Senior Writer: Hiba Ali
Pricing is one of the most critical elements in determining revenue. However, the average SaaS startup spends six hours daily defining, testing, and optimizing its pricing strategy.
The confusion is understandable – with so many software pricing models, strategies, and tactics available, it’s hard to know what to do. Therefore, we will explain, explore and analyze the crucial SaaS pricing models. We’ll also take a look at SaaS pricing model examples and the components of a profitable pricing strategy for SaaS.
Suitable SaaS pricing strategies can attract potential customers and sell more subscriptions, increasing monthly recurring revenue.
What is SaaS Pricing?
SaaS pricing is a software pricing model in which consumers pay for online software use on a subscription basis. Target markets, revenue objectives, and marketing strategies influence SaaS prices. If price is a deciding issue in purchasing a SaaS solution, an appealing pricing scheme can help.
SaaS (Software as a Service) is an online application distributed to customers as a subscription service. Therefore, developing a well-thought-out pricing plan is essential to ensure your SaaS products’ success. Sales Hub is SaaS, and so is Google Analytics.
SaaS products’ success depends mainly on balancing customer lifetime value (LTV) and acquisition cost (CAC). You won’t grow at its most basic level; you won’t grow unless you have a significantly higher LTV than your CAC.
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What is SaaS Pricing Model?
The SaaS pricing model is a method that software providers use to charge their clients for cloud-based software. It’s popular for its flexibility and scalability. The most common pricing models include subscription-based, usage-based, and tiered pricing, which can be customized to suit various industries or target markets. Selecting the best pricing model is important for SaaS providers and its impacting customer acquisition, retention and revenue growth.
What are The Different Types of SaaS Pricing Models?
The software as a service pricing model determines the best pricing for your goods or service. There are several methods to bundle your SaaS price, each with benefits and drawbacks.
1. Flat-Rate Pricing
Flat rate pricing could be the simplest way to sell Saas models: you provide a single item, a single set of capabilities, and a single cost. There aren’t any pricing or feature alternatives for you to select. The flat rate pricing model bears a lot in common with the software licensing model before cloud infrastructure existed, but (usually) it is billed monthly, which makes it easier to sell.
The approach relies on the “one size fits all” price structure, wherein you charge your clients monthly/annually, irrespective of the number of users or resources they use.
Basecamp is a real-time communication tool that keeps teams on track. Their fundamental value is simplicity. To align with their principles, they’ve implemented flat-rate pricing of their goods, which makes it easy to grasp and avoids confusing customers by providing several options.
- Simple to understand
- Easy to communicate value
- More focused
- Minimal customer diversity
- Decreased profits
2. Usage-Based Pricing Model
The Pay As You Go model is the pricing technique. It directly correlates the price of a SaaS product to its use. The cost of the product is directly related to how much a consumer utilizes it under this approach. The price rises as they use more. The price decreases as they consume less. The consumption can be charged based on various variables, such as the number of emails sent, per API, per call, per transaction, etc. Some SaaS billing models are completely usage-based, whereas others include a base subscription cost and charge according to use.
Chargebee is a subscription billing system that charges customers by syncing the pricing tier’s price with income. You will be charged extra if your revenue increases. It guarantees that clients can pay for the item and that the price is acceptable.
- Prices directly proportional to usage
- Customizable for users
- Low bar to entry
- Revenue is more difficult to predict
- Disconnects value from the product
3. Tiered Pricing Model
The tiered pricing model is modeled after the real-world pricing scenario’s tiered pricing method. Several editions of the item are priced differently in the tiered pricing model. The business determines them depending on the product’s characteristics, the number of users, or usage.
Two to five tiers are often created, from which your clients can select based on their demands. Using this pricing strategy, you can incrementally upsell to your consumers, including capabilities as they scale. The pricing levels must be clearly established using a suitable technique, or your customer may be confused.
Hubspot is a software product developer and marketer focusing on inbound sales and marketing operations. The company has priced its plans so everyone can use their product as it grows. Each tier is tailored to the demands and budget of a specific type of potential consumer, ranging from inbound marketing beginners to marketing professionals and marketing teams.
- Multi-persona appeals
- Saves money
- Clear upsell route
- Potentially confusing model
- High-level risk for users
4. Per-User Pricing
The per-user pricing model enables business owners to charge based on the number of people who use the product. The revenue in this model scales with the adoption of the product by the company’s users. Every member is charged, making revenue prediction easy.
