Pricing & Packaging and the developer buyer — 4 insights from SaaS IPOs

In the three years spanning 2018–2020, at least thirty-nine¹ SaaS companies filed for IPO. They form a healthy dataset to create benchmarks for startups that are early on their journey.

I use the average contract value (“ACV”) as the framework for extracting insights from this dataset. The ACV cohorts I use are:

  1. X-small: ACV < $10k, e.g. Dropbox, Slack, and Zoom. 13 companies
  2. Small: $10k <= ACV < $50k, e.g. Datadog, PagerDuty, and ZoomInfo. 12 companies.
  3. Medium: $50k <= ACV < $100k, e.g. Fastly, Sumo Logic, and ZScaler. 6 companies.
  4. Large: $100k <= ACV < $1m, e.g. Anaplan, Medallia, and Snowflake. 8 companies.

This framework is valuable because the benchmark set by Slack (x-small ACV) will not be relevant to a startup with large ACV.

In this post, I survey how these companies package and price their products. The key highlights are:

  1. Insight #1: x-small ACV companies have visible pricing; the rest tend to be opaque. Companies that sell to developers all have visible pricing irrespective of ACV.
  2. Insight #2: A quarter of companies offer a free version of their product so customers can “try before they buy”. On the opposite end, a quarter insists on a sales demo as the only way to experience the product. The rest offer a trial as the offer of least friction. Where you fall on that spectrum depends on the ACV and buyer profile.
  3. Insight #3: Trials are typically 30 days long, do not require a credit card, and are fulfilled immediately.
  4. Insight #4: x-small ACV companies offer monthly billing. Annual billing is offered at an average 20% discount to monthly billing. 90% of companies selling to developers offer monthly billing.

Previous Discussions:

  1. Benchmarks for Key SaaS metrics from SaaS IPOs of 2018–2020

A caveat before I unpack each insight: every one of these companies has a large brand in their category. Many buyers have used their product at prior companies. I assume these companies are under less pressure to be transparent about pricing and packaging compared to the average startup. So, for the average startup, I recommend being more generous in pricing visibility and packaging than the benchmarks uncovered in this survey.

Insight #1: Pricing Visibility

Price visibility spans a spectrum. On one end is total transparency where companies show the price per unit (e.g. per seat price) for at least one package. On the other end is the practice of showing a “starting price”. I consider any numerical guidance on pricing an example of pricing visibility.

X-small companies predominantly show a price. This is because they have to remove all friction from the buying process to efficiently sell at their price point. The biggest friction is simply, “how much is this gonna cost me?”.

Even if we remove x-small ACV companies, 38% of companies give customers pricing visibility on their websites.

Percentage of companies with visible pricing

The lesson here is that a sizable chunk of companies, and likely your competitor, offer pricing visibility. So, before you decide to slap a “talk to sales” banner on your website, think about your buyers’ needs.

A great example of this is companies selling to developers. There are ten companies in this data set that broadly sell to developers: Pluralsight, Elastic, Cloudflare, PagerDuty, DataDog, Fastly, Dynatrace, JFrog, SumoLogic, and Agora. Every one of them offers pricing visibility. 100%. This is because they understand that a developer buyer mistrusts sales and abhors lack of transparency.

In summary, listen to your buyer and bend toward visibility.

Insight #2: The least friction offer

There are three packaging archetypes: free, trial, and sales demo. Companies can offer a menu of packages from these archetypes. Free gives the least friction to the buyer, followed by trial and sales demo. When a company offers packages from multiple archetypes, the “least friction offer” is the archetype with the least friction. For instance, if a company offers a trial and sales demo, the trial is the “least friction offer”.

This figure shows how the “least friction offer” changes with ACV:

Distribution of the least friction offer
Distribution of the least friction offer

Across the board, companies prefer trials over free or sales demo. There’s a 25–50–25 distribution between free-trial-salesdemo, irrespective of ACV. In other words, a quarter of companies choose to only offer a sales demo!

Why is that? First, I observe that this approach is popular in medium to large ACV companies. This is because they sell complex products involving significant process change to an executive. They want to understand the needs of the decision-maker to customize the demo and sales engagement. Hence, a significant number of such companies do not offer trials or free.

Looking again only at companies selling to developers, none of them offer a sales demo as the “least friction offer’, irrespective of ACV. They all offer either a free or trial version of their product, in addition to a sales demo. This again speaks to the buying habits of developers. As a rule, they prefer not to talk to sales, at least not in the beginning. They want to self-evaluate and not let the “purity” of their decision be influenced by the sales team of a vendor. If you’re building a company selling to developers, offer trials or free in addition to sales demo.

Insight #3: Trial duration, fulfillment, and credit card requirements

The median trial duration is 30 days. Since no company in this data set offers a trial longer than 30 days, this is a safe option for the rest of us.

Moving to a pet peeve of mine, nearly 80% of companies fulfill a trial request online. In other words, you fill out a form, they send you a verification email, which lets you enter the trial — all without talking to a sales rep. 20% of companies that offer trials insert a sales rep in this flow. I hate this. Buyers hate this. Don’t be like these companies. If you must insert a sales rep, drop the pretense of offering a trial.

Finally, nearly 90% of companies that offer a trial do not require a credit card to start the trial. The ones that require a credit card are usually in the x-small ACV cohort trying to encourage trial conversion to paid.

Insight #4: Monthly billing

Practically all companies in this data set offer annual billing. However, 46% also offer monthly billing. This is a sizable number, driven primarily by x-small and small ACV companies:

I was surprised by both extremes of this distribution: I expected every x-small ACV company to offer monthly billing and few medium to large ACV companies to offer monthly billing.

One explanation for monthly billing showing up in larger ACVs is that it is driven by companies selling to developers, as you can see here:

The unique nature of the developer buyer shows up in this data point as well.

Monthly billing is convenient for the customer, but it is complicated for a startup to manage. At large ACVs, monthly billing is not worth the trouble, as the product’s complexity is high enough that adopting it on a month to month basis is neither feasible for the customer nor for the vendor.

When monthly billing is offered, the annual billing price is on average a 20% discount off of monthly billing.

Summary

The goal of x-small ACV companies is to reduce buying friction: hence, they focus on being transparent in pricing, offering free or trial versions of their products, and offer easy pay-as-you-go monthly billing options.

On the other hand, small, medium, and large ACV companies tend to behave similarly. On average 38% of them offer price visibility. They rely mostly on trials or sales demos and tend not to offer monthly billing.

My biggest learning is that the developer buyer is a force of nature. Irrespective of ACV, she expects pricing visibility, not having to talk to sales in evaluation, and pay-as-you-go monthly billing. Even if you are not selling to developers, if they are a key stakeholder in your selling motion, it is best to listen to them.

And finally, a shout out to Tyler Jewell of Dell Capital. I copied the introductory template of this article from his writing. Imitation is the best form of flattery!

Footnotes

  1. ADIN, AVLR, CBLK, DBX, DOCU, DOMO, ESTC, PLAN, PS, SMAR, SVMK, TENB, XM, ZS, ZUO went public in 2018. BILL, CRWD, DDOG, DT, FSLY, MDLA, NET, PD, PING, SPT, WORK, ZM in 2019. API, ASAN, BIGC, BSY, FROG, JAMF, MSP, NCNO, SNOW, SUMO, VERX, ZI in 2020.

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