As a business owner, it’s important to understand SaaS pricing and how it can impact your bottom line. This guide will explain the different types of SaaS pricing models and their pros and cons.
I remember when I first started my software company, I had no idea what “SaaS” was or how it impacted pricing. All I knew was that I needed to get my product out there as quickly as possible and start generating revenue. It wasn’t until later that I realized the importance of getting my SaaS pricing strategy right from the beginning.
To make wise decisions about pricing, it is important to understand the reasons for pricing software as a service and also to consider the different strategies available.
We will look at 7 pricing models which are commonly used.
What Is SaaS Pricing?
Software-as-a-Service pricing is the term used to refer to how a company charges its customers for access to its product.
There are a variety of ways to price your software as a service, such as flat rate, features, and hybrids.
The SaaS pricing strategy you use can have a big impact on the strategic and financial decisions you make. The model you choose will also affect the logistics required to implement your chosen strategy. When it comes to SaaS pricing, maximizing profit is usually the ultimate goal. However, picking the right strategy isn’t always easy.
One of the key objectives of SaaS pricing is to generate profit for the company. However, it’s not always easy to determine which strategy will be most effective in achieving this goal. For example, should we focus on acquiring more customers at a lower price point, or fewer customers at a higher price?
Is it more worthwhile to chase after more clients at a cheaper price or should you focus on a smaller number of clients who are willing to pay more?
It is important for software companies to compare multiple SaaS pricing strategies in order to make the best decision for their business. The answer will vary depending on the company’s individual needs and goals.
The competition in the software-as-a-service (SaaS) industry has been intensifying recently due to the industry’s rapid growth.
As more and more businesses enter the market, it’s becoming increasingly important for software as a service (SaaS) providers to find ways to set themselves apart from the competition.
One of the most important things for a SaaS company to do is to establish a clear and competitive pricing strategy. By having a well-thought-out pricing strategy, companies can improve their efficiency and margins. Many factors go into determining the best pricing strategy for a particular company, but it is essential for SaaS businesses to find a way to stand out from their competitors.
Every business is different, so the best strategy for a software as a service (SaaS) pricing model will vary from case to case.
The services offered by the company, the targeted market, the stage of the business cycle, and the scale of operations can all play a role in determining whether or not to outsource.
Why Is It Important To Get Your SaaS Pricing Strategy Right?
The quality of your service and the price you charge for it will affect how many of your customers decide to stay.
If your product is incorrectly priced, you might not be able to make a profit on it or you might end up losing customers.
The wrong pricing for a SaaS company can be caused by several variables, including: -The wrong target market -Underestimating expenses -Offering too many features – Underestimating the value of the product
It is important to get your SaaS pricing strategy right for a number of reasons:
1. The wrong pricing strategy can cause your company to lose money in the long run.
2. The wrong pricing strategy can make it difficult to sustain a profit over time.
3. The wrong pricing strategy can lead to tension and conflict within your company.
4. The wrong pricing strategy can make it difficult to attract and retain customers.
Each of these issues can be particularly troublesome for software as a service (SaaS) businesses.
Thinking about your long-term business goals, current market conditions, target market, and specific business problems will help you determine a pricing model that works best for your company.
Pricing Models For SaaS
Finding a balance between helping your customers and being compensated properly for your services is important for any service-based business.
If you do not price your products correctly, you risk spending more on development than you can recoup in sales. If you overprice, you risk losing out on potential customers.
There are a few different pricing models for SaaS businesses, and each has its own benefits and drawbacks.
1) Flat rate pricing
The flat-rate pricing model is the simplest and most common way to offer your SaaS. You sell a single, fixed price, and customers pay that price for a set period of time. This model is similar to how traditional software is priced, but with the added bonus of usually being billed as a monthly service.
Like software licenses, flat rate billing is for companies that don’t want to deal with setting up their own servers. However, unlike traditional server hosting, it’s usually charged on a monthly basis.
