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Estd 4.22.2023
Is your SaaS pricing strategy really the problem, or are you targeting the wrong market? Many SaaS startups assume they have a "pricing issue" when, in reality, they have a segmentation problem. Even a perfectly calibrated price won’t work if your product is misaligned with its target customers.
In fact, research by Amaryllis Liampoti, Moritz Hagenmüller, Urs Rahne, and Sandeep Ganapa highlights that applying the right pricing strategy in alignment with target market segments is important for competitiveness and profitability. Simply put, it brings more clarity on how small businesses and enterprises perceive value differently.
To truly grasp why pricing and market segmentation are so tightly linked, let’s explore this connection in more detail.
The Overlooked Link Between Market Segmentation & Pricing
Pricing doesn’t exist in a vacuum; it’s inherently tied to who you’re selling to. When you target the wrong audience, no price will ever feel "right." A high price for a low-value buyer is just as problematic as a bargain price for a high-value enterprise customer.
Even VC, Tomasz Tunguz is clear about the fact that the SaaS companies can succeed by targeting SMBs, mid-market, or enterprises, but each segment demands its own approach to positioning and pricing.
In his analysis of public SaaS firms, Tunguz found that the revenue opportunity was roughly equal across SMB, mid-market, and enterprise companies, as long as the product, marketing, and sales strategy aligned to that customer base. In practice, that means your product positioning (the problems you solve, the way you market) sets the context for pricing. If your positioning resonates with the segment’s needs, your price will more likely match their willingness-to-pay. Or else, just expect the other way around..
To add in for more clarity even Jason Lemkin highlights a case where an SMB-focused software vendor quoted 5x the price of an enterprise incumbent for the same use case. The SMB vendor’s pricing model aggressively monetized larger “whale” customers. The enterprise-oriented competitor, by contrast, had lower per-unit pricing for small deployments (tuned for Fortune 1000 scale, where that usage is tiny) – so to this customer, the enterprise software actually appeared cheaper! The lesson: pricing is relative to your segment. Product positioning influences perceived value and willingness-to-pay, so segmentation must come first.
SMB Pricing: Simplicity and Affordability for Small Businesses
When targeting small businesses (SMBs), SaaS companies often succeed by keeping pricing friction low and aligning with the principles of product-led growth (PLG). PLG focuses on driving user adoption through the product itself, users experience the product's value firsthand, leading to organic growth and, eventually, conversion to paid plans. This strategy is particularly effective for SMBs, where budgets are tight and the need for simple, low-barrier solutions is high.
SaaS companies adopting a PLG approach often offer freemium or free-trial models that reduce the initial risk for SMB customers. This creates a frictionless path for small businesses to begin using the product with minimal upfront investment. As users see the value, they are more likely to upgrade once their needs outgrow the free offering.
It made almost its entire product free to small teams, only limiting things like message history and integrations. This approach meant a small business could use Slack indefinitely at no cost, then seamlessly upgrade to a paid plan once they needed more – an upgrade that felt “almost trivial” in cost given Slack’s inexpensive entry tier.
Dropbox followed a similar playbook by offering 2 GB of cloud storage free – genuinely solving a pain point for small users – while nudging power users to paid plans once they required more space. The free tier provided real value without strings, helping Dropbox virally grow its user base, which it later monetized as a portion of free users hit the limits and converted to paid.
In the same vein, Zoom leveraged a friendly freemium offer – unlimited 1:1 video calls and 40-minute group meetings at no cost – to become a staple tool for millions. This low-barrier strategy paid off hugely: by mid-2020, Zoom’s daily meeting participants ballooned from 10 million to 300 million, a 30x increase, with businesses upgrading to remove the time limits for their teams. The pattern is clear: freemium creates a funnel of enthusiastic SMB users, built on immediate value and goodwill, so that when usage grows or advanced features are needed, conversion to a paid tier is a natural, almost grateful progression.
Importantly, “free” doesn’t mean these companies fail to monetize – it means they maximize reach first. By removing pricing barriers early, companies ensure that their products become indispensable to SMBs. Once integrated into a small business’s daily operations, the transition to premium features becomes a natural and justified step, ensuring sustainable monetization.
Mid-Market Pricing: Scaling Value for Growing Companies
SaaS companies moving from targeting SMBs to mid-market clients often need to adjust their pricing approach. While small businesses need simplicity and affordability, mid-market companies require more flexibility, additional features, and scalability. This shift in customer needs calls for a more simple and approachable pricing structure that balances simplicity with the ability to grow with the customer’s needs.
