The best strategy depends on your stage and market. Early-stage companies often start with cost-based pricing to ensure profitability. As you understand customer value better, transition to value-based pricing for higher margins. Use competitor-based pricing in crowded markets where customers actively compare options. Many successful SaaS companies blend all three approaches across different tiers.

Three tiers is the sweet spot for most SaaS businesses. This gives customers a clear choice without overwhelming them. Your Basic tier captures price-sensitive customers, Professional targets your core market, and Enterprise serves high-value accounts. Avoid more than four tiers as this creates decision paralysis and complicates your sales process.

Offer both options but incentivize annual payments with a discount, typically fifteen to twenty-five percent off. Annual billing improves cash flow, reduces churn, and lowers payment processing fees. Monthly billing lowers the barrier to entry for new customers. Display annual pricing prominently and show the savings clearly to encourage longer commitments.

Healthy SaaS companies target gross margins of seventy to eighty percent, meaning your cost to serve each customer should be twenty to thirty percent of revenue. Calculate all costs including infrastructure, support, customer acquisition amortized over lifetime, and allocated overhead. Early stage companies may accept lower margins to gain market share, but plan to improve margins as you scale and optimize operations.

Raise prices when you add significant new features, improve your product substantially, or discover you're underpriced based on customer feedback and low churn. Many SaaS companies raise prices annually by five to ten percent. Always grandfather existing customers at their current rate for at least six months to maintain goodwill. Test higher prices with new customers first before communicating changes to your base.

Customer Lifetime Value is the total revenue you expect from a customer over their entire relationship with your company. Calculate it by dividing your average monthly revenue per customer by your monthly churn rate. This metric determines how much you can afford to spend on acquisition. A healthy SaaS business has an LTV to CAC ratio of at least three to one, meaning each customer generates three times what it costs to acquire them.

As a smaller player, you typically need to price below established competitors to overcome their brand advantage and incumbent relationships. Position yourself at seventy to eighty-five percent of their pricing while emphasizing superior service, faster implementation, or specialized features. As you build credibility and customer success stories, gradually increase prices toward market rates. Never compete solely on price as this creates an unsustainable race to the bottom.

Free trials work best for products with clear time-to-value that customers can evaluate in fourteen to thirty days. Freemium works when you have viral growth potential and can convert free users at scale. Free trials typically convert better for B2B SaaS, while freemium suits consumer-focused products. Consider your sales cycle length, product complexity, and whether free users create value or just cost. Many successful SaaS companies use neither, opting instead for great demos and money-back guarantees.