Examples of Flat Rate Pricing
If you’re looking for examples of flat rate pricing, you won’t find too many out there. However, one notable example is Buffer’s Awesome plan. While this is no longer the only pricing option offered by Buffer, it’s a good example of how flat rate pricing can work. Another company that still uses flat rate pricing is CartHook.
Our flat rate pricing of $300 per month (or $2,400 billed annually) gives you access to all the features our product has to offer!
Pros of Flat Rate Pricing
Easier to scale. With a flat rate, you know exactly how much each new customer is worth, and can more easily predict (and plan for) future growth. The main advantages of flat rate pricing are that it is easier to sell, communicate and scale than other pricing models.
Cons of Flat Rate Pricing
While a flat rate pricing model is simpler to implement, it limits your ability to extract value from different types of customers and makes it hard to upsell.
2) Usage Based Pricing
The pay-as-you-go pricing model, also known as a metered billing plan, charges you based on how much you use the software. If you use more, you pay more; if you don’t, you don’t.
Pricing based on usage is a strategy that charges customers based on the number or amount of API calls, data, or transaction they process. This is common for infrastructure and platforms, like AWS.
Usage based billing is becoming more and more popular as more and more software providers are adapting it. This allows them to only pay for the services they use, instead of paying a flat rate.
Examples of Usage Based Pricing
By charging based on usage, you can ensure that your customers are only paying you for what they actually use. This guarantees that your customers are paying for what they use, and that you aren’t overcharging them.
Pros of Usage Based Pricing
For consumers, this pricing model means that you only pay for what you actually use. This reduces barriers for new customers and is fair. For companies, this ensures that heavy users aren’t unfairly burdening the system.
Cons of Usage Based Pricing
Usage-based pricing models mean that your monthly bill can vary based on how much your customers use. This makes it difficult to predict your revenue and hard to estimate your customer’s cost.
3) Tiered Pricing Strategy
Tiered pricing models are the norm in software as a service, with flat-rate and usage-based models being less common.
Tiered pricing is an effective way for companies to offer multiple packages with different combinations of features at different price points. This type of pricing strategy allows businesses to cater to a variety of needs and budget levels, making it a flexible and versatile option.
Businesses offer an average of 3.5 different package options, usually catering to lower, mid and upper price ranges. This allows them to appeal to a wider audience, as there’s likely something for almost everyone.
SaaS Content Marketing CompanyHubSpot Use Tiered Pricing to Great Effect
SaaS content marketing company HubSpot offers tiered pricing that is designed to meet the needs and budget of different types of customers. The tiers range from “those new to Inbound marketing” to “professional marketers” and “marketing teams.” This allows each customer to get the most out of their HubSpot experience.
Pros of Price Tiering
Price tiering can be a helpful way to appeal to multiple personas and maximize revenue. By offering different packages, you can tailor your offerings to better suit the needs of each customer type. Additionally, price tiering provides a clear path for upselling when a customer outgrows their current package.
Cons of Price Tiering
Offering different pricing tiers can be problematic. Customers may get confused, and you could lose sales. Also, offering too many options can make it difficult to please everybody.
4) Per User Pricing
If you browse around enough, you’ll quickly find that the most popular way to sell software online is by charging a per-user fee. This is backed up the Pacific Crest Survey, which found across 300 companies that a “per user” model was by far the most popular.
The 2018 annual SaaS survey by Pacific Crest found that, among 50+ different service providers, per user was the most popular pricing model.
This pricing plan is simple. You pay a flat monthly fee per user. If you add more users, the cost goes up. If you remove a user, your monthly bill goes down. This makes it easy to know what you are paying for, and for startup founders to forecast their revenues.
This pricing method is simple to understand, which makes it easy for both customers and companies to predict their revenues.
Per User Pricing Example
For an archetype of user-based pricing models, look to RoadMap, a software-as-a-service product from Atlassian.
The only thing that changes in their Business Plan when it comes to pricing is the number of users added to the account. The per use price is the same whether you’re a single user or part of a team of 100.