Take Atlassian for example (maker of Jira, Confluence, etc.). Atlassian built a high-velocity business with no traditional sales force, partly by using transparent, self-service pricing that mid-market teams could trust. For years, Atlassian kept all prices online and avoided the "contact us" haggling that usually comes with enterprise sales. A customer could spend $10,000 via credit card to onboard their team, without ever talking to a sales rep. The simplicity of the process made it easy for businesses of all sizes to trust Atlassian's pricing model and scale effortlessly..
In practice, Atlassian now offers tiered editions (Free, Standard, Premium, Enterprise). While mid-market customers can pick the plan that fits their needs, the company has also made adjustments for growth. For instance, volume-based price breaks are applied as the user count increases. This allows mid-sized businesses to scale easily, with transparent pricing and no surprise negotiations.
Atlassian's success comes from blending self-serve simplicity with flexibility. Mid-market SaaS offerings generally follow a similar approach, where base pricing is clear and consistent for all. Larger customers, however, can opt for more advanced packages or longer commitments at better rates. This approach ensures that pricing is fair and relatively fixed, often no negotiation needed for mid-market deals in the five-figure range but also gives customers a clear roadmap for how they can grow with the product.
However, winning mid-market deals often requires a flexible approach beyond one-size-fits-all pricing. Value-based pricing becomes more prominent at this level, where the price is tied to the tangible value a mid-sized client gets, whether that’s users, contacts, or usage.
HubSpot, for instance, grew from serving very small businesses into the mid-market by expanding its product bundles and pricing metrics. It introduced contact-tier pricing in its Marketing Hub (the more contacts a customer stores and markets to, the higher the tier) and later seat-based pricing model for Sales and Service Hubs, ensuring that as a customer’s database or team grew, HubSpot’s pricing scaled accordingly. HubSpot rewards larger purchases with built-in discounts, around 10-20% off for annual pre-paid plans or higher-volume commitments. This aligns pricing with value and incentivizes customers to lock in longer commitments.
It’s common for mid-market SaaS vendors to combine standard tiered packages with custom options (e.g., 800 users getting the 1000-user tier at a slight discount). This ensures that as companies grow, they can maintain cost predictability without overpaying upfront.
Enterprise Pricing: Custom Deals and Long-Term Partnerships
Enterprise SaaS pricing is defined by tailored deals, negotiations, and multi-year partnerships. Unlike SMB pricing, which thrives on standardization, enterprise deals cater to large customers with complex needs and substantial budgets. Pricing is often a collaborative discussion. List prices serve as a starting point, but as Jason Lemkin highlights, “At the enterprise level, discounting SaaS contracts is expected, not optional.” Vendors anticipate that large clients will negotiate on aspects like volume discounts, custom feature bundles, or special payment terms. To manage this, vendors craft pricing strategies that protect margins while offering concessions.
For example, Salesforce, the world’s #1 SaaS CRM, is known for its sophisticated enterprise pricing tactics. Salesforce’s standard Master Services Agreement actually bakes in an automatic 7% price increase each year for multi-year deals. Why? This gives Salesforce’s sales team a bargaining chip: they can waive that 7% annual uplift if the client commits to a longer or larger deal upfront.
In practice, a Salesforce rep might say, “Sign a 3-year contract now, and we’ll lock your price with no annual increases,” essentially offering a discount by bypassing the built-in annual hike. This shows how enterprise pricing is as much about negotiation leverage and deal structure as it is about the per-user price.
Enterprise SaaS deals often span multiple years (3+ years), with custom pricing based on the client’s projected usage and requirements. Contracts may include clauses for price escalation, renewal caps, or opt-out conditions. The goal for the vendor is to secure long-term recurring revenue, while the customer gains guaranteed value, support, and volume-based savings in return for their commitment.
ServiceNow exemplifies how enterprise SaaS can focus on a strategic partnership. The company often begins with IT service management, then upsells additional modules like HR or Customer Service under an enterprise license. ServiceNow's deals usually run 3-5 years, with a typical contract worth six or seven figures annually. What justifies the pricing? The business value delivered. According to Nucleus Research, ServiceNow’s customer service product delivered 167% ROI in under 6 months for a large client, making the software’s high price tag more than justifiable.
Similarly, Palantir takes enterprise pricing to the extreme with bespoke agreements. Their software platforms become deeply embedded in an organization’s operations, so their pricing reflects a partnership. Palantir’s contracts average nearly 4 years, with some worth tens or even hundreds of millions. A clear cut instance is shown below in the image where Palantir secured a $458M multi-year deal with the U.S. Army to power a data analytics platform, with pricing tailored to the Army’s specific needs. These types of deals typically include extensive services, customization, and performance obligations, all of which factor into the price.
