Finance⏱ 5 min read
How to Calculate Pricing for a SaaS Product
SaaS pricing affects growth more than almost any other decision. Here is how to calculate value-based pricing, set tiers, model MRR, and think about price elasticity.
Most early SaaS companies underprice by 30-50%. Cost-plus pricing (what it costs to build) is almost always the wrong framework for software. Value-based pricing — anchored to what the customer gains — leads to dramatically better outcomes.
Value-Based Pricing Framework
Step 1: Quantify the value your product creates for the customer
Step 2: Capture a fraction of that value (10-30% is typical)
Step 3: Compare to alternatives (competitors, manual process)
Example: project management SaaS that saves 2 hours/week per employee
Customer: 10-person team, average salary £40,000/year
Hourly cost (loaded): £40,000 / 2,080 hours = £19.23/hour
Weekly savings: 10 employees x 2 hours x £19.23 = £384.60/week
Annual value: £384.60 x 52 = £20,000/year
Capture 15% of value: £20,000 x 15% = £3,000/year = £250/month
Price anchor: £250/month for 10 seats = £25/seat/month
Pricing Tier Construction
Three-tier structure (industry standard):
Starter | Growth | Pro/Enterprise
Psychological pricing rules:
Middle tier should capture 60-70% of conversions
Top tier should feel like a deal vs middle for power users
Anchor pricing: list a high price then offer discount
Example (project management SaaS):
Starter: £15/month (5 users, basic features) -- entry point
Growth: £49/month (20 users, + integrations, analytics) -- primary tier
Pro: £149/month (unlimited users, + API, priority support) -- power users
Price ratio between tiers:
Growth/Starter: £49/£15 = 3.3x -- reasonable
Pro/Growth: £149/£49 = 3.0x -- reasonable
Avoid: pricing tiers closer than 2x or further than 5x apart
MRR and ARR Modelling
MRR (Monthly Recurring Revenue) = Sum of all active subscriptions per month
Example after 6 months:
Starter customers: 200 x £15 = £3,000 MRR
Growth customers: 80 x £49 = £3,920 MRR
Pro customers: 15 x £149 = £2,235 MRR
Total MRR: £9,155
ARR (Annual Recurring Revenue) = MRR x 12 = £109,860
MRR growth rate: (New MRR - Churned MRR) / Start MRR x 100
If 5% monthly churn and 15% new MRR growth:
Net MRR growth = 15% - 5% = 10% per month
MRR doubles every 7.2 months (rule of 72: 72/10 = 7.2)
Churn Economics
Customer Lifetime Value (LTV) = ARPU / Monthly Churn Rate
ARPU = Average Revenue Per User per month
At £49 ARPU and 3% monthly churn:
LTV = £49 / 0.03 = £1,633
At 5% monthly churn:
LTV = £49 / 0.05 = £980
SaaS benchmark: LTV:CAC ratio should exceed 3:1
If Customer Acquisition Cost (CAC) = £400:
LTV/CAC at 3% churn: £1,633 / £400 = 4.1x (healthy)
LTV/CAC at 5% churn: £980 / £400 = 2.45x (below benchmark -- churn is destroying value)