August 23, 2019

How To Determine Monthly Pricing for Software As A Service

This post breaks down pricing (in as simple terms as possible) for Arcus – software for service businesses.

How Much Money Do You Want To Make Per Month?

There is no need to over-complicate this: $120k in monthly recurring revenue is the goal.

Once you've determined the number you want to make, you can then find out the best way to make that amount.

So, I need to make $120,000 per month. That's $4,000 per day.

Based on monthly subscription model, the numbers break down as follows:
- Get 5,000 people to pay $24 per month.
- Get 2,000 people to pay $60 per month.
- Get 1,000 people to pay $120 per month.
- Get 500 people to pay $240 per month.
- Get 300 people to pay $400 per month.
- Get 200 people to pay $600 per month.
- Get 100 people to pay $1,200 per month.
- Get 50 people to pay $2,400 per month.
- Get 25 people to pay $4,800 per month.
- Get 5 people to pay $24,000 per month.

How To Determine Pricing For Your Software Business

Let's change the model on this and work backwards.

Think in terms of a monthly subscription service for your software:

  1. My goal is $120,000 per month.
  2. If I set the base package at $120/month, then I'll only have to onboard and retain 1,000 companies! (Totally doable!)
  3. Or, I could price my base package at $240/month... then, I only need 500 companies.

In my mind, the sweet spot is somewhere in-between.

Maybe we have a base package at $99/month, a mid-tier package at $150/month, then a highest tier at $300/month.

By running these numbers, it's easier to figure out the best way to make $120,000 per month.

Designing Features To Match Pricing

Once you have a pricing strategy determined, you can start to identify features that support your pricing.

In other words: “What software features should I build, so people will pay $99/month?”

For example, our base package ($99 a month) should include:

  1. Basic CRM
  2. Invoicing
  3. Scheduling
  4. Secret Ingredient

I think having these 4 features is worth $99/month all day long!

The next (mid-tier) package ($150 a month) could include the following:

  1. Basic CRM
  2. Invoicing
  3. Scheduling
  4. Secret Ingredient
  5. Supplement to Secret Ingredient

The final (top-tier) package ($300 a month) could look like this:

  1. Basic CRM
  2. Invoicing
  3. Scheduling
  4. Secret Ingredient
  5. Supplement to Secret Ingredient
  6. Feature +
  7. Feature ++

Thinking about pricing in this manner helps me focus on something that will meet my goals faster by focusing on a pricing structure that will get me there quickly.

Entrepreneurs struggle with pricing their products and services. Let's face it, pricing is hard.

A mistake I made with my previous SaaS business was charging per seat. This sounded good at the time, but ultimately generated less cash per month than the business should have.

The problem with charging per seat, is companies and people will use the same login credentials to access your software. That's not a huge deal... but when your software relies heavily on word-of-mouth referrals, you want as many users as possible touching the software.

Also, my first SaaS company only had a total addressable market (TAM) of around 1,000 companies. Because of this, we had to price our base package very high.

However, with Arcus, the TAM for services businesses is in the hundreds of thousands. So, the pricing strategy is considerably different.

So, I hope this post helps you determine pricing better.

Take all these factors into account. And, just because your TAM is small: < 1,000 prospects... don't let that deter you from creating something that people want, and will pay for. I promise, even with a small market, you can still make a shitload of $$.