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Pricing greatly affects revenue for SaaS businesses. Still, the average SaaS startup owner only spends a few hours to pick their pricing model. We can’t blame them: with a myriad of pricing models, strategies, and tactics to choose from, it can be challenging to determine where to begin.
In this article, we will dive into the first component of a successful pricing strategy: the pricing model. Find out how to strike the perfect balance between value and revenue and select the pricing model that is tailored to your SaaS business.
What’s the deal with SaaS pricing models?
A pricing model is the amount SaaS companies charge for their services to users.
Customers in the subscription-based pricing model make regular payments for continued use of a service or product. This requires SaaS companies to carefully consider their pricing models, as ongoing payments and complex product packages need a different approach than traditional product pricing.
Unfortunately, many SaaS businesses neglect pricing, spending only six hours on it, which leads to outdated pricing and disregards the evolving industry and customer demands.
To ensure a successful SaaS pricing strategy, it is crucial to see pricing models as flexible and adaptable to the changing needs of your business. Finding the right balance between delivering value to customers and sustaining profitability should be an ongoing process, rather than a one-time decision.
To begin, let's make sure that we have a clear understanding of the terms being used in this article. It is important to note that pricing models and pricing strategies are two different things:
Pricing model: it outlines how customers are billed for using your software. All charges are clearly displayed on the pricing page.
Pricing strategy: this is your company's internal pricing strategy, created with short, mid, and long-term goals in mind.
The pricing model plays a crucial role in any pricing strategy. In this article, we will focus on understanding pricing models as a means to determine how users pay for your product, what they receive in exchange, and the perceived value this generates.
Essentially, we view pricing models as a strategy to boost the number of paid users and achieve revenue goals.
7 SaaS pricing Models explained
Achieving the perfect balance between value and revenue is crucial for the success of your SaaS company. It is essential to provide effective customer assistance while also ensuring fair pricing for your services.
Undercharging can lead to significant financial losses due to unpaid development and delivery costs. On the other hand, overcharging can hinder your company's growth and deter potential customers.
We will analyze the seven major SaaS pricing models to ensure you maximize the benefits of your product. By examining their advantages and disadvantages, you'll be able to determine the most effective approach for marketing, selling, and expanding your SaaS business, regardless of whether you are currently using tiered pricing or experiencing challenges with freemium.
1. Freemium pricing model
What is the freemium pricing model?
The freemium pricing model allows customers to access a basic version of the software at no cost. They need to pay a subscription fee for the advanced features.
This model is frequently employed by SaaS companies aiming to rapidly expand their customer base. By offering the service for free, many users can be attracted. Once they experience the service and recognize its worth, they are highly likely to purchase a more comprehensive package of features.
Pros of the freemium pricing model include:
Makes it easier to get started - Getting started with a SaaS business can be tough, but the freemium pricing model helps overcome that hurdle. It's the perfect opportunity for customers to try out your product with minimal effort.
Create an extensive customer database - Freemium users are a valuable resource for acquiring email addresses and fostering ongoing relationships.
Product validation – It is a fantastic method for trying out new features with various customer personas.
Cons of the freemium pricing model include:
Lack of profitability - The freemium pricing model is not a profitable strategy for SaaS businesses. Free users do not bring any money to your company. As a result, it is necessary for your paying users to generate sufficient revenue to cover the expenses of acquiring and serving all users, both paid and free.
Higher churn rates - Using a free package makes it easier to switch. The value we place on things increases as we pay more for them. While offering a free version of your SaaS product encourages wide adoption, it also leads users to have a disposable mindset, resulting in higher churn rates.
Establishing value is challenging - Offering your core service for free can actually devalue it. When your product effectively solves a costly and painful problem at no cost, your users may become resentful when they are eventually required to pay for the service.
The freemium pricing model is a good fit for:
The Freemium pricing model is ideal for new SaaS businesses seeking to generate product awareness. With a top-notch free tool, the potential for viral popularity on social media increases significantly, resulting in an uptick in paid signups.
MailChimp, the top email marketing platform, offers a generous freemium plan that makes it easy for users to get started. With plenty of free features, users can quickly get their email campaigns up and running. As their subscriber list grows, they can easily upgrade to access even more features with the first paid tier.
Customers using the flat rate pricing model pay a fixed fee for software access, regardless of usage or number of users. This fee grants unlimited software access through a one-time or recurring subscription.
