Pricing your SaaS using the Pareto power law

I want to add: but don't offer too many pricing plans or users will get lost :)
Many options are bad as none.

The 4x doesn't seem inherent in the concept. Maybe 20% will pay more, but how much more relies on more than an exponent, no? Or am I missing something?

4 is a bit too much. The decoy pricing is proven or a simpler annual/monthly with a premium on monthly. Example of Decoy Pricing

I quickly checked Hubspot, and indeed, they follow the x4 pattern (at least for business clients).

I believe the rule might be applied for big SaaS (aforementioned Hubspot / MailChimp), however, I am not sure it translates 1:1 to indie hackers.

It's strongly related to the product/offer. Sometimes it's really hard to offer sufficient value to justify the significantly increased price, especially at the beginning of the hacker journey.

I agree that it's possible to neglect your top paying customers. However, I think it's even more common to overlook another kind of customer.

While Darko makes valuable points, he misses something important. Most demand curves are not truly Pareto distributed, although they are often highly skewed. This might seem like a nit-picky point to make, but it has concrete implications for your pricing strategy. That's because most demand curves have fat tails. In other words, they don't obey the 80/20 principle because a substantial amount of the distribution is located at the lowest prices. As a result, it often also makes sense to try to capture your fat tail by capping free users' usage per month and then offering a base tier that costs as little as $1 per month or a few cents per API call.

True Pareto distributions, which are thin tailed, are quite rare, even in finance, much less SaaS. Most businesses are unlikely to capture 80% of their revenue from their top paying 20% because their distribution is likely to have a fat tail. That's why it pays to attend to your top users, your middle users and your fat tail. They all matter.

In my view, the big mistake people make is that they tend to make pricing tiers linear when they should experiment with pricing tiers that are closer to a logarithmic scale, as Darko rightly points out at the end of his post. However, I would slightly revise his lesson. Consider following a pricing strategy such as [0.1x, 1x, 10x]. You should conceptualize your mid-tier offering as your base price and work on strategies to provide both deep discounts and extravagant services relative to your "middle class" user.

I ran a studio rental business for years and we really took off when we started experimenting with very cheap and very expensive offerings, while retaining solid mid-tier prices for normal customers.

Saw this posted on Hacker News the other day, It's an interesting point of view but is really high level and overlooks a lot of nuance of buyer behaviour and the other Ps of marketing.

What is the calculation for coming up with that 60%?

The demand curve shows that as prices rise, demand typically falls.
The Pareto distribution suggests that 80% of revenue often comes from 20% of users.
By introducing pricing tiers in multiples of four, you can tap into this principle and potentially increase revenue significantly. Hubspot and Mailchimp use similar pricing strategies, where higher tiers yield higher value and revenue.

What do you think a productized service should do?
Follow what works for SaaS or do their own experiments?

Definitively gonna try it for my saas

Very interesting. Thanks for the insights. However, it would amaze me if the lesson ("create SaaS pricing tiers in multiples of 4") worked in some scenarios.
Anyways, this is definitely worth diving into to learn more. Thanks!

Segment customers based on value.
Create tiered pricing with premium options.
Use dynamic pricing when possible.
Focus on retaining high-value customers.
Analyze data for insights.
Educate customers about premium features.
Regularly review and adjust your pricing strategy to align with customer needs and market trends.

The math for this kind of what-if can get complicated if you want to do some ranges to see how it may work out. I'm a huge fan of causal.app for doing such calculations, rather than spreadsheets.

see my example http://tiny.cc/tgTAM1

This guy prices

It seems quite difficult to 4x the value at every tier, especially for smaller product

Segmentation: Identify the top 20% of your customers who generate 80% of your revenue. Tailor pricing tiers and features to cater to their specific needs and willingness to pay.

Tiered Pricing: Create pricing tiers that align with the varying demands of your customer segments. Offer premium features for the top 20%, while providing cost-effective options for the rest.

Pricing Optimization: Continuously analyze data to refine pricing structures. Focus on the critical 20% of features that drive most of your revenue and invest in their enhancement.

Personalization: Implement personalized pricing strategies based on customer behavior and usage patterns. This can maximize revenue from the most valuable customers.

Value Communication: Clearly communicate the value proposition of each pricing tier to customers, emphasizing how it addresses their specific needs. This ensures customers perceive value in their chosen plan.