In enterprise SaaS, pricing may depend on factors like number of seats, data volume, geographic regions, premium support levels, results achieved, or even strategic value. Palantir, for instance, has even accepted equity or outcome-based fees from commercial clients. The takeaway here is clear: in enterprise SaaS, rigid pricing is rare. Deals are about solution selling, working closely with the client to agree on a price structure that matches their specific usage and success criteria.
One thing remains constant across enterprise deals: big enterprises expect to see value. Many buyers want to pilot the software first or use a trial or freemium model before committing long-term. For example, vendors often offer a paid pilot that transitions into a larger contract or a discounted initial phase with the understanding that prices will ramp up after successful implementation.
Negotiation in the enterprise space often involves executives, legal teams, and procurement departments. Thus, pricing must account for these complexities, including approval processes and budget cycles.
Market-Driven Pricing Framework: A Step-by-Step Guide
How can SaaS companies systematically craft pricing that fits their market? The answer is a Market-Driven Pricing Framework – a structured, iterative approach to align prices with customer segments and value. Here is a step-by-step breakdown of such a framework:
1. Identify and Segment Your Customers with Precision
Everything starts with knowing your target segments. Use data and research to define clear customer segments based on factors like company size, industry, use case, or profitability. The goal is to pinpoint groups of customers that share similar needs and willingness-to-pay.
(For example, you might segment by SMB, mid-market, enterprise, or by vertical industries, etc.) Ensure your segments are measurable, distinct, and meaningful – criteria often include size, budget, and needs. If you have existing customers, analyze which ones are most successful and profitable – those likely represent your ideal segment. This step is essentially aligning on your ICP (Ideal Customer Profile).
Tomasz Tunguz says that developing the right segments is critical because it anchors your product, marketing, sales, and success strategies to tangible customer archetypes. Decide which segments to focus on (and which to deprioritize).
- For a new SaaS, you might choose one primary segment initially.
- For a scaling SaaS, you might have offerings tailored to multiple segments (e.g. a self-serve SMB product and an enterprise suite).
The outcome of this step is a clear map of customer segments and an understanding of their key characteristics – including approximate value perceptions and budget ranges.
2. Align Pricing Models with Perceived Value (Segment-by-Segment)
Next, design your pricing model and packaging to match how each segment derives value from your product. This involves choosing the right pricing metric and structure.
Ask: what does each segment value most, and how can we charge in proportion to that value?
- For SMBs, perceived value might be in ease-of-use and solving a specific problem, so a simple per-user or per-month fee might work.
- For enterprises, value might be tied to usage volume, advanced features, or cost savings, suggesting a usage-based or tiered approach.
Select a value metric that scales with usage or outcomes – for instance, charging per user, host, data volume, or outcome achieved – such that larger customers naturally pay more because they get more value.
OpenView Partners’ data advises SaaS companies to “price on a value metric with expansion built-in,” meaning usage or outcome-based pricing that grows as the customer’s needs grow.
Equally important is packaging: create bundles or tiers that resonate with each segment. You might have an entry-level package for SMB, a mid-tier for mid-market, and a high-tier (or custom package) for enterprise. Each should include the features and service levels that segment cares about.
For example, small customers might get self-service only, whereas enterprise plans include dedicated support and advanced security features. The pricing model should align with these packages: perhaps a flat monthly fee for SMB, but a committed annual license for enterprise. Make sure your list prices for each segment are in line with their willingness-to-pay by leveraging data – this can include industry benchmarks and competitor analysis.
By the end of this step, you’ve essentially mapped your product offerings and pricing to each target segment’s value perception – ensuring that what you charge feels fair relative to the value those customers get.
3. Test and Refine Pricing Strategies with Real Customer Data
Once you’ve set an initial pricing structure, recognize that it’s not set in stone. This is where an iterative, data-driven approach kicks in. Launch your pricing and then measure, listen, and adjust. Monitor key metrics by segment: conversion rates (from free trial to paid), win/loss in sales deals, customer feedback on pricing, usage patterns, and retention/churn rates at the given price points.
You might run pricing experiments – for example, A/B test different price points on your website for self-serve plans, or pilot a usage-based model with a few customers to gauge response. The framework here should be continuous improvement.
“Pricing is never a 1 time thing” – you should revisit it regularly (twice a year is a good rule) and treat it as an iterative process. If data shows a certain segment has much higher willingness-to-pay than you priced for, consider raising prices or creating a higher tier for them. If another segment is churning due to pricing, you may need to adjust value or pricing down for that group or introduce a more affordable tier.