Pros of Per User Pricing Simplicity
The per user pricing model is simple and easy to understand, making it a great option for customers who want to know exactly how much they’ll be paying each month. Additionally, this pricing model scales directly with adoption, so companies that are able to increase their number of users will see a corresponding increase in revenue. Finally, per user pricing is predictable, which makes it easier for SaaS companies to forecast their monthly revenue.
Cons of Per User Pricing
A pricing model where each user pays individually for your product can discourage adoption as it makes the product more expensive. It also makes it easy to leave as it doesn’t reflect the value of the product.
When we first started using a project management tool, we used ScrumDo: it was simple, lightweight, and fitted well with our workflow. But problems came when we wanted to add customers to the tool: despite the fact we were trying to spread the product into another company, and a whole new potential customer base, we were penalised by per user pricing. Contrast that to something like Gather Content: every plan offers unlimited users, and correlates pricing with Items and Active Projects. We pay more if we use more, and we’re free to add as many users as we like Will Steward, Cobloom
When we first started out, we started out with a simple, light-weight, and easy-to-use project-management tool that worked well with our workflows.
But when we tried to scale up our tool, we were hit by the per-user pricing model.
In contrast, something like Gather Content offers unlimited users and correlates pricing with Items and Active Projects. This means that we would only have to pay more if we use more of the content, and we are free to add as many users as we need without any penalties.
Adding customers to the tool can be difficult because of per user pricing. This type of pricing can make it hard to expand the product into another company or create a new customer base.
In contrast, Gather Content offers a pricing structure that is based on Items and Active Projects, with unlimited users allowed. This means that we only pay more if we use more of the service, rather than being penalized for adding new customers.
5) Per Active User Pricing
Many companies offer different pricing structures, such as per-user or active-usage. Some companies even charge a yearly fee.
This can be a large expense for new customers, with no guarantees that the salespeople will use the product.
Per active user pricing is an effective way to encourage customers to sign up for your software. By only billing for active users, you can ensure that your customers are getting the most value out of your product.
Per Active User Pricing Example
The most well known example of this pricing model is from a company named Slack. They charge you based on how many people are actually using the services, but you won’t be charged for those who aren’t.
At Slack, you only get billed for what you use. So you don’t pay for the users that aren’t using Slack. And if someone you’ve already paid for becomes inactive, we’ll even add a prorated credit to your account for the unused time. Fair’s fair. Slack
At Slack, you only pay for the number of users you have. So, unlike other phone services that require you to pay for every user, you only have to pay for those actively using the service.
If a customer you previously paid to becomes inactive, we’ll add credits to your next bill for the un-used portion of their subscription. That way, you only pay for what you actually use and that’s the way it should be.
Pros of Per Active User Pricing
With per-user pricing models, companies only have to pay for what they actually use. This reduces risk, as companies can test the waters before rolling out to their entire company.
Cons of Per Active User Pricing
This pricing plan might not be ideal for smaller teams, as it can be hard to justify the expense of paying per seat when cash flow is slim and your team is small.
6) Per Feature Pricing
The previous two pricing models for software as a service were based on the number of users, but it’s possible to base your price on the number of features that you offer.
Per feature pricing is a great way to separate out the different functionality available in each package. The higher priced packages usually have a greater number of features, making them more valuable to the customer.
Per Feature Pricing Example
The different tiers of service offered by Evernote are differentiated by the level of functionality and support available. New features are unlocked with each tier.
Pros of Per Feature Pricing
Increased customer lifetime value. If you’re able to successfully upsell your customers, they’ll be getting more value from your product – which could lead to them being a customer for longer. Per feature pricing is a great way to offer a clear incentive for upgrading, as well as compensating for delivery-heavy features. This pricing model can also help increase customer lifetime value, by making it easy to upsell customers to get more value from your product.
