Pricing can make or break a SaaS businesses. So why does ​the average SaaS startup owner only spend a few hours choosing their pricing model?

We can’t totally blame them—with a myriad of pricing models, strategies, and tactics to choose from, it's hard to even know where to start.

In this article, we're diving into a key element of any pricing strategy: the pricing model. Find out how to strike the perfect balance between value and revenue and select the pricing model that's tailored to your SaaS business.

What’s the deal with SaaS pricing models?

A pricing model is the amount SaaS companies charge users for their services.

Subscription-based pricing of SaaS means customers make regular payments for continued use of a service or product. This means SaaS companies must carefully consider their pricing models, as ongoing payments and complex product packages need a different approach than traditional product pricing.

Unfortunately, pricing is often neglected. It's been found that SaaS businesses only spend around six hours total on their pricing. With the ever-evolving nature of the SaaS industry, more often than not, this results in outdated pricing that ignores changing customer demands.

To combat this, the first step is to see your pricing model as flexible and adaptable. Your business will change and evolve over time, and so your pricing strategy must reflect this. Finding the right balance between delivering value to customers and sustaining profitability should be an ongoing process, rather than a one-time decision.

SaaS pricing models vs pricing strategies

Before we dive into the nitty-gritty of different pricing models, let's first make sure there's no confusion about the terms being used in this article. It's 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.

So, a pricing model is part of a pricing strategy—and a big one at that!

In this article, we're zooming in on 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

Striking the right balance between value and revenue is no easy feat for SaaS companies. It's 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're here to lay out the seven major SaaS pricing models to help you choose the right one. Whether you currently use tiered pricing or face challenges with freemium, understanding the pros and cons of each different model will help you determine the most effective approach for marketing, selling, and expanding your SaaS business.

1. Freemium Pricing Model - Great for SaaS ✅

🎯 What is the freemium pricing model?

The freemium pricing model allows customers to access a basic version of the software at no cost. It's only more advanced features that require a subscription fee. 

This model is a top choice for SaaS companies aiming to rapidly expand their customer base. Offering their service for free attracts many users. Once users are able to test out the service and recognize its worth, they're highly likely to upgrade to a paid subscription in order to access more features.

👍 Pros of the freemium pricing model include:

• Making it easier to get started - Starting out as a SaaS business is 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.
• Creating an extensive customer database - Freemium users are a valuable resource for acquiring email addresses and fostering ongoing customer 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, you must rely on paying users to generate enough 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 for customers to switch to a different service. It's a basic truth: the more we pay for something, the higher value we give it. 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.

✅ When is the freemium pricing model a good fit?

The Freemium pricing model is ideal for new SaaS businesses wanting 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.

👌 Example of a SaaS using a Freemium pricing model:

Take a look at MailChimp, the popular email marketing platform. They offer 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, users can easily upgrade to access even more features with the first paid tier.

2. Usage-Based Pricing Model - Great for SaaS ✅

🎯 What is a usage-based pricing model?

With the usage-based pricing model, customers are charged according to exactly how much of the product they use.

👍 Pros of the usage-based pricing model include:

• Simplified Pricing - No need for a hefty initial investment. The usage-based pricing model entices even more modest companies with limited budgets to became users. They can rest assured knowing that their prices will go up only if their usage does.
• 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 a 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.

✅ When is usage-based pricing a good fit?

SaaS businesses who have a hard time predicting customer demand can really benefit from usage-based pricing. In this case, it's beneficial to customize your pricing to align with this type of fluctuation.

Usage-based pricing will allow even smaller start-ups to access the same products as big companies without breaking the bank.

👌 Example of a SaaS usage-based pricing model:

Let's look at Snowflake's pricing plan.

Their 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.

3. Tiered Pricing Model - Great for SaaS ✅

🎯 What is the tiered pricing model?

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. For instance, take 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 all of its additional features.

👍 Pros of the tiered pricing model include:

• Targeting 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.
• Maximizing your earnings - Since the tiered pricing model allows you to appeal to multiple customer personas, you'll be able to increase your revenue. It helps to avoid leaving 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 through a variety of packages.
• Streamlined upselling opportunities -  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.

✅ When is the tiered pricing model a good fit? 

Tiered pricing is the ideal SaaS pricing model for businesses that sell licenses, seats, or similar products.

👌 Example of a SaaS using a tiered pricing model:

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.

4. Per-Feature Pricing Model - Great for SaaS ✅

🎯 What is the per feature pricing model?

This SaaS pricing model bases the price on specific features of the product.

The per-feature pricing model is tailored to the specific features your customers require. It's when 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 attracting more users. You don't want to include key features only in expensive tiers or have most of your product's benefits restricted to the least expensive package.
• Leaves a negative impression - Users could start to resent your per-feature pricing. Despite paying a fee for a product every month, your customer might still find themselves lacking certain functionalities they would really like.

✅ When is the per-feature pricing model a good fit?

Per-feature pricing is an adaptable model that is most effective for SaaS businesses who have thoroughly matched their features to specific customer personas. Keep in mind that if all your features are suitable for all customers, you won't reap the advantages of this particular 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.

5. Per-User Pricing Model - Only For Team-Based SaaS 🟠

🎯 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:

• Simplicity - 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:

• Limited adoption - Charging for each user creates a disincentive for adding additional users and encourages cheating by sharing the same login.
• High churn rates - 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 - User's likely won't experience a difference when more users are added to their plan. So, higher pricing won't necessarily correlate with higher value. 

✅ When is per-user pricing a good fit?

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.

👌 Example of a SaaS using a per-user pricing model:

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.

6. Per-Active User Pricing - Not Great For SaaS ❌

🎯 What is a per-active user pricing model?

The per-active user pricing model is a form of the per-user pricing model that can be very attractive for many users. SaaS companies often 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 paying 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 ones.
• Decreased financial risk - When selling your service to a company, you want to do everything you can to gain more users. With per active user pricing, companies are more willing to take 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.
• Complexity - Determining the concept of an "active user" can add complexity to pricing models, particularly in comparison to per-user pricing.
• Needing intense usage - Annual price plans may not be suitable if the service is not used frequently, as customers may view it as a waste.

✅ When is the per-active user pricing model a good fit?

The per-active user pricing model is ideal 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.

7. Flat rate pricing - Not Great For SaaS ❌

🎯 What is a flat-rate pricing model?

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:

• Marketing ease - By offering only one product at one price, all sales and marketing efforts can be concentrated on promoting a distinct and well-defined offer.

• Straightforward - 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 companies opt to use 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.

✅ When is the flat-rate pricing model a good fit?

If your business offers a simple product with limited features or a consumer-focused subscription, the flat-rate pricing model could be the way to go.

👌 Example of a SaaS using a flat-rate pricing model:

The Shopify plugin is a prime example of flat-rate pricing. Their model is simple: they offer one package at $6.99 per month.

📚 Recommended reading

👉 The importance of SaaS positioning
👉 Demand generation for SaaS, myth or reality?
👉 The ultimate guide to SaaS content marketing
👉The guide to SaaS psychological pricing