SaaS has become a widely used and recognized term in recent years.
The keywords 'Software as a Service,' or SaaS is in the name of over 1.2 million product pages. Google search also reports over 2 million company websites and webpages linked with phrases such as ‘SaaS products’ and ‘SaaS pricing models’.
While these numbers indicate that the SaaS industry has been spreading like wildfire, they also prove that if you’ve built a SaaS product, you’re up for a big challenge when selling it.
On average, a SaaS company today has a minimum of nine competitors. It’s you against a dozen other companies with similar marketing approaches and the same struggle of acquiring customers and traffic.
It’s you against me.
To thrive in a competitive industry like this, you have no alternative but to find plug and play growth hacks every day.
Growth occurs in different forms and through different strategies. Marketers and entrepreneurs across the world are so dedicated to aggressive marketing and customer acquisition strategies that they often neglect an important aspect of the business - product pricing.
Often, companies launching a business in the SaaS industry decide their pricing figures randomly without considering enterprise SaaS pricing models.
SaaS pricing models
According to OpenView Survey, more than 40% of companies never pilot or test their pricing strategy, and about 55% have never conducted research to understand how much their target customer is willing to pay.
This is not the right approach for any SaaS business wishing to be successful. Let’s have a look at the fundamentals of SaaS product pricing and essential things to consider when evaluating a pricing strategy for your SaaS.
SaaS pricing strategy
Before your product launch, you’ll need to come up with an appropriate pricing strategy. Let’s explore, analyze, and understand the following five SaaS pricing techniques used in SaaS business.
Limited free features with the option to upgrade to premium for complete access
Charging a business subscriber for each user
Charging a business subscriber for each active user
Charging a single fixed fee, regardless of usage
Charging a dynamic fee, depending on the features used
You need to consider all of these models to rule out a robust pricing plan. These pricing models won’t only give you a chance to balance your product’s value and revenue through the application of tested theories, but they will also help your business in achieving growth goals.
No matter how great your product is, consumers are always looking to optimize their SaaS spend. So, you've got to have a pricing model for your product.
It is well worth your time and resources to use these models to help find a balance between revenue and value. Try to avoid this, and your business will collapse with uncompensated development and you’ll drive away hundreds of prospective customers.
Since there are plenty of pricing models that are already used at a large scale by entrepreneurs, you don’t need to devise a new model. All you have to do is estimate the pros and cons of existing B2B SaaS pricing models, and evaluate the one that’s best for your product.
Research, experiment, and test until you find the perfect match.
To cut your homework short, here are a couple of models which are widely used by some top SaaS companies.
1. Freemium pricing
Freemium is a pricing model where users have limited access to features with the option to gain access when they upgrade.
The freemium pricing model has been around for a while. As a freemium plan, the SaaS product is offered free with limited features, which encourages users to buy paid plans for additional features.
Following this model, companies scale their customers rapidly with little to no incremental cost for each customer gained and then charge for the additional services.
SaaS companies use the freemium model of pricing as a part of a tiered pricing method. In freemium, a regularly paid package is supplemented with a free tier.
Is freemium an ideal SaaS pricing model?
Yes, if your aim is to get the customers started with your product.
For any SaaS startup, the initial adoption is a big challenge. But with freemium, it’s easy for a startup to get their products in the market. Once the product is out and the customers are using it and sharing feedback, it’s easy to revise and remarket it.
The free trial instigates the user to upgrade to paid plans for an uninterrupted collaboration experience.
No, if your main goal is to earn revenue.
With freemium SaaS pricing models, you cannot expect to generate profits because it’s a revenue killer. Free users do not generate any profit.
Freemium promotes a throwaway mentality. Although it makes your product’s adoption easy, it also increases the churn rate when users trash the product once the free period is over.
2. Per user pricing
Per user pricing is when a SaaS company charges business subscribers for each user.
The per user pricing strategy is widely acquired by SaaS companies and is actually one of the most popular strategies, given the simplicity of the model. This pricing model is good if your subscribers increase their use over time. It entices them with low pricing at the beginning and then brings in more revenue as they add users.
In the per user pricing structure, the price varies depending on the number of users or members using the product. Add one member and the price is fixed, add another, the price doubles, add a third one, and the cost triples.
Per user pricing, apart from being easy to manage, also help startups predict their revenues.
Example of per user pricing
Salesforce, a Customer Relationship Management tool, uses the per-user pricing model to increase customer base and generate revenues.
Apart from offering a free trial, it has different plans for various types of companies.
Through The Essentials plan, Salesforce charges $25 per ten users.
Is per user pricing an ideal SaaS pricing model?
Yes, if your focus is calculated revenue generation.
The per user pricing model is one of the most direct models for simplifying the sales process. With this, your product revenue scales with adoption. The more users, the more revenue you see.
With the per user pricing model, SaaS companies can easily forecast their revenue for each month and then plan their budget accordingly.
Per user pricing leads to customer stickiness and lower barriers to adoption because customers are likely to give the product a try. If they continue to use it, the software becomes embedded as one of the products they use daily, making it difficult to switch providers.
No, if your buyers are more likely to share the same login between multiple people.
This enterprise SaaS pricing model promotes an incentive to cheat. Users are smart and they always find a way to cut down the costs. By charging per user, SaaS products give an option to share a single login among multiple team members. This strategy also increases the churn, making it easy for users to abandon the service when asked to pay more for adding an extra member.
