You’ve built a great product. Congratulations! You’ve made the first step towards building a great company and helping your target market.
Now, what’s next? Developing marketing strategies? Hiring sales teams?
If you thought about pricing your product, then you’re right.
Unfortunately, many SaaS companies don’t realize that combining a good product with reasonable pricing can mean more for your acquisition process than anything else.
Pricing your product while keeping the product’s value is a delicate process. Especially with so much competition around.
Knowing your options about pricing models can help you develop a pricing strategy that will keep your business financially stable.
Read on to see which pricing model you can apply to your business.
Jump to section:
What Are Pricing Models?
Types of Pricing Models
How to Choose the Pricing Model for Your SaaS?
What Are Pricing Models?
We’ve already covered some basics of how SaaS companies make money, but now we’ll focus on different pricing models.
Pricing models are packages of your products or services with an attached price.
How you determine the prices for your products depends on many factors, such as the uniqueness of your product, your target market, and the scale of your business.
However, since it’s the most important thing that affects your revenue, you should carefully plan which pricing model to use.
There are different pros and cons to each model, and not every model is suitable for every SaaS business.
One great thing about pricing models in SaaS is that they can be quickly changed and adjusted to your needs. You can change them as many times as you want.
Your prices should match your customers’ perceived product value.
You can also set different prices for different customers to have a broader range of acquisition and revenue streams.
Pricing in SaaS gives you enough flexibility and testing opportunities. Individual customers can also be easily tracked, allowing for usage-based or per-user pricing.
Different pricing models have other unique uses.
To start with, they can give you a competitive edge. Looking at your competition and the price attached to their products can give you an insight into how similar products are billed.
That way, you won’t overcharge or undercharge your products because either can drive customers away.
Setting a reasonable price with your product tells your potential customers that they can match value with their budget.
They can easily justify this expense, and you can later leverage this for future growth.
Types of Pricing Models in SaaS
Carefully consider each pricing model to monetize your customers adequately. Because, according to Price Intelligently, monetization has the most significant impact on your bottom line.
SaaS pricing models go in and out of fashion, but here are some of the most popular ones to look at.
Flat Rate Pricing
Flat rate pricing is a model in which users pay one price for a product.
You charge your customers the same amount per month or annually, and it’s a good strategy for companies with a specific target market. However, this model is based on a one-size-fits-all strategy, and it’s rarely used for SaaS because of many disadvantages.
Nevertheless, let’s talk about the positives first.
The advantage of flat-rate pricing is that it’s a straightforward method, and it’s very easy to market.
Everyone is familiar with a fixed pricing strategy, and sales teams have no problems clearly outlining what customers get for their money.
The second advantage is that predicting revenue is accurate. As a result, it can make the accounting process less complicated, unlike with other pricing models.
Still, the disadvantages are what turns many SaaS companies away from this pricing model.
The biggest is that there are no upselling opportunities and scaling revenue is very difficult.
Larger businesses can also drain your resources, and you can’t do anything about it because they pay the same amount as your smaller customers.
Also, if you thought about reaching enterprise companies to try to upscale, forget about it. These customers want custom plans, so fixed prices with a strict set of features will not appeal to them.
While this model is mostly used by businesses that sell physical products, there is an example of one SaaS company that has implemented flat-rate pricing.
Basecamp is a project management and communication tool that helps businesses handle the workload in one place.
They have a flat rate model, charging $99/month. Their focus is the ease of use and speed of adoption, so they’ve adopted this into their pricing strategy.
Usage-Based Pricing
In usage-based pricing, you charge your customers based on how much they used your product. It’s also known as the pay-as-you-go method.
It’s a very transparent pricing model because the price depends entirely on how much your customers will use your product at a specific time.
How you determine usage depends on your product—the number of emails sent, per transaction, per call, etc.
Customers generally perceive it as the fairest method.
It’s useful for companies with products that depend on their customers’ growth.
For example, if you have an email marketing product, your customers’ subscribers list will inevitably grow, and your prices will match that growth.
Then, companies that have seasonal or campaign-specific services can offer this method, as it makes sense for different scales of specific projects, such as marketing software for product launches, etc.
Also, if you provide one-off or bulk services that your customers won’t use regularly, they only get what they pay for, based on their current needs.
What are the advantages?
