What I Would Do If I Ran Tarsnap

If you run a high margin SaaS business where much of the technology is open source, you are going to get cloned. Once you get cloned, you can be crushed by people much better at marketing and sales.

If you stick to low margin / cost plus pricing, it effectively poisons the well for your competitors.

The "poison the well" strategy has worked very well for Craigslist, and the Siracha hot sauce guy.

I'd do everything patrick suggested, but stick to the cost plus pricing and not worry about extracting consumer surplus for the value you create.

Once you have a $500/month enterprise plan that is popular, you are going to have competitors that offer more for $400/month, and VC's will be plowing them with money to hire salespeople to go after these $40,000 LTV customers. All the sudden, your product will no longer be the best solution for your own customers.

And most of your $500/month clients won't move. You won't get so many new clients, but your existing clients have 'something that works' and 'we're doing something else now'.

An enterprise-level client - one that the article characterises as being able to employ lawyers, and specifically not the cheap ones - isn't going to change from a vendor with a working system to a new vendor just to save $100/month.

From the sounds of it, Tarsnap isn't trying to own everyone's backups and expand at the speed of light. It's been a 'take me or leave me' product whose income currently satisfies the owner. Not getting new customers because of undercutting competitors will only happen when the level of income is much higher than it is now, and one assumes the owner won't have a problem with that given pricing history.