Pricing in the SaaS business can be one of the most challenging aspects. So many variables, from the cost of goods and acquisition to competition, come into play. But don’t despair- there are several different saas pricing models out there that can help you boost revenue and make your business more sustainable in the long run.
From subscription plans to usage-based billing, there’s sure to be a model that fits your unique business needs. So what are you waiting for? Check out these 9 SaaS pricing models and find the perfect fit for your company today!
Why is it Important to Have a SaaS Pricing Strategy that Works?
How many people decide to become customers will depend on the price you charge and the quality of your service. You might lose potential customers if your product is priced incorrectly.
SaaS companies can make the wrong pricing decision due to various factors.
- Shareholders and relevant parties are under pressure to maximize profit now rather than focus on the future.
- There is a tendency to replicate the pricing strategy of another company and assume that it will work for you.
- Choosing the simplest solution over the best one for the company is natural.
- Incorrectly valuing fixed and variable expenses and other line items can have a negative impact on your company’s bottom line and income statement.
Pricing your software as a service (SaaS) product can be tricky. It’s important to consider your long-term business goals, your current position in the marketplace, your targeted customer, and your company’s specific challenges.
The Most Common SaaS Pricing Models
1. Tiered pricing
This is the most familiar pricing model among SaaS companies. This allows customers to control the software’s features and upgrade as they see the benefits. This model works well with other pricing strategies. Many companies base their tiers on usage, features, or users.
There should be at least three to four tiers to avoid confusion. However, anything higher than five is acceptable. Customers may have difficulty deciding which one they need if there are too many options. They might feel overwhelmed and decide to go elsewhere.
Tiered pricing is a great way for SaaS businesses to increase their recurring revenue and upsell. Tiered pricing should be strategic and have clear benefits and advantages at each tier. Customers will know how much value they are getting currently and what additional features they can get if they unlock more features.
Hubspot is an example of intelligently laid out tiered pricing based on features. It is interesting to note that they don’t just list the features at each level; each tier has its list of business benefits.
- As companies grow, they will attract a wide variety of people and scale with them.
- It’s easier to increase revenue by upselling customers after they’ve tried more basic tiers.
- You can tailor your tiers to suit the needs of many businesses, from small mom-and-pop shops to large corporations.
- Customers have more options and flexibility.
- Increases conversion rates because your pricing page can be appealed to a wider audience.
- Marketing can be targeted at specific audiences for each tier.
- Customers can feel confused by too many tiers and be left feeling uncertain about your product.
- Top-ranked users can make the most of the strategy with heavy use.
- You can accidentally target the wrong customers with your product if you offer too many options that aren’t the most profitable for you. Instead, consider targeting a specific niche.
- Users could choose the wrong tier, leading to a high churn rate.
- You must understand your audience and price point to sell your product or service successfully.
2. Per-User Pricing Model
Per-user billing is easy to understand and implement both for the customer and the SaaS provider. It also reduces the complexity that comes with multiple team members being hired.
The per-user pricing model allows customers to pay for each user who uses the software. It is common for people to try to cheat the system by using one login for multiple users. Companies will often try to reduce the number of accounts required if the fees are excessive.
Microsoft is an example of user-based pricing that are familiar to most. They have successfully implemented this billing system for Microsoft 365. They clearly explain the service and highlight and clarify what products customers can access.
- The system can be implemented by both you and your customer easily.
- As your revenue scales increase in line with adoption set clear and tangible growth goals.
- Forecast revenue accurately and easily.
- All users have equal access to all features of the product.
- Cash flow and budgeting can be simplified by using simple calculations.
- Customers can only add the seats they require, which limits adoption.
- Companies are incentivized to cheat the system by multiple users logging into the same account.
- As only a few people use this tool, it is susceptible to high churn.
- Customers may be surprised at the price increase when adding users during high growth periods.
3. Flat-rate pricing
This pricing strategy reduces customer confusion and ensures that all customers pay the same rate.
A flat rate pricing strategy allows companies to communicate their value proposition, and customers can easily see which features they will have. Companies can sometimes misunderstand the price of lower tiers and pricing.
