Is it a good idea to drop prices to improve retention and MRR?

Setting prices for your Saas product can be very difficult.

Bootstrapped Saas founders are so bad at it that Patrick McKenzie made a name for himself by offering the simple advice

“Charge More”

But as Nathan Barry pointed out, it might be better to make your product’s price a no brainer to renew. It’ll also gain you more referrals and a higher conversion rate.

“Don’t Charge Too Much”

Maybe.

It depends.

I’ve written before that for most Saas companies, there is an upper limit on MRR determined by new monthly revenue and churn rate.

While it’s tempting to set prices that will maximize that number, there’s another aspect to consider: time.

It might take months (or years!) for the lower price to earn more revenue than the higher price, even though it’s better in the long term.

So the best option is to try out some scenarios and see what works best for you and your business.

Here’s a calculator that will let you do that:

Some interesting scenarios

I played around with the calculator and ran some scenarios that had interesting results.

Note: Since there’s not a lot of public data, I had to guess the effect price changes would have on conversions and retention. Even if the estimates might not be predictive of what would actually happen, they can still be helpful. I recommend that you vary the assumed numbers to see how changes impact the prediction, too.

Scenario 1: Big price cut yields a big boost to retention and signup conversions

50% price cut, 50% decrease to churn, 50% increase to new signups.

Theoretically, this scenario is a no-brainer. With these improvements, max MRR comes out to be 50% higher overall over the higher price scenario.

But… it will take 17 months(!) before you see an improvement in MRR over the higher price. It takes a whopping 29 months to see a benefit to lifetime revenue.

After the first year, you lose 16% total revenue by having the lower price.

By the time MRR breaks even, total revenue is still down 10% behind the higher price.

Base SaaS model
Average revenue per user	$50
New customers per month	40
New customer growth rate	0%
Churn rate	8%
Improvements
Average revenue per user	-50%
New customers per month	+50%
New customer growth rate	0%
Churn rate	-50%

Scenario 2: Modest price cut with large improvements to churn.

20% price cut, 50% decrease to churn, 5% increase to new signups.

This scenario is also a no-brainer. Churn reduction gets an outsized boost from a relatively small price decrease.

Max MRR will end up 68% higher overall over the higher price scenario.

But again, it will still take 11 months before you see better MRR and 16 months to see more lifetime revenue.

When MRR breaks even, total revenue is still down 4.8% behind the higher price.

After the first year, you lose 3.7% total revenue by having the lower price.

Base SaaS model
Average revenue per user	$50
New customers per month	40
New customer growth rate	0%
Churn rate	8%
Improvements
Average revenue per user	-20%
New customers per month	+5%
New customer growth rate	0%
Churn rate	-50%

Scenario 3: Massive price cut that spurs referral + word of mouth spread.

80% price cut, 50% decrease to churn, 100% increase to new signups, 500% increase to referrals.

You can see from the graphs below that this is clearly a runaway success over the long term.

But it still takes 20 months to see a benefit.

When MRR breaks even, total revenue is still down 34% from the original price.

Base SaaS model
Average revenue per user	$50
New customers per month	40
New customer growth rate	1%
Churn rate	8%
Improvements
Average revenue per user	-80%
New customers per month	+100%
New customer growth rate	+500%
Churn rate	-50%

Conclusion

These 3 scenarios show that even in no-brainer pricing models over the long term, it can take a while to see the results.

As a bootstrapped SaaS founder, it’s up to you to decide whether or not you can make that work in the short term or if you should start with a higher price and “Charge More”.