Freemium vs. Enterprise Pricing
How a company makes money determines how the team communicates. A "Freemium" company talks about Users; an "Enterprise" company talks about Accounts.
1. The Freemium Model (Bottom-Up)
- Self-Service: Users sign up and pay with a credit card without talking to a human.
- Conversion Rate: The % of free users who become paid users.
- Viral Loop: When users invite other users, creating free growth.
- Examples: Slack, Notion, Zoom.
2. The Enterprise Model (Top-Down)
- High-Touch: Requires sales reps, demos, and legal contracts.
- ACV (Annual Contract Value): How much a single customer pays per year.
- SLA (Service Level Agreement): A legal promise about uptime and support.
- Examples: Salesforce, Workday, Oracle.
Feature Gating
This is the art of deciding which features are free and which are paid.
- "We should gate the SSO (Single Sign-On) feature for the Enterprise tier."
- "Let's move the 'Unlimited History' feature to the Pro plan."
Alex's Tip: If you work at a startup, you'll often hear about the "Move to Enterprise." This means the company is trying to stop selling to individuals and start selling to big corporations to increase their ACV.
LTV:CAC = Lifetime Value / Customer Acquisition Cost.
| Ratio | What it means | | ----------------- | ------------------------------------------------------------ | | Below 1:1 | Losing money on every customer (dangerous) | | 1:1 to 3:1 | Marginal; growth may not be sustainable | | 3:1 or higher | Healthy; customers are worth at least three times their cost | | Above 5:1 | Very efficient, but possibly under-investing in growth |
The benchmark most cited is 3:1: a healthy SaaS customer should be worth at least three times what they cost to acquire.
Explaining unit economics in a meeting
Here is how you might present these metrics clearly:
Our CAC is $100, and our LTV is $400. That gives us a 4:1 LTV:CAC ratio, which is healthy. Our monthly churn is 3%, and our NRR is 110%, meaning existing customers are actually spending more over time thanks to upgrades. The main focus this quarter is reducing CAC by improving our self-serve funnel.
Notice the structure: state each metric, then give the ratio or context, then state the priority. This is how finance and product teams talk in real meetings.
Common mistakes
- Confusing MRR and ARR. MRR is monthly; ARR is annual (ARR = MRR × 12). Mixing them up changes the story completely.
- Forgetting that churn reduces LTV. High churn shrinks LTV because customers leave sooner.
- Saying LTV-to-CAC ratio is good without the number. Always give the ratio: our ratio is 4:1, not our ratio is good.
Practice
A SaaS company has these numbers:
- Average revenue per customer: $40/month
- Monthly churn: 4% (0.04)
- CAC: $80
- Estimate the LTV.
- Calculate the LTV:CAC ratio.
- Is it healthy?
Answers:
- LTV = $40 / 0.04 = $1,000.
- Ratio = $1,000 / $80 = 12.5:1.
- Yes, very healthy (well above 3:1), though it may suggest the company could invest more in growth.
In the next lesson, you will learn churn and retention in depth, the metrics that make or break a SaaS business.