3. Per active user pricing
Per active user pricing is a pricing model where subscribers are charged for each active user.
Per active user pricing is a developed form of per user strategy, where the teams can sign-up with as many members as they want, but the final billing is only for the members who were active during that billing cycle.
This strategy is unique. With a pricing model like this, you only charge your customers for what they use. They don’t have to pay for the members who are inactive. This means that no money is spent on the vacant seats.
Example of per active user pricing
Slack is the ultimate example of per active user pricing.
Irrespective of the number of members added to the Slack, you’ll only be charged for those who are actually using the application. For those members who become inactive after getting billed, they get credit added to their account for inactive time.
Is per active user pricing an ideal model?
Yes, if you are targeting large scale companies.
As long as you are selling your SaaS to an enterprise company, per active user pricing sounds like an attractive SaaS subscription pricing model because you’ll still have a significant number of active users.
You’ll be increasing the product adoption by initiating a company-wide product roll-out. Exposure is never a concern.
No, if you are targeting small businesses:
Per active users pricing model is a strict no if you are targeting small businesses with small team sizes. Here, you get no significant incentive because teams are small and cash is tight.
4. Flat rate pricing
Flat rate pricing is used when companies charge users a single fixed fee, regardless of how many people use the product.
Under ‘flat rate strategy’ the company offers a fixed set of features for a fixed price. There is no additional charge for an exclusive feature or an add-on. This differs from other dynamic models, as the rate does not fluctuate.
It is a very simple and straightforward strategy, and it is easy to calculate revenues and help customers understand the pricing. A single and fixed monthly bill grants the user access to all the features of the product.
Example of flat rate pricing
Buffer, a social media management tool, has three flat rate plans: pro, premium, and business. Under each plan, the provider offers a fixed set of features for a fixed price. The price is static irrespective of the number of users and features.
Is flat rate pricing an ideal model?
Yes, if you don’t have a diverse target customer.
If your product or service has ‘one size fits all’ features, and the target audience have the same requirements, flat rate pricing is good.
It helps you to focus both the marketing and sales energy on a single, clearly defined, pricing offer.
No, if you’ve different types of target customers
If you have a diverse category of users, who may need specific features, flat rate pricing is not suggested.
This pricing model makes it difficult for such companies to extract value from different users. You’ll miss out on some revenue because there is no flex in the flat rate for buyers who need limited or specific features.
5. Per feature pricing
Per feature pricing is when a SaaS business charges subscribers a dynamic fee that all depends on the features being used.
Users today know what they want. When choosing a SaaS product, buyers are most likely to compare different service providers and evaluate them on the basis of price and features. With feature based pricing, they pay only for the features they need.
If you want less features, you pay less. If you need more, you pay more.
Through the per feature pricing model, the service provider offers different pricing tiers as per the features and functionalities available in each plan.
It’s like buying a smartphone. If you want a basic model with limited features, you have one price. If you want advanced features with more storage and better battery life, you have to pay more.
Example of feature based pricing
Leadpages, a business management application, charges users on the basis of features they need. There are three plans: standard, pro, and advanced. Each plan has a distinct set of features. Buyers who need basic features subscribe for a standard plan, and they switch to pro or advanced if they need more functionalities.
Is feature based pricing an ideal model?
Yes, if you are offering advanced features that encourage customers to upgrade.
As long as the service provider has exciting, useful, and advanced features, they can convert the basic plan subscribers into pro members. With a pricing model like this, customers know what they are paying for, and thus the service meets both their expectations and demands.
No, if your service doesn’t need advanced features.
If your basic plan is not appealing, chances are the buyers will switch and never upgrade to pro plans. Service providers charging with a per feature model often need to develop infinite features to charge more, and end up creating plans that drive the customers away.
Feature based pricing is an effective option as long as there is the right balance between the features and their prices.
Pricing for SaaS is always a work in progress
Product pricing is something SaaS companies continually struggle with. SaaS pricing models are a function of marketing that determine your market position, among other things.
Time and time again, you have to analyze the market trends, evaluate how much your customers are willing to pay, and modify your pricing strategy accordingly. As a SaaS company, you have to spend time researching the different pricing models. During this process, you’ll identify the core values of each of the models.
When thinking about choosing a model for your SaaS, consider the following:
Audience demand: Which features or functionalities do they want?
Prioritizing advanced features: Which feature is least or most valuable?
Market size: How many users/subscribers can you get on board?
Funding abilities: How much can you spend on building premium or advanced features?
Customer spending abilities: What would be a great deal for your customers? How much are they willing to pay for features that resolve their problems?
So, how much are they willing to pay for features that resolve their problems?
Pricing for SaaS companies is always a work in progress. Determining the price for your product once and keeping it static forever isn’t an option. You must research, evaluate, and experiment. There’s no shortcut.
Want to learn how to optimize your SaaS spend? Check out G2 Track for more details!
Md Mohsin Ansari is a Marketing Manager at Troop Messenger- a team communication software that comes with all the requisite features. It brings all internal communication to one place. Mohsin is accountable for analyzing the market trends, demographics, and dealing with all promotional and media channels. Connect with me on Linkedin.