, number of records etc. For example:

• Slack prices on the number of users
• Twilio prices on the number of SMS messages sent
• Mailchimp prices on the number of email contacts.

Crucially, none of those three well-known companies rely on just a single value metric for determining customer pricing.

The problems with relying on a single value metric

Problem #1: Decoupling price from value

The risk is that customers get wildly different value from your proposition per “unit”, but this is not reflected in the price they pay.

For example, for an email marketing SaaS (e.g. Mailchimp) – with the number of email contacts as the value metric – the average value of a contact to Customer A could be much higher than the average value of a contact to Customer B. (E.g. because conversion rates or average transaction values are higher)

• If you raise the price per email contact then the proposition may deliver a negative ROI or become unaffordable for Customer B
• If you leave the price unchanged, then Customer A benefits from a big consumer surplus[^1], and the business collects less revenue than it could from Customer A.
• If you lower the price per unit, then the proposition could become attractive to prospective Customer C– who obtains an even lower value per contact than Customer B. But, gross margin takes a hit*,* and now the consumer surplus gets even bigger for Customer A and Customer B.

The wider the variance between customers in value per unit, the less efficient the pricing will be.

Pricing on a single value metric has the benefit of simplicity. But it risks making the proposition unaffordable for some prospective customers, while leaving a lot of money on the table for others. So, a single value metric makes it hard to segment customers by their requirements and willingness to pay, and it decouples the price from the value delivered.

Problem #2: Demolish your own margins by offering a single point of leverage in customer negotiations

Setting the price around one value metric is often the consequence of a well-intentioned desire to keep pricing simple. Annoyingly, margin gets demolished if the customer has much procurement experience, and especially if your customer is an enterprise buyer[^2]!

If your pricing is determined by a single number then your customer has a single target to attack. They have one figure to haggle over, and to play-off against competing solutions. If the customer’s Decision Making Unit (DMU) includes multiple stakeholders with different priorities or incentives, then a single number unites them: there is literally nothing else to negotiate with!

As the vendor, a pricing structure with multiple levers on which to pull will put you in a stronger position. E.g. a second value metric, optional add-ons, tiers, support fees, transaction fees etc[^3]. These levers can also be the output from customer segmentation work. I.e. if you have customers with greater needs and a higher willingness to pay, then the pricing structure should make it very easy for them to pay more.

Mailchimp have implemented this. Their core value metric is number of contacts. But:

• They use two other value metrics – number of emails sent per contact per month, and seats – plus premium support, to differentiate between their Standard plan and a more expensive Premium plan.
• They hive off SMS sending into a separate email + SMS bundle for those who need it
• Transactional emails get their own plans too

There is a difficult balance here between an instinctive desire to keep pricing simple, and adding enough levers to properly segment your customers and reduce vulnerability to competent buyers who will happily batter down a single value metric.

[^1]: Consumer surplus is the difference between what a customer is willing to pay for a product, and the actual price they pay. In this example, if a customer was willing to pay $100 per seat, but they actually pay $20 per seat, then the consumer surplus is $80 per seat.

[^2]: A notorious tactic is for the enterprise customer to negotiate the price down, and then introduce the procurement team who squeeze it further.

[^3]: While writing this post, I discovered a brilliant tweet by Gokul Rajaram who makes a similar point with further detail and insight. Check it out here: https://x.com/gokulr/status/1862951080570810634