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Open Core Ventures Handbook/đź’˛Pricing

Pricing

For early-stage companies, there’s no need to institute strict sales/pricing rules. Experiment with different deal structures & pricing units to see what works for your customers to drive sales.

Default to price-based costing

Don’t try and reinvent the pricing wheel. Default to using the price-based costing method, which looks at what competitors or substitutes would charge to provide a similar product/service to get a sense of willingness to pay. Base your pricing on existing incumbents and those who are defining the market at this time.
Pricing has a negative correlation with demand. When the price goes up, the number of customers willing to pay that price will go down. In general, pricing alone should be the primary reason 20% of people are not willing to buy the product.

Consumption-based pricing

The consumption-based pricing model is a service provision and payment scheme where the customer pays according to the resources used. The provider needs to track customer usage and bill accordingly. Consumption-based billing is best for businesses that can easily break down their offerings into small, variable units.
Advantages
Drawbacks
Fair to the customer (paying for actual usage)
Difficult to predict revenue (can’t price annually)
Align operating costs with customer usage rates (e.g. cloud storage)
Receive payment in arrears as opposed to in advance

Hosting fees

Use hosting fees to control high hosting costs. When the cost of hosting is high, consider a hosting fee for small customers and a minimum size for hosting costs to be waived.
Two hosting examples:
  1. Use Cloud to explain its “You pay the bill:” Posthog, Consul, Jira
  1. Unless they sell an API, not an interface: MongoDB, Elastic, Redis

Margin and markup

SaaS companies should typically target an 80-90% margin with a target of 15% or less of costs spent on infrastructure and a target of 5% or less of costs spent on support.
Calculating margin and markup
Margin = (Revenue - Costs)/Revenue = 1 - Costs/Revenue
Markup = (Revenue - Costs)/Costs = Revenue/Costs -1
Markup = Margin*Revenue/Costs = (1/(1 - Margin)) - 1
Markup = (1/(1 - 80%)) - 1 = (1/20%) - 1 = 500% - 1 = 400%

Pricing tiers

Keep your pricing tiers simple by limiting them to 3 tiers. It’s OK if you need to go up to four tiers, but don’t add more than that.
  1. Free: Typically, a SaaS product that includes all the same functionality as the open source software and includes limited access to proprietary features and functionality. The open source version may be the “free tier” for self-hosted products, but no limits should be imposed. Upgrades to paid plans will be driven primarily by features.
  1. Premium: Includes everything in the free tier and introduces paid features. Premium tiers typically include some base-level support.
  1. Enterprise: The highest-paid tier that includes everything from free and premium, plus enterprise-specific paid features and support. Enterpriseready.io is a great resource to find paid features to build first.
Tier
Free (Good)
Premium (Better)
Enterprise (Best)
Potential Buyer
Individual Contributor
Manager/Director
Executive
Price
Free ($0)
$$ (e.g. $9)
$$$$ (e.g. $99)
Billing
ă…¤
per user/mo billed annually
per user/mo, billed annually

Free tier limitations

The free tier drives upgrades to a paid version by imposing limitations, usually in the form of compute consumption, storage, a number of something (searches, projects, users), or some combination of those things. Avoid free forever plans. The intention of providing a free tier is to let people try out the product.
Design the free tier to start as a 30-day free trial of the premium offering and then revert to basic features. If hosting costs are significant, offering a free SaaS tier is not recommended. Provide a generous trial period that doesn’t require credit card information instead. Trials should always require a user account.
A well-designed trial period can help users understand the value of the product and encourage them to upgrade to paid plans.

Open source versus free tier

The open source project and the free version of your software are typically not the same thing. The open source project should always remain open source and be available to download, use, and modify via the repo it’s stored in. There are no restrictions, limits, or constraints on the open source version, but it’s not usually available as a hosted SaaS product. It’s important to maintain a good, usable version of the open source project and contribute back to the open source community.
The “free tier” is typically a hosted SaaS product that includes all the same functionality as the open source software and includes some access to proprietary features and functionality. The goal of the free tier is to drive people to upgrade to paid versions. A free tier comes with limitations, usually in the form of consumption, number of users, storage, or some combination of those things. Limitations within the free tier should focus on quickly driving users to the paid tiers to reduce friction. We recommend providing a limited trial of premium features in the free tier upon sign-up.
The open source versions and free SaaS versions don’t need to match.

