Few things will influence a business' revenue as much as getting the pricing right.
Go too low, and you could be missing out on clients that are willing to pay big bucks for your service. Price too high, and you'll risk putting off those on smaller budgets or not providing value for money.
When it comes to SaaS pricing in particular, many companies fail at setting the optimum price point to attract and retain the best clients. But although SaaS pricing can be complicated at first glance, getting it right doesn't need to be the enormous challenge some make it out to be.
What is a SaaS pricing model?
The SaaS business model involves customers paying a regular subscription fee for the continued use of your services/products. This combination of ongoing payments plus potentially complex service packages can make finding the perfect pricing model challenging for SaaS providers.
But despite the challenges, many SaaS businesses only put six hours of work into pricing. Ever. This means they're not updating their pricing to properly account for changes in the industry, nor are they considering their client's changing needs over time.
When determining the right balance with your SaaS pricing, it's essential to view pricing models as a continuously changeable aspect of the business. Combining value for customers, value for your business, and sustainability over the long term shouldn't be a one-off event.
There are numerous SaaS pricing strategies available to business owners, from flat-rate pricing to tiers that change the cost based on usage or available features; we're going to look at seven of the most popular models.
How to price SaaS products
As we've mentioned, when it comes to SaaS (or any other business), it's vital to find the right balance of providing excellent value to your customers vs. ensuring your own business can receive the revenue it needs to grow and excel.
A good starting point for pricing SaaS products is balancing the customer lifetime value (CLV) against the customer acquisition cost (CAC). In simple terms: the value a customer provides to your business needs (CLV) to exceed the cost of attracting the client in the first place (CAC).
That said, although balancing the CLV and CAC will ensure your business turns a profit, it won't be enough to attract and retain high-quality customers for the long term. To do this, you need to put some more thought into your business goals and how your pricing strategies reflect them.
Related: Discover the six reasons why a SaaS management tool is in your best business interests.
7 types of pricing models
There are numerous SaaS pricing models available to help you balance the needs of the customer vs. the needs of your business. As a starting point, here are seven of the most popular options.
1. Flat-rate pricing
Flat rate pricing is the most straightforward SaaS pricing model available. With flat-rate pricing, you offer a single product with a single set of features at a single price.
Not many SaaS businesses offer flat-rate pricing, but it can be an effective way to provide a simple solution that customers can take or leave. There will be no expensive add-ons or exclusive features, no limits on users, and it's incredibly easy to communicate. However, it doesn't offer any flexibility to cater to customers with different needs.
Simple. With no complicated add-ons or extra features, customers know they're getting everything your service offers for one price.
Easy to sell. One straightforward package at a single price point provides a "take it or leave it" option that customers will love (if you set the price right).
Easy to understand. Flat-rate pricing leaves no room for error and allows you to focus on improving the sales process or marketing strategy.
No overcomplicated pricing. Customers know what their bill will be, and you know what revenue you'll be receiving each month.
It could be difficult to extract value from different users (for example, SMB pricing could mean you miss out when it comes to Enterprise clients)
Only get one shot at persuading customers to buy – The lack of wiggle room and "take it or leave it" approach is both a benefit and a con to flat-rate pricing.
2. Freemium model pricing
The Freemium business model involves offering a free-to-use product, often supplemented with paid extras, add-ons, or packages. It's incredibly popular in SaaS pricing, frequently forming the "entry-level" option as part of a tiered pricing model.
The ability for customers to trial a limited number of services/features at zero cost is an excellent onboarding option for many, and it's a good idea to include more "premium" options alongside to provide a clear upselling route so your customers can grow with you.
Generally, freemium tiers will be limited by features, users, or capacity. You could even limit a freemium package by use (for example, clients can use the free package within their own business, but they can't use it for managing customers unless they upgrade to a paid plan).
Easy onboarding. With no barriers to entry, freemium lets users sign up and experience your services with no fees and little cost to your business.
Encourages user referrals.Dropbox is an excellent example of how freemium pricing can encourage user referrals and enable rapid business growth thanks to customers who've benefited from the free package.
Clear route to upselling. Freemium is usually an "entry-level" tier with a limited number of features compared to paid packages. This means that as your users' needs increase, they're more likely to upgrade as and when the premium package becomes necessary.
No revenue without upgrades. Customers who use your products/services without paying are (obviously) not generating revenue for your business until they upgrade to a paid package.
Easier to churn a free product. Without paying for a subscription, users may not feel obligated to use your services and could disappear at any time.
Can devalue your core services. Freemium can devalue your paid packages, leading customers to feel resentful when the time comes to upgrade: "if I'm getting X for free, why should I pay?"
3. Tiered pricing
Tiered pricing is the de-facto pricing model used by most SaaS companies. It's basically the opposite of flat-rate pricing and involves offering multiple packages at different prices.
The benefits offered by the different tiers can vary but will most commonly be categorized by features, users, or usage, with higher costing packages offering the most comprehensive service.
