Per User Pricing for SaaS: the Best Way to Kill your Growth
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Pricing in the SaaS industry is a subject that sparks significant discussion and disagreement. It goes beyond simply determining the price, but also involves deciding on the pricing model to use for your SaaS. Should you charge per user? Opt for a flat rate? Or perhaps use a complicated credit system?
During the initial stages of software sales and the shift towards SaaS, per user pricing was the norm.
Per user pricing was once seen as the standard for SaaS companies, but it may not be the best approach for everyone. In fact, some consider it to be one of the worst pricing models.
However, there are successful companies that are thriving by charging for every user added to an account. So, is per user pricing truly a drawback, or could it actually be a way to fuel growth? Keep reading to uncover the answer.
The per user pricing model charges a subscriber for every user of the product. For instance, some subscription businesses charge $9.99 per user per month, while others offer unlimited usage for a fixed fee.
Now, let's take a closer look at Asana. Just like Salesforce, they have various plans available, each with its own unique price per user.
Asana offers a compelling feature: a free option. However, it's important to note that this free option does come with limitations on the number of seats available.
Per user pricing, a relic from the 1980s
To a deeper understanding of why per-user pricing may not be the optimal approach for most SaaS products, let's delve into the concept of a SaaS pricing value metric.
A value metric refers to the basis and manner in which you charge for your product. For instance, if you were selling shoes, your value metric would revolve around "per pair of shoes." As customers acquire additional pairs, your business naturally expands.
An effective value metric should fulfill three key criteria:
Firstly, it should be easily comprehensible for customers.
Secondly, it should align with where customers derive the most value from your product.
And finally, it should grow in tandem with the level of value customers obtain through its usage.
Using our shoe example, charging per pair is inadequate because their value is not solely determined by the pair itself. Instead, factors like the duration of use, mileage covered, or even the smiles they bring play a crucial role.
Charging based on the mileage alone would be impractical, just as it was thirty years ago when software was priced per license. Monitoring usage was challenging and didn't align with integration or delivery costs.
Initially, software companies adopted pricing models similar to hardware or shoes, which may seem unsophisticated.
However, with the emergence of Software as a Service (SaaS), we continued to employ the same approach despite our software becoming more sophisticated and valuable.
The previous limitations are now obsolete. For most current products in development, user count is no longer the primary determinant of value. Instead, value is derived from factors such as completed tests, stored files, bandwidth usage, or even visitor analysis.
Customers do not perceive value from your product on a "per user" basis
Customers do not perceive value from your product on a "per user" basis.
If you're not achieving the desired results by adjusting pricing based on customer value, consider this: the majority of customers do not perceive value in terms of individual users.
Priceintelligently has tested this with 75 SaaS companies, gathering survey responses from tens of thousands of their customers. Their feature value algorithm consistently revealed that certain value metrics are more important than others (the specific metrics have been omitted to protect customer privacy).
Even customers using CRM and help desk services have shown similar patterns, indicating that value lies in factors such as increased sales, contacts, reports, and more.
While it is important to involve users in your model, it should not be your initial focus or primary metric for a marketing or analytics product.
In most mid-market and some enterprise companies, the natural maximum number of users is typically only 5 - 10.
Additionally, product differentiation is necessary to drive customer pricing segmentation and increase MRR (Monthly Recurring Revenue) through upgrades. Take Salesforce's pricing strategy as an example, with its higher plans offering the most exciting features.
The “per user pricing” increases churn by reducing the number of Daily Active Users.
Per-user pricing is dangerous for most SaaS companies. This pricing model can significantly contribute to a high churn rate by reducing the number of daily active users.
By limiting the number of people who can access an account, you are effectively reducing the stickiness of your product within an organization.
There are situations where per user pricing can actually benefit SaaS companies. Let's explore when it makes sense.
SaaS companies built around teams
If your product relies on having multiple users, implementing per user pricing is a logical choice. Many team-based SaaS products follow this approach, and Slack is a prime example.
However, Slack goes beyond charging per user; they charge per active user. This means you only pay for users who actively engage with the platform.
Charging per user may seem like the perfect scenario for some companies, but it's crucial to understand that Slack doesn't fit the typical mold. In numerous cases, SaaS companies charge for every user added to a customer's account, irrespective of their actual product usage.
💡 Takeaway: For team-based SaaS products, a per user pricing model can be sensible. However, it is important to ensure that the added value justifies the cost.
Many companies that implement a per user pricing model tend to focus on enterprise or mid-market customers. This is no accident. In fact, a survey conducted by KeyBanc revealed that 33% of SaaS companies prioritize the number of seats or users as their main pricing metric.
We were surprised by the number, so I decided to find out which businesses were included in the survey. Upon further investigation, we discovered that the majority of the businesses surveyed were focused on the enterprise and mid-market sectors.
Enterprise SaaS companies typically focus on larger customers, and it only makes sense. By targeting larger customers, they can tap into a greater pool of potential users, leading to increased revenue, especially when they charge based on the number of users.
💡 Takeaway: If you don't fit into either of these two categories, per user pricing may not be the best choice for growing your business. There are some exceptions, but for most SaaS companies, there are better ways to price your product for maximum growth.
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.