The first one is flexibility. When customers know that they’re not tied to a specific plan, they are happier to stick with that service.
They might seek other solutions if they don’t use a product to its full potential, so having the ability to pay based on their needs in different periods is valuable.
The second advantage is you can market to a wider customer base.
You’re covering large costs attached to heavy users like large companies but also SMBs, and startups with smaller budgets.
Everyone can do business with you since your pricing is entirely customizable to their individual needs.
Here is an example of usage-based pricing from Zapier. They offer some base pricing for their plans to cater to different customers, and then they add features as needed.
Now to the disadvantages.
While flexible pricing might be considered a good thing, customers often can’t perceive the value at first glance. So what are they getting out of using your product, and for what price?
The size of the company sometimes isn’t reflected in the usage.
Large companies might not use your product as much as a small startup might. So you’re losing on potential revenue.
Also, predicting revenue is very difficult and might be a nightmare for accounting. However, with good billing software, this becomes less of an issue.
The usage-based pricing model is a transparent but complex model to implement if you don’t have the right product to monetize your customers properly.
Tiered Pricing
With tiered pricing, different versions of the same product have varied prices.
Each tier has a specific set of benefits with a price that’s usually calculated to convince the customer to opt for the highest option.
Thus, the most expensive tiers have more competitive prices and offer the most options.
Companies usually create 2 to 5 tiers to appeal to a wide range of customers. The first tier is often a freemium or a trial to entice customers.
Most SaaS companies use this method because of its many advantages.
First, there is a large upselling opportunity with this pricing model. Customers with limited features in the freemium model can convert easily once they see the product’s value.
Just like with usage-based pricing, you can increase your market share and appeal to beginners and advanced users alike.
You also offer them choices to use your product based on their needs and thus improve their customer experience.
With tiered pricing, it’s easier to segment your users and use your sales team to better target specific audiences.
One big disadvantage is that offering them too many choices can backfire. Customers might give up because they are overwhelmed by the number and complexity of different options.
Here is a simple example of tiered pricing from Framer.
They chose a three-tiered pricing model with the ‘Pro’ as a standard. They also have a freemium plan with minimal features for visitors to perceive the value of their product. Their final tier is highly customizable and provides everything their customers need for prototyping.
An extremely popular subsection of tiered pricing is per-feature pricing.
Per-Feature Pricing
Price your product based on features you offer to your customers.
It’s very similar to tiered pricing because the number of features offered in a product varies on price.
However, the per-feature pricing model focuses entirely on features, while the tiered pricing model can include anything—features, number of users, usage, etc.
The functionality of the product will depend on the plan you opted for.
Each plan comes with a set of predetermined features, and the more features your customers want, the higher the prices. Evernote is an example of SaaS using a feature-based pricing model.
The great thing about this pricing model is that as your customers grow, they can scale with your product simultaneously.
Therefore, upgrades are correlated to their business growth, which is an excellent indicator of your own growth.
One advantage is that users don’t overpay for features they don’t need.
You also see which features are the most used, so you can save on costs for upgrades and maintenance on features your users don’t use.
Following that, it’s tough to determine which features your customers will find the most helpful and what they’re willing to pay for.
Again, this can impact adoption and limit your growth if you don’t structure your pricing and your sets of features effectively.
Explore the market to understand which features your customers want and what they’re willing to pay for them.
Freemium
Freemium plans are not for every SaaS business.
Before we go into the pros and cons of this pricing model, let’s define what it is. The freemium pricing model is when you offer the basic version of your product for free for an unlimited time.
Freemium models offer unlimited usage but minimal features, like Airtable does, for example.
Companies usually create them to encourage users to become paying customers. You can limit your customers in your freemium plans on available features, usage, capacity, or support.
But freemium plans are not a one-size-fits-all type of model. Instead, they usually work best for:
- Customer acquisition strategy
- Products with large customer bases
- Simple and easy to use products
- Products that have usage as a primary limitation
- Carefully developed nurturing strategies and customer success programs
- Companies with positive LTV : CAC ratio
- Models with separate pricing for different customer needs
The biggest pull of freemium models is providing value before monetization.
Customers appreciate the lack of commitment, and companies can use this as an opportunity to build business relationships.
The biggest drawback is that some customers might be satisfied with the features that you include in your freemium, so they never feel the need to upgrade.
They’re also very draining on your resources for maintenance and support.