The key is to use real customer data to validate or challenge your assumptions. Also, speak directly with customers – especially in B2B, conversations can reveal if customers feel the pricing is a blocker or if they’re getting exceptional ROI (in which case you might be underpriced!). When making changes, do so carefully to avoid alienating existing users: best practices include grandfathering existing customers on old prices or adding more value when you increase a price. The framework should involve a cross-functional team (product, sales, finance) continuously analyzing pricing impact. By testing and refining, you ensure your pricing evolves in sync with your product-market fit and market shifts. For instance, as your product adds new major features or addresses new use-cases, you might need to adjust packaging or pricing for those. Or if the market shifts (say competitors change prices or a new economic climate affects budgets), you adapt accordingly.
High-performing SaaS companies treat pricing as a dynamic lever – according to Kyle Polar, 42% of SaaS companies updated their pricing in the first 3 quarters of 2024 alone, many doing multiple iterations. This iterative process is how you optimize pricing over time to capture maximum value without sacrificing customer trust.
Following this market-driven framework, SaaS companies can continually fine-tune their monetization.
Key Takeaways: Crafting a Sustainable Pricing Strategy
Pricing is not a one-off decision; it’s a dynamic, market-driven process that should evolve with your business. For SaaS founders, the key takeaway is simple: your pricing strategy must be closely tied to your target market segmentation and the value you deliver. Here are the core principles to guide your approach:
Segmentation is Step Zero: Before you set your prices, make sure you clearly define your customer segments and ideal target audiences. If your pricing feels too high or too low, it usually means you’re not targeting the right customers or haven’t effectively packaged your value for them. Pricing that aligns with your customer segments ensures that the price feels justified to them. If it doesn’t, expect ongoing pushback. Always ask yourself: “Who is this price meant for?”
Align Price with Value (Value-Based Pricing): Don't base your pricing on your costs or a general idea of “what software costs.” Instead, price according to the value your product delivers to each segment. Measure value through the right metrics, whether that’s users, usage, or specific outcomes and ensure your pricing reflects what customers get in return. When customers see a direct link between the price they pay and the value they receive, it builds trust. For example, if you charge $100K, make sure the customer feels they’re getting more than $100K worth of savings or added revenue. When value and price align, even higher prices feel like a bargain for the right segment.
Keep it Simple (Especially for Lower Segments): Simplicity in pricing is key, especially for SMBs and lower-mid markets. Complex pricing models can confuse potential customers and create unnecessary friction. Leading SaaS companies excel by offering clear, easy-to-understand pricing tiers that avoid overwhelming prospects with too many options. The simpler the pricing, the easier it is for customers to make a purchase and this simplicity is crucial when scaling. As one SaaS expert put it: “Don’t make it hard to buy.”
Use Data-Driven Iteration: Pricing is not set in stone. Continuously collect data on how your pricing is performing and remain flexible in adjusting based on insights. Whether it’s tracking usage analytics, conversion rates, or gathering direct customer feedback, use this data to iterate and optimize your pricing. High-performing SaaS companies treat pricing as a growth lever, regularly refining it based on data. If your pricing isn’t working maybe your mid-tier plans aren’t converting or enterprise deals are stalling, dig into the root cause and refine your approach. Schedule regular pricing reviews (e.g., quarterly or semiannually) to institutionalize this process and keep your strategy sharp.
Anticipate Evolution with Product-Market Fit: As your product matures and your market expands, your pricing should evolve along with it. Early on, you might use penetration pricing to attract users, but as your product’s value grows, you’ll likely introduce premium tiers or enterprise editions. Ensure your pricing strategy evolves with both your product’s capabilities and your changing customer profile. What worked at $1M ARR might not work at $10M ARR, and that’s entirely normal. Plan for pricing adjustments as you scale, keeping in mind that pricing is never “done.”
Beware of One-Size-Fits-All Pricing: Avoid using a single pricing model for all customers, especially in a market with diverse segments. A rigid, one-size-fits-all approach can leave some segments underserved or overcharged. By segmenting your market and tailoring your pricing, you can capture more revenue and avoid “revenue leakage.” For example, if you only have a $50/month plan, you’ll never be able to attract an enterprise willing to pay $5,000/month for a larger, more complex solution. Tiered and segmented pricing ensures you don’t leave money on the table, while also preventing customers from churning due to misaligned pricing.
By applying these principles, SaaS companies can create sustainable pricing strategies that grow alongside their business.
If you’re looking to ensure your pricing strategy is not only theory but also a practical driver of business results, consider partnering with the best SaaS pricing consultants. At Monetizely, we help you implement a structured, segment-focused pricing framework that enables you to capture the true willingness-to-pay of your target market, ensuring your pricing maximizes both value and revenue. To learn more, book your free pricing assessment with us today!