Flat-rate pricing works best for companies with a clear idea of their ideal persona. This will ensure that their landing page appeals to a specific audience.
- It is easy to use and understand.
- Because there are fewer factors involved, your projected revenues will be much more accurate.
- It’s easier to craft a single landing page or piece of sales material, as you only have to convey the value and benefits of one specific product or service.
- Can reduce the decision-making process and speed up your conversion rate because there are fewer things to think about.
- Recurring billing is simplified by reducing revenue recognition
- Customers who require custom options may find it difficult to accept a one-size-fits-all approach.
- Customers may not take your offer seriously if they don’t have a choice. It can feel as though everyone is being treated the same way.
- Flat-rate pricing can have the unfortunate side effect of making companies feel that you don’t care.
- There are no opportunities to upsell. You don’t get any additional revenue if companies use your product more.
- Scaling will be difficult as your flat rate price only applies to a particular market/persona.
4. Feature-based Pricing
A software product’s price can be based on the offered features. Higher-tiered products often offer a lot more options than lower-tiered options. This is sometimes referred to as Feature Based Pricing.
This is because users become comfortable using your product, building trust, and customer relationships. Companies will often face new challenges as a result of growth. Your solution can handle these challenges.
Businesses plan out their tiers, so each is a gradual and natural step.
- As the incentive to upgrade to a higher tier is clear, upselling is easier.
- By charging extra for customized features, you can ensure that only customers who truly need them are paying for them.
- Customers can test out your lowest-tier offerings without spending too much.
- Pricing is easy to understand for customers.
- This is a great choice for hybrid SaaS pricing strategies, such as a combination of featured and tiered models.
- It can get confused if there are too many features or tiers.
- It isn’t easy to categorize which features belong in which tier.
- While some basic features should be found in lower levels, it is important to include enough important features at higher levels to encourage upgrades. It cannot be easy to balance!
- Resentment can develop if the customer feels deprived of too many features, despite paying a monthly fee.
- Some features are built for redundancy so that certain functions can be accessed at different levels. However, each function should solve a problem, not just be designed to impress.
5. Freemium pricing model
SaaS companies who want to offer a limited product version can use the freemium pricing structure. This strategy attracts new customers and allows them to upgrade to the paid version. A lot of free versions are ad-supported.
Offers a free trial to attract customers. Users can try premium features to see if they like the performance. Dropbox has seen a high level of adoption of its services through this strategy.
- Customers are less expensive to acquire.
- The barrier to entry is often lower when there are free trials.
- This encourages product adoption in companies because everyone can use the tools, and is not limited to a few people.
- You can make money by promoting your premium plan even if customers are not paying.
- Free trials will spread faster through word-of-mouth, reducing the marketing effort required.
- You can experiment with new features by downloading free versions.
- Reduce the perceived value of your product.
- Conversion rates between free and paying customers are often lower than those from lower-priced tiers or premium ones.
- Free users can be an operational burden and require support, even if they have not paid for any services.
- Inflated Churn Rates at the End of Free Trial Periods.
- To recover costs, it is necessary to have many customers.
6. Cost-plus pricing strategy
This strategy is what people mean by business. It allows companies to sell products for more than it costs to produce them. Both manufacturers and retailers use this.
The advantages of cost-plus pricing are its predictability and simplicity. It doesn’t require any formulas or deep market knowledge. If you spend $2 to brew coffee, you want a 50% markup of $1. Add the numbers up, and you’ll get $3. With every sale, you’ll make $1.
This model is not flexible for growing businesses. What if you need to spend more money on marketing or to hire new staff? Your monthly subscription prices will likely increase. Subscriptions cannot adjust for all price changes so the profit margin will suffer.
Why do so many startups place so much emphasis on internal costs when determining the pricing? Customers don’t care about your costs. Just as they don’t care about the cost of components when they buy a bottle of coke, they don’t care how much you spend developing.
While cost-plus pricing is convenient for companies, it doesn’t reflect the customers’ expectations.
Your product’s value is likely if you sell software as a service.
