Welcome to The Principles of Pricing, from Notion Capital. Our mission is to share the knowledge, tools, and operating principles which enable B2B SaaS and Cloud businesses to develop best-in-class pricing and monetisation strategies and build in house expertise.
Pricing and monetisation is a topic which in our experience many founders and entrepreneurs under-invest in. This is especially true in the modern world of B2B SaaS and Cloud, which faces its own unique monetisation challenges and has not had the time to fully develop a common set of standards, principles, frameworks and language.
We have launched this resource entirely free of charge, in order to:
Notion Capital is a venture capital firm focused on B2B SaaS and Cloud start-ups in Europe, supporting exceptional founders on their extraordinary journeys.
If you were to strip a business down to its most basic (very basic!) principles, its purpose is
To survive, a business must generate sustainable profit over time, to cover its costs and further invest in future growth and innovation. That future investment is particularly important in the fast-moving technology environment where your competitors are always going to be looking to build an advantage against you.
Profit= (Price - cost) x volume - fixed costs
A ‘traditional’ business, such as a manufacturer, will try to steer profitability directly by establishing a high degree of margin visibility over all its SKUs and thereby understanding how sales volumes might change if they were to change the price. Once a sale is made, it can simply be accounted for.
Steering profitability directly for a recurring revenue business is a lot trickier, especially in an early-stage, high-growth business, as it takes time for the unit economics to produce a profit. Customers only become profitable in a recurring revenue model if you can keep, nurture and grow them over time.
Year one profitability is not the main focus - and nor should it be. At an individual customer level, we are trying to maximise each customer’s lifetime value (CLTV): the total revenue they generate over their lifetime of using your product, minus the cost of servicing them.
This time dimension is at the heart of what makes the recurring revenue business model so unique and interesting for examining pricing and monetisation strategy.
For large, mature SaaS businesses, another challenge arises. They have lower visibility into margins by product or business line. SaaS businesses are not good at allocating the indirect costs in the business required to understand and steer product profitability, so trying to optimise profit directly is, in most cases, a non-starter.
For these reasons, we need to tweak our approach and language to be more relevant to the SaaS environment, in particular for high-growth recurring revenue businesses. If we put costs to one side, the most relevant financial metric for a SaaS business is annual recurring revenue (ARR).
Annual recurring revenue = retained customer revenue + expansion revenue + new customer revenue
A recurring revenue business, therefore, grows by getting really good at three things:
Growth isn’t the same as money in the bank. If you’ve completed a basic economics course, you’ll know that maximising revenue is not the same as maximising profit, so targeting recurring revenue won't automatically lead to the best profit outcome.
That’s why we’re not focused on driving revenue at any cost. Monetisation is ultimately concerned with efficiently translating a business’ innovations and selling motions into recurring revenue.
For a high-growth start-up or scale-up, this means leveraging monetisation strategies, processes and tactics to lower its burn multiple.
The burn multiple tells us how many dollars we need to spend in order to grow recurring revenue by $1. Monetisation’s mission is to help the business become as efficient as possible at growing net new recurring revenue, lowering the burn multiple below $1.