Slack is Rewriting the Rulebook on SaaS Pricing: Here’s How

2839a4f by

Slack has won a lot of attention over the past few months, mostly for its high valuation and rapid growth, but there is much more to the Slack story than this.

Slack is solving the internal communication problem through an elegant use of channels, search, tags and document sharing. But it is doing more than this. It is also rewriting the rules on pricing in a way that will impact everyone who has a subscription revenue model.

How so?

We use Slack at TeamFit for a variety of things and are planning to integrate, so we have had a paid subscription for quite a while. I administer the account. So I was delighted to get this e-mail from Slack.

Slack credit

Now, like most people, I have had trouble with companies that make it hard to change a subscription (‘a commitment is a commitment’ they tell me). So I was surprised and delighted to be working with a company that automatically gave me a credit for reduced use. It makes me more loyal to Slack, and more willing to commit to higher levels of subscription, as I trust they will be flexible and act in my best interests.

Is this an aberration? Something that other SaaS companies can ignore? Is it an end state? Or could it be a transition to something else? I believe it is the latter.

Evolution of Software Pricing Models

evolution of software pricing

(Note: These are representative companies — of course Oracle now has many offers based on subscription models.)

Once upon a time people sold software by perpetual license and installed it on the customer’s hardware. This was great. The seller got a big lump of money upfront and the buyer got to capitalize the cost. The problem was that the seller had little insight into how much the software was being used. And this led to the transition to subscription models, which, combined with hosting software in the cloud, is now the new normal.

Today, leading SaaS companies are subscription-based, and companies like Zuora are building substantial businesses around the ‘subscription economy.’ Subscriptions are popular because they provide both predictability and a way to commit in well-defined increments. I can commit for a month or a year, and I am generally offered levels of subscription to choose from. As a buyer, I like this as subscriptions give me cost predictability. Most companies have budgets that they use to pay for subscriptions and budgets require predictability.

The vendors also like predictability, and so do their investors. The standard list of SaaS metrics, including MRR (Monthly Recurring Revenue) and LTV (Lifetime Value of a Customer) are measures of predictability. In an uncertain world we all want a little more certainty, and subscriptions give us this.

Adaptive Pricing or Bust: Slack’s Formula for Disruption

Hosted subscription models contain the seeds of their own disruption. Good SaaS companies generally have a well-developed API strategy and integrate with many other services. There is now a lot more data available to make two critical calculations:

  1. How much value does this service provide the customer?
  2. How predictable is usage?

If we know these two things we can change our pricing models.

*The Risk Discount

Willingness to pay goes down when a buyer is unsure of how much their company will will use an application or how much value they will get. Vendors try to address this through free trials and proofs of concept, and examples from other similar companies, but there is usually lingering doubt, especially among early adopters and early main-street markets.

When willingness to pay is low the vendors pricing power is low, and they address it through lower prices or discounts. This is why early-stage companies can often only charge for a very small part of the value they create for their customers.

If we know how much value we are providing we can develop a pricing model that tracks the value to the customer. This removes risk for both parties and will lead to higher profits (you may not know it, but your current subscription price has a ‘risk discount’ built in*).

And if we can predict use we can predict a) revenue (for the vendor); and b) cost (for the buyer). This predictability is needed for widespread adoption of value-based pricing.

I have been told that Slack has very good analytics to predict future use and that it uses these to adapt its pricing to optimize revenue and renewals. Is your SaaS company doing this? If not, you better get started. Because adaptive pricing models like Slack combine the best of predictability and adaptability. And I now expect all SaaS companies to offer me a credit for reduced use. (Thank you Slack.)

As a growth company, what do you need to do to prepare for and make sure you’re on the right side of this transition?

  • Start giving users credits for lower levels of use (your users are going to demand this anyway, so get ahead of the game)
  • Develop models for how you create economic value for your users, then see if your software can actually track them (and look for the integrations that help)
  • Invest in predictive analytics to predict future use and future value to your customers
  • Find a pricing metric that tracks your value metric (see my previous post “How to Disrupt Your Market with an Innovative Pricing Model”)
  • Test your business model to see what adaptive pricing will do to your cashflow

The shift from perpetual licenses to subscriptions put a lot of pressure on incumbents and opened a huge space of opportunity for innovators. The shift to adaptive pricing and then to value-based pricing will do the same. Companies wedded to conventional subscription models will end up as roadkill.