Use freemium plans only if it makes sense for your acquisition strategy, and carefully consider the limitations you put on your product.
Cross-Selling Pricing
Use your current customer base to create cross-selling opportunities.
If your customers want more from your product but don’t want to commit to a plan upgrade, try expanding the services within their existing plan.
Sometimes they don’t need a complete set of new features, but a small addition, so this is your cross-selling opportunity.
There are several things you can do in this model.
The first is to build additional products or features for your original product.
Next is to sell third-party products that integrate with your product.
Finally, you can create a service marketplace to connect business partners with service offerings surrounding your product.
The goal is to provide more value to your customers, and each of these strategies will tie your customers to your core product even more.
Find customers who can benefit from added features without sacrificing their customer satisfaction.
Per-User Pricing
Per-user pricing allows businesses to scale their revenue based on user adoption in the customer’s company.
Customers are only charged based on the number of individuals who use the product. Therefore, it’s relatively easy to predict revenue and for customers to budget their spending.
In recent years many have abandoned per-user pricing, claiming it’s not sustainable for SaaS. However, it really depends on the type of product you have and your target market.
The per-user pricing model works well with SaaS aimed at teams and enterprises. Both add new users regularly and their business scale, so their SaaS needs as well.
Here is an example of a successful per-user pricing model from Monday.com.
Each of their plans adds more advanced features based on the number of users (seats) customers add to their team.
Per-user pricing can’t stand alone, so Monday includes additional features to become more competitive.
SaaS businesses have no problem charging per user, regardless of whether those users really use the product or not.
However, the new problem they encounter is that companies don’t like paying for unused software, so they quickly turn to the per-active-user model.
Per-Active-User Pricing
Per-active-user pricing is more attractive for customers because they only pay for active accounts.
While all your users have unlimited access to your product, there is a risk of abuse of your pricing model.
For example, companies can limit the number of users or even allow multiple individuals to use the same account to cut costs.
Nevertheless, this is a great model for large companies that need to implement new solutions company-wide.
When they’re only charged for the number of people who actively use it, there is more chance for widespread user adoption and fewer chances of churn.
Regpack, for example, has solved the problem of inactive users by charging a per-admin fee, while allowing unlimited users and projects.
The most significant drawbacks have to do with defining an active user because different businesses have different activity metrics (such as login numbers or time since their last activity, among others).
Another one is that most per-active user pricing models are annual plans (even though they charge per month) which some companies aren’t too thrilled about.
Per-active-user pricing doesn’t work with small teams since company-wide implementation is guaranteed.
And finally, even though some customers have access to the product, they might not use it.
Who is this model for?
Large companies that want to implement SaaS products but are scared that they will waste money because of low user adoption.
If they only pay for their active users, there is less fear of overpaying for a product.
Per-active-user pricing is a good solution for companies that want to offer security to their customers about overcharging for products they don’t use.
How to Choose the Pricing Model for Your SaaS?
Choosing a suitable pricing model for your business is extremely important.
Don’t be one of those companies that think their product will be valuable enough. Without thinking about how prices affect customer acquisition and adoption, you’re signing up for failure.
Features are great, but once your customers have to pay for them, they carefully assess the benefits to cost ratio.
To choose the right pricing model, think about how your customers perceive it. Then, collect the relevant data to determine factors for implementing the right pricing model.
It’s good to know the following things:
- LTV/CAC ratio
- Ideal customer
- Position of your product
- Pricing models of similar SaaS products
- Product value offer
Everyone on your sales, marketing, and product development team should join forces to develop an effective pricing model.
They can also help you find ideal buyer personas to whom you can market your product.
If you plan to change your pricing model, think about consulting with your existing customer base.
What is the value they’re getting from your product, and are they willing to pay more?
Decisions based on data are more important than deciding on your gut feeling.
Essential aspects of your business should not be left to chance.
Conclusion
Pricing models are changing every day in the SaaS world, and companies are continuously trying to find the right fit for their business model.
If you haven’t found the right solution from the start, don’t despair. When you know your options, it’s easier to find the one that will grow your revenue the way you want.
You can start with the most popular options like tiered pricing, which works for most businesses.
However, if it doesn’t make sense with your products, then look into usage-based pricing or per-user pricing.
Whichever you choose, it should improve your revenue and always keep your customers happy.