Per-user pricing is among the most common pricing models in the SaaS business today. It’s popular due to its simplicity: a fixed monthly payment for one user, twice for a second, and threefold for a third.
Your consumers will understand what they are getting for their price, and your SaaS organization will profit from consistent monthly revenue.
Canva is an online graphic software website with simple capabilities and features that allows users to produce a wide range of engaging content. They charge their customers each user to utilize the product.
- Simple to use
- Complete access to users
- Predictable revenue
- Login abuse
- Pricing does not reflect the product’s value
- Limits Adoption
5. Per-Active User Pricing
Active user price is a version of the per-user pricing concept. Many Saas vendors promote annual billing cycles. This means that a new client may have to pay for numerous staff members up front, with no certainty that those professionals will utilize the program.
You charge your members based on their active participation in a per-active user pricing model. In other words, only individuals who utilize the product are charged. Teams can enroll as many people as they like to purchase the item, but they will only be charged for those that utilize it. This ensures that no funds are spent on abandoned properties.
Slack is a cloud-based messaging tool that enables employees to interact productively. They’re well-known for employing this pricing strategy, which charges subscribers depending on the number of people actively using the service.
- Payment of active users only
- Minimal risk of widespread adoption
- Easy for enterprise companies to buy a product for teams
- Doesn’t work well for SMBs
- Multiple logins can take toll on revenue health
6. Per-Feature Pricing
The product’s pricing is determined by the features and capabilities given to your clients. The more features you offer, the more your clients will pay, and vice versa.
The payment tiers are split based on the capability available in each tier. When you use feature-based pricing, your consumers grow along with the product. They may require new answers to their difficulties as they mature, requiring an upgrade to their next level. The feature pricing approach ties the components that influence the value you provide to your clients.
Per-feature pricing differentiates distinct cost levels according to the capability provided in each, with higher-priced packages equating to a larger variety of accessible features.
QuickBooks is bookkeeping software for small businesses that helps organize and account for revenues and payments. They base the pricing of their goods on their utility. For example, their beginner package allows you to track revenue, expenses, sales, and sales tax, among other things. As you go, you can manage invoices and users and track time spent, among other things. The charges they charge rise in step with the amenities they provide in each tier.
- Strong upgrade incentive
- Aids Upsell
- Limited features
7. Freemium Pricing
Freemium is a popular pricing model that allows businesses to entice customers to register for a free but restricted product version. The goal is to entice users to try your product and then urge them to upgrade to the paid version.
Some functions are provided for free under Freemium, while a paid upgrade is accessible when users want to gain more capabilities provided by the product. With the Freemium model, you often retain prospective consumers in the free product incubation and target marketing and sales campaigns for them to upgrade.
Drift, a conversational sales and marketing technology business, provides a free trial version of its solutions, enabling freemium versions to function as a lead-generation tool.
- Lower Customer Acquisition Cost (CAC)
- Monetize the free plan with ads
- Good option to experiment with new features
- Decreases the value of the product in the customer’s eyes
- Burden on operational resources
How To Choose the Right SaaS Pricing Model For Your Business?
To select a price strategy, you should put yourself in the shoes of your consumer and base your opinion on the information generated. These are some considerations to make when deciding on a pricing model:
- While selecting a pricing model, consider your LTV/CAC ratio. It is useful in determining whether the model will keep your company profitable.
- A single department does not decide the SaaS models pricing. The marketing, sales, product, and management teams should decide collaboratively. They assist you in efficient positioning, packing, managing, and targeting your audience.
- Create buyer personas using the available data. Do an extensive study on who your clients are and which part of the population you interact with. It will allow you to better display your product depending on what customers require.
- After you’ve identified your buyer personas, create distinct tiers. Recognizing how to distinguish what a startup wants from what a larger enterprise wants can help your package and offer your capabilities at various price points, allowing you to market more effectively.
- Create your pricing model using data input from existing and future clients. Learn to ask your customers what they would like from their product, as they are the individuals who will use it.
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Best SaaS Pricing Strategies
Your pricing model drives your SaaS business’s repeatable sales processes and recurring revenue: it’s the foundation of your business.
As you work toward your overarching goal of “growth,” you will have various plans to reach within the framework of your pricing model. Therefore, pricing strategy for SaaS operations plays a vital role in achieving these goals for your SaaS Business.