More Pricing Tips from Steven Forth

New Call-to-action
  • Steven thanks for great post. I was convinced that other saas vendors give credits for reduced usage, but your article shed some different light on it. We at Repignite use SaaS billing system that manage this automatically and it should be golden standard for every in this market

  • Great read & insight this weekend:)


    • Cazoomi looks like an interesting company. I like the pricing metric of Synch Profiles and the way you have your premium offer on the left of the page.

      • Thanks Steven and learned that from Xfinity over the years too:)


  • Ken Pearson

    Mothernode CRM does this too.

  • I like the premise of this article but find the example a bit flawed. You could just as easily have summarized the example that you overpaid initially and they were kind enough to automatically refund you some of that overpayment later.

    Would have been better if they just billed you what you owed them for usage at the end of that period rather than making you guess up front how much you might use. Their billing practice doesn’t really seem all that revolutionary to me.

    • Exactly Tom and do like this weekend read however here.

      I just wish Xfinity would use this strategy for usage as usage based billing is not new and all Slack seems to be doing here is over billing folks, using your money to build out their monthly biz plan then making it look like they are giving you something back in return as well after they use your money. Why not just track it with Zuora like software.

      “And I now expect all SaaS companies to offer me a credit for reduced use. (Thank you Slack.)”


    • What you suggest would not give either party the predictability they are looking for. Both buyers and sellers often value predictability over getting the best overall price. Note that Slack did not offer a refund but a credit. They also get the money upfront, which is important for SaaS companies as they tend to have much tighter cashflows than companies that give perpetual licenses. What you are proposing would delay cashflow and make things less predictable.

  • It’s a smart strategy – offering this kind of adaptive pricing helps to increase trust in the relationship with Slack, and trust is essential to ongoing customer loyalty. What Slack gives up in shot-term revenue it will probably make back in spades in retention, loyalty, and expansion.

  • Sue Lingard

    Totally agree with you that with subscription-based systems there is a growing momentum towards fairer and more transparent pricing models. However, it seems nonsensical that Slack takes your money first, then “award” you a credit – rather than just invoice you for what you actually used. This is the approach we’ve been using since 2012 with our global Cloud HR – Cezanne HR. There was some initial concern about predictability – but since the fee is based on actual managed employees (plus models taken) it varies in line with headcount – so is perfectly manageable.

    • Sue, would you be willing to charge based on actual usage and not on the number of registered users? That would be closer to the Slack model. You would only charge for the users that showed a certain level of activity during the billing period.

  • This is a great example and validates how we do our billing. We don’t email the client of the change until the end of the month, but I like the idea of emailing every time a change is made to the account.

  • Selver Maric

    Where can I learn more about Value-based pricing strategy for SaaS ? Becouse I am in love with this kind of pricing but I can t find relevant sources to learn more.

  • Peter Heinicke

    Deep insight into the how the software is used being tied to pricing. This makes sales into a science instead of lying, guessing, predicting, and fearmongering. This would be case where the good drives out the ugly and the bad.

    • We can hope so. It is another part of the move to transparency. Transparency about pricing. Transparency about value. And in the long-run that helps buyers and sellers to all make better decisions.

  • Well written, Steven.

    And regardless of how innovative their pricing model is, I totally respect Slack for implementing the change and getting out in front of the pack.

    We’re not Slack users yet at my company, but this is one more good reason to commit to the platform.

  • Excellent article, @Steven Forth:disqus This highlights even more the growing number of opportunities that Slack has today on their hands. That’s why I put them inside the strategic partnership between Apple and Cisco, because the first one wants to revamp its Enterprise Mobility offerings (and Slack could be a great vehicle to do it) and the second one wants to change how people communicate at work, so Slack could be a great fit for it. Here’s the article:

  • Phoenix.UK

    Hi Steven – What’s your thoughts on many products when bought in bulk, the buyer expects a discount that grows with the quantity purchases.

    However, with say managed cyber security services; where any given clients mitigation services may need to be escalated to analysts for e.g. which = more human personnel costs.

    So if one sells managed services to a client with say a couple of endpoints, the risk of an analyst being needed is a risk for sure but still quite reduced.

    Then compare to selling the same service(s) into a client with for e.g. 90 endpoints and naturally this scenario largely increases the risk of an analyst needing to be called in to remediate and deal with what the system can’t at that point.

    So in a traditional sector of business, falling end user cost can be reduced on a sliding scale but how do managed cyber security services providers deal with this, when the more devices that their services deal with for any one client =’s a larger probability of human intervention being required and thus surely this actually puts the cost up, not bringing it down like most would initially believe is their right?

    Any views you can share on the above kind of scenario’s would be much appreciated.

    Thanks in advance.