Most SaaS companies avoid flat rate pricing due to its lack of adaptability and flexibility. While a few companies have made it work, the industry thrives on being able to quickly adjust to changes. Flat rate pricing can hinder this agility, acting like lead shoes on a dancer.
Flat rate pricing is a subscription model that offers users unlimited access to all features for a fixed fee, whether paid monthly or annually.
The advancement of technology has led to the development of more efficient and cost-effective pricing models in the SaaS industry. Flat rate pricing is now uncommon in this market, as it is primarily used by businesses that sell physical products to consumers.
However, companies like FedEx still provide flat rate shipping options, which are particularly popular among small businesses and entrepreneurs. In contrast, many subscriptions aimed at consumers still offer a single subscription price.
The trend of flat rate pricing for monthly subscriptions is changing. Now, large entertainment subscription services are adopting their own version of tiered pricing plans.
Netflix has transitioned to a tiered pricing structure, although it remains unclear if this will boost their revenue in a saturated market. Meanwhile, Spotify has introduced discounted tiers for Spotify Premium with the aim of boosting acquisition and retention.
Flat rate pricing offers two key advantages: simplicity and predictability. This pricing model is uncomplicated to explain and sell, making it an attractive option for customers who appreciate a straightforward solution.
If you value simplicity or require a no-fuss solution, flat rate pricing may be the ideal choice for you.
Appeals to a specific demographic
Flat rate pricing is a great option for companies that have a specific product and target audience. It allows founders to focus on making money, gaining customers, and keeping them, rather than spending time on creating different pricing strategies for various types of customers who may not even exist yet.
The flat-rate billing model is the easiest way to recognize revenue compared to other SaaS pricing models. You don't have to worry about handling deferred revenue or revenue reallocation, unless you're also using a different strategy, such as offering a discount.
…and the drawbacks
Doesn't make users happy
The flat rate option is rarely used in the SaaS ecosystem for good reasons. It doesn't cater to the individual needs of users.
Some businesses may opt for a competitor with a cheaper starter plan, while bigger businesses may require more features and bandwidth than a flat rate subscription can provide.
Strain on resources
Larger businesses pose a risk to SaaS platforms with flat rate pricing. They can potentially drain server and customer support resources, and since the pricing is fixed, they won't pay for the extra trouble caused.
Fortune 500 companies, despite their high traffic, have suffered from costly server spikes due to inadequate monitoring and management of cloud resources. To avoid fluctuating resource costs per user, it is recommended to switch to a usage-based pricing model.
Flat rate pricing can lead to lost customers, high costs, and missed opportunities for growth. By using a one-size-fits-all approach, you ignore the individual needs of your users. On the other hand, tiered pricing lets you tailor your offerings to different user segments, allowing for more targeted development and support.
With flat rate pricing, you can't adjust your prices based on the value you provide, resulting in a missed opportunity for additional revenue.
SaaS can’t grow their revenue with a flat-rate pricing model
No, it is not worth it to try and improve your pricing power on a flat rate pricing model. Top SaaS companies generate over 30% of their total sales from expansion revenue, which is not possible with flat rate pricing.
On the other hand, scaled or tiered pricing has consistently proven to be more profitable and fuel growth in the long term. Whether you base your pricing on features, users, or usage, scaled pricing is the key to long-term revenue growth, whereas flat rate pricing quickly becomes stagnant.
Companies need to understand that implementing flat-rate billing takes time and thorough planning. Rushing the process will only lead to ineffective results. To ensure success, here are the three essential aspects of the pricing model that will support your growth process.
We present you three key components for implementing a successful flat-rate billing strategy:
Set a clear and transparent pricing
Attract potential buyers with a straightforward pricing model that builds trust and understanding. This transparency enhances customer management and gives your start-up SaaS a clean competitive advantage.
Achieve success with flat-rate billing by targeting a specific buyer persona or niche demographic. Prioritize thorough market research to learn who your potential customers are, who your competitors are, and what is the current industry landscape before choosing your billing model.
Pick the right billing system
An effective recurring billing solution is crucial for maximizing the revenue of your subscription model. It gives you consistent revenue and reliable projections, helping you make well-informed decisions and stay in control of your cash flow.
With the right system, you will be able to automate revenue recognition, reporting, but also to adhere to accounting standards such as ASC 606 and IFRS 15, minimize errors, and seamlessly add new billing elements without overwhelming administrative duties.
Consider the per active user pricing as an alternative to the per user pricing model. With this approach, customers pay for the individuals who actively use the product. This resolves the concern of your customers about purchasing
Feature-based pricing, a popular SaaS pricing model, allows companies to set prices based on the level of functionality provided. This approach is often used alongside tiered pricing, where more features come at a higher cost.