SaaS companies can utilize unlimited numbers of packages to appeal to a wide variety of clients. However, studies show the average number of tiered pricing options tends to be 3.5 (high, medium, and low). This provides the best balance between flexible options without overwhelming customers.
Appeals to multiple buyer personas. Flat-rate pricing only offers one chance to appeal to customers. However, with tiered pricing, you can target and tailor your packages to suit customers with different budgets and requirements.
Clear upselling route. By clearly stating the services available at each tier, customers can see the value in upgrading their package and can use the different plans like stepping stones as they grow their own business.
Easy to understand. Again, the clear benefits of each package leave little confusion and ensure your customers know precisely what they're getting at each price point.
Tempting to try and appeal to everyone. While tiered pricing offers a flexible solution to appeal to multiple buyer personas, this can have a downside if you try to appeal to everyone and cater to every possible need. You need to set limits.
Analysis paralysis.- Offering too many options can become overwhelming for customers, and they may choose not to buy rather than spend hours comparing ten price points!
No recourse for "heavy" users. If users on the top tiers exceed their expected service usage, you may not be able to collect additional revenue to compensate.
4. Per feature pricing
Per-feature pricing is a popular SaaS pricing model that offers different pricing tiers based on functions/features. The higher the price, the more features you can expect to receive.
The challenge with per feature pricing is ensuring your basic/lowest package contains the "essential" features your customers will need to use your product and where to draw the line at each price point.
Clear cost/benefit analysis. Customers can immediately see what they're paying for at every price point and how each "upgrade" will benefit them.
Incentive to upgrade. As new features are "unlocked" at each price point, customers can upgrade their packages as and when they need to. This also offers a clear upselling route that you can capitalize on.
Allows you to compensate for "heavy" features. If you have features or services that require a disproportionate amount of time/money/resources to provide, you can compensate for this by placing them in the top tiers.
Can be challenging to get right. Finding the right balance between the essential features your customers need at lower levels and the desirable or premium features in top tiers can be challenging to perfect and may take some adjustment over time.
May leave customers feeling resentful. If your customers are paying for a service that they're not receiving "in full," they may feel resentful of the higher price points. Equally, as customers upgrade, they could be paying premium prices for services they were previously receiving at a far lower cost.
5. Per user pricing (inactive)
Also known as Per Seat Pricing (PSP), per-user pricing is a hugely popular SaaS pricing model. In fact, according to research, it's the most popular SaaS pricing model out there.
With per-user pricing, customers pay a fixed monthly price based on the number of users benefitting from the product. As new users are added, the price increases.
If you're targeting SMBs, per-user pricing can be an excellent way to enable your services to expand with the customers' business. As they grow and hire more staff (and hopefully gain more revenue), they can upgrade their packages to ensure staff accounts are available (providing more revenue to you).
Illustration from the KBMC SaaS Annual Survey illustrating per-seat pricing as the most popular primary pricing metric.
Simple and easy to understand. There are no over complications with per-user pricing. If you have 5 staff, you pay for five logins.
Easy to scale with adoption. With user-based pricing, revenue increases directly with adoption. Double the users = double the revenue.
Predictable revenue. Per-user pricing models allow SaaS businesses to easily predict the revenue they'll receive every month.
Transparent billing for customers. Customers won't be hit with potentially expensive and complicated bills. Just like you know exactly how much revenue you'll receive each month from per-user bills, customers know exactly how much they'll be expected to pay.
Limits adoption / can encourage "cheating". By charging customers by user account, you could dissuade them from adding new users. At best, this could lead to users sticking with the same package; at worst, they could "cheat" by allowing multiple team members to share a single login.
Large businesses could be put off or feel penalized. Realistically, large businesses are going to provide greater revenue for your SaaS business. However, if you're charging per user, you're considerably more attractive to small teams. You could even find businesses abandoning your services as they grow, and a per-user model is no longer cost-effective for them.
Doesn't reflect value. Before you go for a per-user SaaS pricing model, it's essential to consider whether this is an effective way of offering value. If it doesn't cost you any more, why charge extra if a customer has four vs. three users?
Usage-based pricing may be more appropriate. There is a strong argument that usage (not user) based pricing is a more accurate and appropriate model for calculating costs. Although this is a less predictable method, it can provide a better cost/benefit analysis to your SaaS business and customers.
6. Per user pricing (active)
Per active user pricing is an alternative pricing model that attempts to reconcile some of the cons of per-user pricing by allowing customers to only pay for employees that actually use the product.
With per active user models, businesses sign up for as many user accounts as possible but receive a guarantee that they will only pay for accounts that actually use the platform. This means large businesses don't need to worry about paying upfront for hundreds of employees that might leave the company before the SaaS contract is up.
Slack is probably the most famous example of per active user pricing.
No money wasted on "empty seats". With active user pricing, companies only pay for users who actually use the platform, not logins that go untouched.