Cons of Per Feature Pricing
Per feature pricing can be difficult to get right, as you must anticipate which features your users will want most. If you get the balance wrong, it can discourage adoption, as crucial features may end up in overpriced tiers, or the bulk of your product’s benefit may end up in your cheapest package. Additionally, per feature pricing can leave a bad taste for customers, who may feel resentful that they are paying a monthly fee but still missing out on some functionality.
7) Freemium Business Model
Many successful software-as-a-service (SaaS) companies like Slack, Evernote and Dropbox have used the strategy of offering a “freemium” model, where users are given free access to a basic version of the service, with additional features offered as premium upgrades.
The “freemium” model is often used in tiers: one free package, then several premium ones.
The tiers are structured so that users are incentivized to upgrade to a more expensive plan once they reach a certain threshold of use. This is usually done through features (if you need x, you need to pay), bandwidth (if you go over, you have to pay) or use cases (you can use it for internal purposes, but not to manage clients).
Example of Freemium Pricing
Freemium software provider, Drift, uses their free product as a lead generation tool.
Their free plan is a great way to get started with your first 100 conversations. If demand grows, it might become necessary to upgrade.
Pros of Freemium Pricing
Increased customer lifetime value. Once a user is invested in your product, they’re much less likely to churn. The freemium pricing model has a number of advantages that make it appealing to SaaS businesses. Perhaps most importantly, it’s a great way to get customers through the door, as there are no barriers to entry. Additionally, the viral potential of the model means that businesses can grow rapidly through word-of-mouth referrals. Finally, once a customer is invested in your product, they’re much less likely to churn, meaning that you can increase your customer lifetime value.
Cons of Freemium Pricing
The con of offering a free version of your service is that it doesn’t generate revenue, it makes it easier to lose customers, and it can lower the perceived value of your premium product.
There are a few things to consider when choosing a pricing strategy for your subscription services. Freemium models might seem appealing at first, but they can actually damage your revenue generation in the long run. Per-user pricing is another option that you might want to consider, but it can also have some negative effects. Ultimately, it’s up to you to decide which pricing model will work best for your company.
Lessons for Pricing SaaS Products
You can always change your price. If you’re not happy with your current pricing, or if you want to increase prices to drive more revenue, it’s relatively easy to do with a SaaS product. You can make the change and see how customers react without having to go through a long and costly process of re-engineering your product.
Pricing is an important part of early validation for SaaS products. While you may not finalize your pricing until later, it is beneficial to have a general idea of your pricing model during the product conceptualization stage. This allows you to build your pricing model into the value proposition and avoid surprises down the road.
Additionally, estimating customer lifetime value (LTV) early on is crucial to understanding what you can afford to spend to acquire customers. The formula for success in the SaaS world is simple: LTV must be significantly greater than customer acquisition cost (CAC). Creating upsell opportunities within your pricing model and offering free trials are great ways to increase sales conversions.
However, keep in mind that service and support are key when working with subscription-based products. Customers also don’t care about your business costs – they’re more concerned with the perceived value of your product. Therefore, it’s important to take into account the psychological aspects of pricing when determining your final price point.
Lastly, remember that you can always change your price if necessary – one of the benefits of working with a SaaS product.
What is SaaS pricing?
SaaS pricing is a subscription pricing strategy where customers pay for access to a software application on a monthly or annual basis. The price is typically based on the number of users, the amount of storage, or the features included.
How is SaaS pricing done?
SaaS pricing is typically done on a subscription basis, where customers pay a recurring fee for access to the software. The price may be based on the number of users, the amount of data storage, or other factors.
Who owns pricing at a SaaS company?
The owner of pricing at a SaaS company is typically the CEO or the Head of Product. However, there are a few other stakeholders involved in the pricing process, such as the Head of Sales, Head of Marketing, and the CFO.
What does SaaS stand for?
SaaS stands for software as a service. It is a type of subscription software that allows users to access and use the software from a remote location. The software is typically hosted by the provider and accessed over the internet.
There are a lot of different factors to consider when it comes to SaaS pricing. But if you take the time to understand the different options and how they can impact your business, you’ll be in a much better position to make informed decisions about what’s right for you.