This got debunked heavily on Hacker News.

Damn thanks for sharing man! Glad you liked it!

This is a pretty interesting idea I came across so thought I'd write a little something on this :)

Pricing a SaaS (Software as a Service) using the Pareto Power Law involves leveraging the principle of the 80/20 rule, also known as the Pareto Principle. The Pareto Principle states that roughly 80% of the effects come from 20% of the causes. Applied to SaaS pricing, this means that a significant portion of your revenue will come from a relatively small percentage of your customers who derive the most value from your service.

Here's how you can approach pricing your SaaS using the Pareto Power Law:

Segmentation: Start by segmenting your customer base into different groups based on their usage, needs, and willingness to pay. The key is to identify the top 20% of your customers who are likely to generate 80% of your revenue.

Value Analysis: Identify the features and benefits that provide the most value to this top 20% of customers. These are the features that solve their critical pain points, offer substantial benefits, and drive the most engagement.

Tiered Pricing: Create tiered pricing plans that align with the different levels of value your SaaS provides. Instead of offering a one-size-fits-all pricing model, tailor your plans to cater to the specific needs and value expectations of different customer segments.

Basic Tier: This tier could offer essential features at a relatively low cost, targeting customers who have basic requirements.
Intermediate Tiers: These tiers can provide a mix of features, including some of the high-value features that the top 20% of customers find most beneficial. Price these tiers higher to capture the willingness to pay of customers who need more advanced capabilities.
Premium Tier: The top-tier plan should be designed to cater to the needs of the high-value customers. It should include all the essential and high-value features, along with exclusive services, priority support, and customization options.
Value-Based Pricing: Assign different prices to each tier based on the value they offer. The goal is to capture a larger share of the value that your customers gain from using your service. High-value tiers should have correspondingly higher prices.

Dynamic Pricing: Implement dynamic pricing strategies that allow you to adjust prices based on factors like customer usage, demand fluctuations, and market conditions. This ensures that you are consistently capturing the maximum value from your customer base.

Regular Review and Iteration: Continuously analyze customer behavior, usage patterns, feedback, and the distribution of revenue among different tiers. Regularly adjust your pricing strategy to optimize for the Pareto Principle and ensure that you're effectively catering to the top 20% of customers who contribute the most to your revenue.

Remember that pricing is not a one-time decision. It's an ongoing process that requires monitoring, experimentation, and adaptation to changes in your customer base and the market. By applying the Pareto Power Law to your SaaS pricing strategy, you can focus on maximizing revenue from your most valuable customers while providing tailored offerings to various segments of your user base.
regards : <a href="https://malloftoys.com/collections/new-release-beyblade-x"> beyblade x</a>

Super interesting insight! I'm thinking I'm going to offer my product for free to start until I have a user base that I can then utilize to acquire revenue in other ways. Once this is done, then I will introduce a small yearly fee. I want proof of value first.

Wow. Such a great project.

Pricing should always from what people like value your product to be. That is the core of supply and demand. Nothing else.

If people perceive an egg to be 100$ then it will be 100$ doesnt matter the cost.

If 10 people using your saas is willing to pay more for better or more tuned to their favor why not.

Its always better to focus your product to those who value your product higher else you product will stuck at the same place and your revenue will be stagnant.

If you want to learn about value based pricing checkout this article : Pricing your product, value based pricing

For SaaS pricing another model might work.
Product has a set of features for each tier. Giving market conditions users are willing to pay X for that set. This X variable is likely to be normally distributed around some mean value. Goal is to determine the optimal mean for this supply/demand combination.
*If you are selling two different models of shoes it doesn't mean one has to be N times more expensive than the other, right?

should we consider values addition while also pricing, should pricing be directly tied to value being offered or just how much the problem is worth to the customers

Pricing your SaaS product using the Pareto power law is a strategic approach that can yield remarkable results. By focusing on the critical 20% of features or customers that drive 80% of your revenue, you not only streamline your pricing model but also enhance customer satisfaction. This approach aligns pricing with value, ensuring that both you and your customers benefit. It's a valuable strategy for SaaS businesses looking to optimize their pricing strategies and create win-win scenarios. Have you tried implementing this approach, and if so, what kind of outcomes have you seen?