23 March 2020
The Ultimate List of Popular and Successful SaaS Pricing Models
Whether you are deciding your SaaS pricing model for the first time or rethinking it, the process of determining the best pricing model can be equally complicated. But choosing a pricing strategy and assessing the right pricing model is crucial for SaaS success.
But how do you choose a model which customers like for SaaS pricing? First, you need to understand how SaaS pricing is different from traditional product pricing. And get to know the different SaaS pricing models. Then you can pick the one that makes the most sense for your business.
What is SaaS Pricing?
Choosing a pricing model for SaaS products is slightly more complicated than pricing a traditional product. In the subscription-based business model, customers pay a set amount regularly in exchange for continued use of the company’s SaaS product or service.
This means that SaaS companies don’t rely on one-time purchases to set the right value-revenue balance that enables them to help customers and be fairly compensated. Additionally, their product is centrally hosted, so they have an added flexibility for offering their product in different variations.
While these factors allow SaaS companies to create different subscription options, it also means they need to put more thought into picking a pricing model.
Successful SaaS Pricing Models
Pricing plays a huge role in your business success. To choose the right pricing model, you need to understand the best SaaS pricing models and their key advantages and disadvantages.
Pay-Per-User SaaS Pricing
Pay-Per-User, also known as Per Seat, is a prevalent SaaS pricing model. The monthly rate for using the product (or service) is based on the number of people using it. Customers pay a fixed monthly fee for each user on the account. If they want to add another user, the price increases.
Similarly, to flat-based pricing, or traditional software licensing, the user-based model enables full access to the product. Customers can easily understand it and calculate the monthly subscription. And since each user account is charged, SaaS companies can predict their income more accurately. But the per-user pricing doesn’t reflect the real value of the product, which can limit wider adoption. And even lead to a higher churn rate.
Pay-As-You-Go SaaS Pricing
The Pay-as-You-Go model is directly related to the usage of a SaaS product. If you use more of the product or service, your spending goes up. Common examples of usage-based pricing are getting charged per action, a percentage of the processed transactions, or based on used gigabytes of storage.
Customers often perceive the usage-based model as the fairest one since it’s proportional to usage, and there are no hidden charges. The upfront costs are low, so single users or small start-ups that use less of the product can afford it while heavy users are still paying the price proportional to their increased use.
The downside for SaaS businesses using the pay-as-you-go model is that their product’s value is disconnected from the product. And, since billing on usage basis can vary from month to month, revenue can be hard to predict as well as customer costs.
Feature Based Pricing Model
A feature-based pricing model can also be described as “add-on” pricing because customers pay an additional amount for an extra set of features or functionality, which is not part of the core product. In this pricing model, the price is tied directly to the product’s value. With higher pricing tiers offering a broader set of features and functionalities.
The good thing is that feature pricing gives customers an apparent reason to upgrade, provided they need the extra features. And it enables SaaS businesses to be fairly compensated for the cost-heavy features by placing them in the top-tier packages.
But because customers’ needs greatly vary, SaaS businesses can have difficulty combining the right set of features for each tier and discourage adoption. Also, customers may not be happy with paying a monthly fee to use a product yet miss out on some crucial features.
Flat-Rate (Fixed-Rate SAAS Pricing Model)
The simplest SaaS pricing model is flat-rate pricing. This model is most similar to the software licensing model in that it offers one product, one set of features, and one price. There may be a monthly and yearly price, though. This method is based on the “one size fits all” approach and chargers all customers the same amount regardless of how much they use the product.
Even though it may be easier to communicate with customers and predict revenue, SaaS businesses may miss out on potential revenue. Flat rate pricing doesn’t leave room for choice nor creating custom plans, which can discourage many potential customers from even considering your product.
Tiered Pricing Model
The tiered pricing is the most common SaaS pricing model used today. This approach allows businesses to offer several different packages that combine different sets of features at various price points. Depending on the product’s nature, the tiers can be based on the number of available features, the number of user’s accounts, or usage. Usually, there are 2 to 5 tiers customers can choose from.
Using tier-based pricing allows companies to appeal and cater to a broader market, thus increase market share and maximize revenue potential. Also, it gives the customer the chance to pick a plan that works best for them. While it still leaves room to upsell customers to a higher tier.
But, if tiers are not created based on needs of the customers you target, the names are off, or there are too many choices, customers can get confused and overwhelmed, and eventually leave without making a purchase.
Freemium (Free-Based Model)
Freemium is another widely adopted SaaS pricing example. It enables businesses to lure customers into using a free version of the product. The freemium is usually part of a tiered pricing approach in which the regularly paid packages are offered in a free, entry-level option. This free option comes with different limits, though, to nudge customers to upgrade. It either limits the availability of features, capacity, or use.
The freemium model can be great for getting customers through the door and has viral potential. And it can be ideal for testing new features without bothering revenue-generating customers. But it can also lead to loss of revenue due to the quite low conversion rates of free to paying customers. And can decrease the product’s value in the eyes of the customers because it makes abandonment much easier.
How to Choose the Right Pricing Model for your Business?
Choosing a pricing model is a crucial decision that significantly influences the future of your SaaS business. A good pricing model can give customers the confidence to use your SaaS product. While not having a clear pricing strategy can have you miss out on a chance to boost your growth or charge more for your SaaS product or service.
There are few things to consider when picking a pricing model:
- Pricing is not one department decision. But a joined effort of marketing, sales, development, and management. When choosing a pricing model, you need to know your customers’ lifetime value to the acquisition costs ratio. It would be best if you had a model that can keep your business healthy in the long run.
- Understand your target audience and their needs. Then based on the key pain-points you wish to address, you can create different packages with different price points that serve each market segment you want to target.
- Define the benefits you provide for different service levels because this will help you emphasize your product value and even upsell to lower-tier customers.
Understanding your SaaS product’s value from a customer perspective can make it easier to choose the best pricing model for your business. And it will help you position your product better and sell more efficiently.
Conclusion
You can choose from lots of popular SaaS pricing models. But if none of them make sense to you, don’t be afraid to get creative and come up with a pricing model that works best for your product and resonates with your customers.
But even if you believe you found the ideal SaaS pricing model, make sure to revisit your pricing as your product develops. As your product grows and matures over time, offering more and more features and functionalities, the price should reflect this value. So, from time to time, test your pricing and adjust it to the changing market needs and trends.
