Pricing your SaaS on the demand curve using the Pareto power law
Episode 46
Hello friends, welcome to Episode 46 of Good Buy. Today, I’m going to share a short 250-word essay on pricing your SaaS using the Pareto distribution.
Let’s dive in.
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Friends,
One of the most important economic concepts is the demand curve. It’s a graph that shows that the demand for units decreases as the price increases. Assuming (a) buying need and (b) purchasing power is constant. Looks something like this:
According to the Pareto distribution, 80% of your revenue will come from 20% of your users.
If you have 1k users subscribing to your SaaS for $10/year, & that’s your only product, you’ll earn $10k in ARR.
But if you add a $40/yr tier, 80% (800) of your users would still only spend $10, earning you $8000.
But the remaining 20% (200) will buy that $40 package instead of $10. This generates an extra $6000. Just by creating this second package, your ARR goes up to $14,000.
This implies that 1/5th (20%) of your users will spend 4x the money (80/20) than the previous cohort.
As you can see, this small change can lead to a significant increase in your expansion MRR.
The lesson here is to create SaaS pricing tiers in multiples of 4x.
Hubspot’s pricing follows a [x, 16x, 64x] syntax while Mailchimp follows the [x, 4x, 16x] framework
As pricing multiples scale, so will the corresponding value. (eg: usage-based pricing) - After all, value is directly proportional to price.
That’s all for today. Hope you found this post useful. More tomorrow!
Cheers,
Shaunaq
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