The flat rate pricing model provides a transparent and easy-to-understand pricing structure that customers love. No unexpected charges or fees based on usage, so customers can confidently stick to their budget. This predictability makes investing in the software a sensible decision.
Pros of the flat-rate pricing model include:
Easier marketing - By offering only one product at one price, all sales and marketing efforts can be concentrated on promoting a distinct and well-defined offer.
Communicate value easily - SaaS pricing can be complex, but the flat rate pricing model is simple and straightforward for customers to grasp.
Cons of the flat-rate pricing model include:
Lack of customer diversity - With the flat rate pricing model, it can be challenging to derive value from diverse users. However, if your focus is on small and medium-sized businesses (SMBs) and you implement a pricing strategy that appeals to them, there is a risk of missing out on significant revenue if large Enterprise companies also choose to utilize your tool.
No room for upsell - With the flat rate pricing model, securing customers relies on a single opportunity. Flat rate pricing leaves no room for negotiation: customers either buy the existing package, or they go elsewhere. Your ability to influence their decision is limited.
The flat-rate pricing model is a good fit for:
If your business offers a simple product with limited features or a consumer-focused subscription, the flat-rate pricing model could be a good fit.
Example of a SaaS using a flat-rate pricing model:
Introducing a Shopify plugin with a simple pricing of just $6.99 per month.
Simplified Pricing - No need for a hefty initial investment. The usage-based pricing model allows even the more modest companies to easily start using the product. They can rest assured knowing that price will go up only if their usage do.
Transparency – The customer is responsible for managing their usage.
Easier access for all – The usage-based pricing model attracts more clients effortlessly. Price is no longer the primary factor.
Cons of the usage-based pricing model include:
Revenue is unpredictable - Consider the impact of "heavy user costs" on your accounts. With an usage-based pricing model, fixed price packages can be risky when certain users consume a significant amount of your delivery resources without contributing more to your spending.
Growth depends on customers – The growth of your business is directly related to the growth of your customers. To scale your own business, it is crucial for your customers' businesses to thrive and spend more on your services.
The usage-based pricing model is a good fit for:
If your customers have unpredictable demand in their businesses, it's beneficial to customize your pricing to align with that fluctuation.
Smaller start-ups can now access the same products as enterprise companies without breaking the bank.
Example of a SaaS using an usage-based pricing model:
The calculator breaks down the costs of each edition of Snowflake in detail.
Snowflake provides two storage options: On-Demand and Capacity-Based. Their pricing calculator offers a comprehensive cost breakdown for both, allowing users to easily compare and choose the option that suits them best.
4. Per-User Pricing
What is a per-user pricing model?
The per-user pricing model charges customers based on its number of software users. The customers can choose to pay a monthly or yearly subscription fee.
This model is commonly used by businesses that require multiple employees to access the software. For instance, a company may need to grant five customer service representatives access to a customer relationship management (CRM) system.
Pros of the per-user pricing model include:
It's simple - The per-user pricing model is straightforward and easy to understand. Customers can easily calculate their monthly costs, which benefits both users and simplifies the sales process.
As adoption increases, so does revenue - The per-user pricing model ensures that as adoption increases, so does revenue. If you can multiply the number of users in a company by two, your revenue will double as well.
Revenue generation becomes predictable - SaaS companies heavily depend on recurring revenue, and pricing per user simplifies revenue calculation and projection for each month.
Cons of the per-user pricing model include:
Adoption is limited - Charging for each user creates a disincentive for adding additional users and encourages cheating by sharing the same login.
Churn is high - Limiting adoption also increases the likelihood of customers abandoning your service. Consider this: would a team of a hundred or a team of ten be more inclined to churn?
The real value is not reflected - Does the number of users, three or four, impact the customer's experience?
The per-user pricing model is a good fit for:
The per-user pricing model offers significant advantages to SaaS companies that heavily depend on recurring revenue. This pricing model simplifies MRR predictions, making it an excellent choice for such companies. Per-user pricing is ideal for situations with multiple users who require simultaneous access to different software features.
Per-user pricing is a logical choice for project management software. Popular platforms like Asana, Trello, and Monday offer options based on the number of users.
5. Per active user pricing
What is a per active user pricing model?
The per active user pricing is a form of the per user pricing model. Many SaaS companies, and especially those that focus on enterprise customers, opt for annual billing cycles. This means new customers have to pay for their entire workforce in advance, with no guarantee that all employees will use the software.
The per active user pricing approach solves this problem by encouraging customers to have as many users as they want, but only charging for the ones who are actually active.