They are worth more than the cost of producing them. To stop losing out on money, look beyond your product.
7. The roll your own or bundling model
Sometimes, feature-based or usage-based pricing can overlook the costs incurred on the human-facing end of your business. Breaking down your product’s features into tiers and usage-based categories might not be easy.
You may find that certain functionalities appeal to one user group but not others. Unfortunately, there’s no easy way around this. You may also have to spend quite a bit on training and consulting with your users about your business.
A range of different bundle options can be ideal for SaaS providers. This allows them to provide specific solutions for different types of businesses. By offering premium services, they can attract a wider range of clients. These customers can then tailor their packages to meet their needs.
Many argue that price bundles should be part of every SaaS company’s strategy. There will always be users who need tools specific to their industry. By packaging bundles for different markets, you can increase sales.
Humble (a game streaming site) is an innovative way to use a bundling strategy. This site sells time-sensitive bundles and includes stats such as how many were sold and when they will expire. This creates urgency and makes it easy to see each bundle’s overall value, including stats such as how many were sold and when they will expire.
- Bundled services offer customers better value.
- This speeds the sales process up.
- It is easy to show the overall value of bundled services by listing them in marketing collateral.
- It adds value without the need to add functionality or features.
- Each customer receives more revenue.
- Partnerships are possible to improve bundles with new features.
- Management overhead and costs may rise as the accounting team must create new line items for bundles or have a more robust system to manage bundles.
- Bundled products can make it difficult to recognize revenue from different streams. It also makes it tougher to do gross margin analysis on different products.
- It can be confusing if there are too many bundles, and it can be frustrating if it is too few.
- Customers might be unable to choose the option they desire or feel that a bundle contains features they don’t want. Partnering with other brands to add features may distract from your value proposition and cause you to lose your focus.
8. Usage-based model
This pricing strategy is based on how many customers use the service. It can use one or more metrics. Phone companies use this billing model to break it down into subsets, such as the number of texts sent, data used, and minutes used. Prices can also be adjusted based on the usage time so that peak hours may have a different rate.
Many companies use usage-based pricing to appeal to a wide variety of customers with diverse needs. It is important to remember that this can be a complicated system and that you must consider how to implement the pay-as-you-go strategy to show customers the value of your services clearly.
Some companies will charge monthly and add-on fees for additional usage beyond the plan’s scope. Others might only charge customers for the amount they use.
Usage-based pricing is often cheaper and more flexible for customers. You may also find that people who are most interested in this option view it as a way to save money and stay within their budget more consistently.
- Customers don’t have to spend much if they only use a few features.
- Flexibility allows users to test your service and increase their payments as they integrate it into their lives.
- Heavy users will be charged for the services they use.
- Potential subscribers will find pricing easy to understand, so there’s less friction when signing up.
- It can offer more customers access by offering lower tiers and different usage rates.
- Both recurring billing and revenue recognition can be managed easily.
- It is often easy to convey the value of special offers and discounts.
- It can be difficult to set up, and customers may not be able to calculate their costs accurately.
- Customers may not perceive more value if there is more usage.
- Your revenue and expenses may fluctuate more from month to month.
- It has been shown that customers who change their lifestyles to take advantage of off-peak pricing have lower overall consumption.
- Customers not certain of their usage requirements may prolong the sales cycle.
- Customers may not always understand the rises in their billing when they scale.
9. Hybrid pricing
You may have noticed a lot of overlap between different SaaS pricing models. You may struggle to understand the differences between tiered and bundle or usage and per-user. That’s normal.
Most SaaS businesses will use a combination of these methods. A hybrid pricing model allows companies to better price subscription services.
You must take time to research your market thoroughly before determining the best path forward.
Choosing the right strategy for your subscription business
After carefully considering all the possible pros and cons of different SaaS pricing models, it’s time for you to choose which one is right for you. It’s also important to choose the right model and implement it with the right tools. You’ll want to partner with a company that offers the complex tools you need and provides customer support.
There you have it, nine different saas pricing models that can help you boost revenue and make your business more sustainable in the long run. So what are you waiting for? Find the perfect fit for your company today!