Makes it easier for companies to risk company-wide rollouts. A considerable risk for companies is rolling out per-user SaaS products on a wide scale. With active user pricing, this is compensated for as they only pay for what they use. If it doesn't work, they don't pay!
Less attractive to SMBs.– Per active user pricing is generally more attractive to larger enterprise organizations. However, SMBs may be working on tight budgets with small teams, so active user pricing won't offer much incentive.
7. Usage-based pricing
Usage-based pricing is basically the "Pay As You Go" pricing model of the SaaS industry, where the price customers pay relates directly to how much they use your platform/services. Put simply: the more you use, the more you pay, and vice versa.
This pricing model is particularly popular with infrastructure or platform-related software businesses that charge based on the number of API requests, processed transitions, or gigs of data used in a given month. It could also be utilized by social media marketers who charge per scheduled post or an accounting tool that charges per invoice processed.
Phone and internet providers, like AT&T’s prepaid plans, are excellent examples of how a SaaS company might bill based on monthly usage.
Price scales with growth. Usage-based pricing is a relatively "fair" way to charge for your services, as customers can pay more on a busy month and less if they don't use your services.
No high up-front costs to deter small businesses. Usage-based pricing means customers don't need to worry about substantial upfront costs. This means even tiny startups can benefit from your services as long as they stay within the permitted usage parameters for their budget.
Accounts for "heavy users". In the same way usage-based pricing is excellent for small businesses as they only pay for their actual use; heavy users are also accounted for in this model.
Difficult to forecast revenue – Usage-based pricing means that bills will vary monthly, making it tricky for you to forecast revenue.
Hard to predict customer costs – If a pricing model means it's difficult to predict revenue, this also means your customers' bills can be potentially volatile and tricky to budget for.
Do users care? – Finally, usage pricing can disconnect value from your product if customers aren't paying attention to their usage. For example, does your client really care how many API requests they generate? Or do they care more about the end result?
SaaS pricing strategies
When it comes to finding the right pricing strategy for your SaaS business, it's essential to consider your business goals. For example, are you expanding into a new market? Looking to attract high-end customers? Or simply trying to raise brand awareness? Once you've established what you're hoping to achieve, you need to figure out a "fair" price to charge for your various services.
Cost-plus pricing is an incredibly straightforward SaaS pricing strategy. To use it, simply work out your costs, and add your chosen profit margin to uncover a price that will ensure you're always able to cover your costs and experience some growth/profit. In other words: Costs + Profit Margin = Price.
Although cost-plus pricing is simple and easy to calculate, it's not always considered the best SaaS pricing strategy. Calculating prices based on the value your customers will get out of your product/services is much better than basing it on how much you pay your developers.
Competitor-based pricing involves researching what your competitors are charging for products/services similar to what you intend to offer. This is an excellent starting point for new SaaS companies who might not be sure what prices to set. It also provides insight into how much customers are willing to pay, as successful SaaS companies have already done the research and clearly got something right!
However, while research into competitors can be invaluable in helping you establish the market value of your products, this shouldn't be the primary driver of your pricing decisions.
Value-based pricing can take a lot of time and effort to get right, and extensive market research is required. However, it's a great way to uncover what customers genuinely want vs. what they can afford to spend. You might even find that customers are willing to pay more for your services than you predicted, allowing you to charge more from the offset.
If you're unsure where to start with value-based pricing, simply ask for guidance from your customers. A simple Instagram poll or email marketing campaign can provide valuable information on your customers' wants/needs. The results may surprise you.
SaaS pricing tips and tricks
Before we move onto our conclusion, here are three top tips to help you make the most out of your SaaS pricing strategy:
Prices ending in '9' tend to sell more: Known as "charm pricing," this psychological pricing tactic utilizes the fact that people tend to register the leftmost number first and unconsciously prefer prices ending in '9'. This is why a $4.99 item is more immediately read as $4 than $5. If charm pricing is losing its edge, try "odd-even" pricing and end your prices with a '7' or '8'.
Put your most expensive package first: "Price anchoring" also takes advantage of our natural bias for the first number we read. By putting your most expensive option first, other packages will feel more affordable in comparison.
Highlight the most popular package (or the one you want to sell the most): This "center stage effect" works on the theory that customers believe the middle option offers the best value for money and is the most popular. You can further emphasize this by offsetting your "most popular" package in the middle and adding a header to play into social proof.
SaaS pricing might seem complicated at first glance, but as you work through the options and complete your market research, you're likely to find that the perfect pricing strategy for your business isn't as tricky as it first appeared.
Speaking to your customers and checking out the competition is an excellent way to establish how much users are willing to pay, and it's essential to find that elusive balance between the value you're providing and what it costs you to provide it.
Remember, SaaS pricing shouldn't be a one-off exercise. Be willing to adapt and adjust your pricing as necessary, and you'll be on your way to a well-priced service that works for everyone.
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