Pricing page template

Your pricing page is likely the most visited page on your site after your homepage. This is not the place to innovate; follow the established conventions outlined below.
Simple page format example
Simple page format example
  1. Skip useless headers. Empty headers like “Simple, transparent pricing” or “Choose a plan that’s right for you” are just a distraction.
  1. Offer 2-4 pricing tiers and display them horizontally and above the fold.
    1. Give each tier its own box and button.
    2. Call the free plan “Free” and show the price ($0). Don’t call it open source.
    3. Use incremental feature lists and don’t repeat features across tiers.
    4. Include usage limits and minimum thresholds in the features list.
    5. Use “planned” instead of “coming soon” when noting upcoming features.
    6. Use “SaaS” to describe hosted services and use “Cloud” to describe managed services.
    7. Give each tier its own CTA button.
    8. Make the most desired tier the primary call to action.
  1. Show the monthly price but only offer annual billing. Eliminating monthly subscription options simplifies your billing cycle, gives you more cash up front, and helps prevent churn.
  1. Display the enterprise price. Including the price helps users self-select into the right category. If the listed enterprise is too much, it’s probably not the right category and acts as a gatekeeper for unqualified enterprise leads.
  1. Use font size and color to show information hierarchy. Offering too many choices, toggles, and buttons adds friction, making it harder for people to make a choice. Don’t use small print and asterisks.
  1. Use CTA language that users understand, and make sure the action matches the language.
    1. “Sign up” leads to a sign-in page.
    2. “Contact us” leads to a form. Don’t use direct email links. Require a company email address and company name as a minimum.
    3. “Schedule demo” leads to an event scheduler.

Handling multiple deployment options

  1. Present one choice at a time. Help customers select a tier, then present deployment options during the signup and onboarding workflow. If deployment options vary by plan, display as a list item within each tier.
  1. Default to showing SaaS pricing. If someone wants to self-host, they'll contact you. Put a line at the bottom: "Need to self-host? Contact us about Enterprise."
  1. Avoid:
      • Toggles for SaaS vs. Self-hosted vs. Desktop
      • Icons trying to show which tier supports which deployment
      • Separate pricing tracks for different deployments.

Comparison tables

It’s duplicative and unnecessary to add an additional table comparing features across your tiers. Create tier-specific landing pages if you need to provide more information about each plan.
Competitive feature comparison tables, however, can add value when they are concise and visually appealing.
  1. Call out your top value-add against your competitors in the header.
  1. Organize rows to show decreasing feature parity. Common features go at the top.
  1. Organize columns from most similar to least. Your product occupies the first column.
Competitive feature comparison table showing decreasing feature parity and a value-focused header.
Competitive feature comparison table showing decreasing feature parity and a value-focused header.

Cost calculators

Pricing calculators can be helpful when they demonstrate value or savings, such as showing cost comparisons against current solutions, ROI from time saved, or money saved versus competitors because they help justify the purchase decision.
Calculators that simply compute usage-based costs (like "enter your token count to see what you'll pay") tend to add complexity without benefit, as customers struggle to estimate their usage and the calculation distracts from clear decision-making. If customers need a calculator just to understand what they'll be charged, your pricing structure is probably too complex and should be simplified first.

Only offer annual billing subscription terms

Simplify pricing plans by only offering an annual subscription. It makes it easier to instrument and finance your company when all customers are on the same plan, versus segmenting by monthly and annual subscriptions. Companies can offer flexible payment terms and a money-back guarantee if customers have reservations about annual commitments.
Benefits of annual subscriptions
  1. Reduce customer churn
  1. Provide cash upfront, which is an effective non-dilutive way to fund the company (cash impact between monthly and annual contracts is substantial).
The recurring revenue metric of annual recurring revenue (ARR) versus monthly recurring revenue (MRR) differs based on the yearly or monthly billing subscription renewal period. Upfront billing ensures 12x recurring revenue when customers are billed yearly. Reporting metrics when a company has both annual and monthly customers is duplicated if both options are available to customers.
There is a risk of losing some business upfront in only billing yearly, but those customers are more likely to churn regardless. Often companies start with monthly billing and switch later to annual billing as they mature, but it is better to start with annual billing early on.

Service level agreements

Use a standard service level agreement (SLA) for all customers. Don’t make it up based on what your customer asked for. Custom SLAs can quickly become unmanageable.

TOS/Stripe Click-Through and subscription agreements

If you’re starting with a low price point and offering self-serve onboarding (e.g., freemium models), it's best to use TOS/Stripe Click-Through for simple recurring payments. This approach minimizes user friction and streamlines transactions.
Subscription models and metered billing, on the other hand, are more complex and require more planning and thought, which can delay your launch. Unless you anticipate a significant volume of self-serve paid customers at launch (which is rare), it’s recommended to start with clearly defined pricing and terms of service (TOS). As customers cross payment thresholds, you can track this in your logs and manually invoice them. Once this process becomes unscalable, you can then automate and integrate billing solutions.

Discount programs

As your company grows to over 100 people and you can handle more complexity, you can consider discounted programs.
  1. Education: Free version without user limitations or paid offerings at a discounted price
  1. Non-profit: Discounted per-user price for paid offerings
  1. Startup: 50-75% discount for startups that meet specific criteria. For example, a seed-stage startup with less than $X in funding and less than $X in revenue.
Discounting may also happen outside of a specific program on a case-by-case basis. Companies don’t lose their ability to discount by having a list price.