These strategies are suited to meet different objectives: rapidly expanding into a new market or attracting precious customers. It would be best to choose a general pricing strategy before deciding on the price tag you will place on your SaaS product. You can set SaaS fees based on different subscriptions and levels on the shadow IT.
For example, will you calculate your business expenditures monthly or annually, then add a markup to earn a profit (cost-based Pricing)? On the other hand, do you plan to look at your competitors’ prices and base yours on theirs (competitor-based Pricing)?
We’ll look at a few pricing strategies below to determine the results of a good SaaS pricing strategy:
1. Competitor-Based Pricing Strategy
When pricing products or services based on competitors’ prices, you can price software above, the same or below them. Competitor-based pricing is a promising saas pricing strategy for companies marketing new SaaS management software.
Unfortunately, if your service hasn’t been on the market long enough for customers to vouch for its value, you’ll have to discover another way to capture market share. In addition, the software may be so newly developed that you’re unaware of all the costs associated with providing it.
You will not want to start too high and scare customers away or go too low and leave them questioning your product’s value. Using a competitor’s price point can help you decide your SaaS prices.
2. Penetration Pricing Strategy
As a form of promotional pricing, penetration pricing involves reducing prices temporarily to create demand quickly. The price reduction is often accompanied by a set timeframe, which you may or may not share with customers. For example, a product might be offered at an introductory price of $79 for six months, then quietly raised.
Alternatively, you could offer 50% off your product’s fees for the first 100 customers, but only for a limited time. After that, customers may feel compelled to act fast, which can benefit you, mainly if your price is competitive.
3. Cost-Plus Pricing Strategy
A cost-based pricing strategy is a method by which companies evaluate the costs associated with providing their services, such as product development and employee salaries, and raise these costs by a certain percentage point to ensure they generate a return on their investment.
In other words, if the cost of designing your software is $100, you may sell it for $125 to ensure a 20% profit.
4. Value-Based Pricing Strategy
The most suitable pricing strategy for SaaS enterprise is Value-based pricing, which refers to pricing products and services based on their value to their target audience rather than cost or competitors’ prices. This strategy does not focus on a company’s costs or competitors’ prices. Instead, what the target audience expects from the product or software.
You may be able to price your service higher than your competitors, generating more revenue if your customers understand the value of your service. This model also allows for price reevaluation should your service need to be changed or updated.
Source, Alt Text: Value-Based Pricing Strategy
As a value-based software provider, Adobe’s apps are more expensive than alternatives like Affinity Photo and GIMP. However, the company knows how much value it provides its customers, so it prices its products accordingly.
How To Choose The Right SaaS Pricing Strategies For Your Business?
There are numerous aspects to consider while establishing the optimum SaaS pricing plan. You should consider the following:
- Prices and items your competitors offer
- Your buyer persona’s ability to spend for your service or good
- Your established timeline in business
- Amount of revenue your product offers
The customer’s lifetime value (LTV) is another factor to consider while pricing. If your SaaS company has been in operation for a long enough time, you will have these KPIs. Yet, they will be more challenging to figure out when you start.
On the other hand, getting a basic standard from your competitors is a good place to start. For example, suppose you understand that the average client maintains an account for one year. In that case, you can calculate your marketing and development expenses and aggregate them against it to determine the amount it would take to maintain profitability while keeping up the same rate of retention.
Pricing for SaaS relies on two key factors: charging for the product’s value and targeting the right audience. If you research these factors correctly, your customers will reward you with their purchases.
Ultimately, all SaaS companies will choose a pricing strategy and billing model that fits their individual needs as they grow and roll out new software additions. So, it’s crucial to remember that companies can permanently change prices over time.
Your customers will appreciate your costs and subscribe to your service if you put time into your plan.
Frequently Asked Questions
SaaS volume-based pricing is a pricing strategy used to bill for real or virtual services. When volume rates are charged, the model sets the price based on the quantity consumed during the billing period. Tiered pricing is sometimes confused with volume pricing.
To optimize SaaS pricing, the following steps can help:
- Establish the minimum that a client must pay to cover costs.
- Determine the most a client is prepared to shell out for your service.
- Examine the pricing of competitors.
- Create your price tiers.
- Connect your value metric with buyer persona-based pricing tiers.
SaaS pricing is the responsibility of marketing teams. Price is critical at every point of the marketing funnel, and your marketing leader, like the product team, must comprehensively understand your ideal customers and buyer personas.