Pros of the per active user pricing model include:
Customers only pay for users who are actively engaged - With the per-active user pricing model, customers only pay for the seats they actually use, avoiding any wasted money on unused seats.
Decreases the likelihood of widespread acceptance - When selling to an enterprise, maximizing adoption is crucial. With per active user pricing, companies are more willing to have a leap of faith and implement the product throughout the organization. There is no financial burden if it doesn't succeed.
Cons of the per active user pricing model include:
Only for big businesses - The per active user pricing model is not suitable for small businesses as there are limited incentives for small teams.
Complex pricing model - Determining the concept of an "active user" can add complexity to pricing models, particularly in comparison to per-user pricing.
Needs intense usage - Annual price plans may not be suitable if the service is not used frequently, as customers may view it as a waste.
The per active user pricing model is a good fit for:
SaaS companies that having trouble getting customers to sign up for their per-user plan. The per active user model is less risky and could motivate them to give it a try.
Example of a SaaS using an active user pricing model:
Slack is a cloud-based messaging platform that helps organizations collaborate more effectively. Their pricing model is based on the number of active users, making it easy for businesses to scale their usage and costs.
With the tiered pricing model, customers are charged only for the features they use. Payment options include monthly or yearly subscriptions.
Businesses often use this model to provide different levels of service. Take, for instance, a company offering a basic CRM system tailored for small businesses, while providing a more advanced CRM system suited for larger businesses. The advanced system costs more due to its inclusion of additional features.
Pros of the tiered pricing model include:
Target a variety of individuals with different interests and needs - By offering tiered pricing, you can customize packages to appeal to multiple buyer personas, giving you the opportunity to resonate with a variety of customers.
Maximize your earnings - The tiered pricing model allows you to maximize your revenue by appealing to multiple customer personas. Don't leave money on the table. Instead of offering a single $100 package that overcharges some customers and undercharges others, cater to different willingness-to-pay levels.
Streamlined path to upselling opportunity - Upgrade your customer's package seamlessly when they're ready for more features.
Cons of the tiered pricing model include:
Can lead to confusion - Having too many choices can overwhelm customers and make them abandon their purchase, especially when faced with ten different price options.
The audience is too broad - Avoid trying to appeal to everyone. While it may be tempting to create a multitude of packages to cater to every conceivable need, the truth is you can't please everyone.
Risk of having "heavy users" - If high-level users consistently surpass their allotted service usage, you cannot collect extra revenue as compensation.
The tiered pricing model is a good fit for:
Tiered pricing is the ideal SaaS pricing model for businesses that sell licenses, seats, or similar products.
DocuSign provides four tiers of service, with pricing options available annually or monthly. These tiers cater to both personal and business users, with more features offered to the latter. Their "Standard" option is labeled as the "Best Value" tier, making it an ideal choice for most businesses and helping undecided prospects make a decision.
7. Per feature Pricing
What is the per feature pricing model?
You can choose to measure the value of your previous two SaaS pricing models using features instead of users.
The per-feature pricing model is tailored to the specific features your customers require. Our different pricing tiers offer a range of functionality, with more features included in the higher-priced packages.
Pros of the per feature pricing model
Significant upgrade incentive - The per-feature pricing model guarantees you unlock additional functionalities to your customers, providing a strong incentive to upgrade.
Deliver better results by focusing on features that require a lot of resources - Certain features require a significant amount of resources to deliver. With per feature pricing, you can appropriately compensate for these features by including them in your most expensive packages.
Cons of the per feature pricing model
Getting it right can be challenging - Determining the right features for your users can be difficult with the per feature pricing model. Striking a good balance is crucial to avoid discouraging adoption. You don't want to include crucial features only in expensive tiers or have most of your product's benefits restricted to the least expensive package.
Leaves a negative impression - Resenting per feature pricing is understandable. Despite paying a fee for a product every month, your customer might still find themselves lacking certain functionalities.
The per-feature pricing model is a good fit for:
Per-feature pricing is an adaptable model that is most effective for SaaS businesses who have thoroughly matched their features to specific customer personas. However, if all your features are suitable for all customers, you won't reap the advantages of that model.
Example of a SaaS using a per-feature pricing model:
QuickBooks is a software designed for small businesses to manage bookkeeping and sales transactions. The cost of the product is determined by its functionality.
The starter plan allows you to track income, expenses, sales tax, and more. As you upgrade, additional features such as bill management, user management, and time tracking become available. The rates charged increase with the features offered in each tier.
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.