Little matters to a business’s revenue more than the way products are priced, marketed, and sold. But while companies, SaaS businesses included, focus hard on sales and marketing, pricing is often neglected or rushed. For many firms choosing a pricing model and strategy are the result of a quick brainstorming session and a decision based solely on competitive research. And they never look back. That’s a major mistake.
Figuring out the right pricing for your product is a complex task and there are many internal and external factors that should be taken into account.
Even if you are a startup and have no previous data to calculate your prices upon, you should invest the time to do your research before you step out into the market, and regularly review and update your prices.
The same is valid for every business out there. Pricing models and strategies are directly related to market changes, consumer behavior, and business growth. To facilitate a balanced revenue, prices should be tested out on a regular basis and adjusted annually, or even more often, depending on the industry.
Pricing is the foundation of every business’s success and figuring it out shouldn’t be taken lightly.
And that goes especially for pricing SaaS products, where the process is even more complicated and has a greater impact on the company’s revenue.
How Is SaaS Product Pricing Different?
SaaS businesses operate on a subscription-based model. This means that the transaction is not a one-off where the company simply offers up a product and the client buys it. It’s an ongoing partnership where the two parties exchange money for services on a monthly or annual basis.
If this doesn’t complicate the process enough, since it is software, SaaS products are not something static. They have different features that users can take advantage of or ignore. The provider can offer various plans that include certain features but exclude others, and have different levels of sophistication.
Also, SaaS products can evolve over time. What the customer bought two quarters ago might not be the same thing that the company offers today.
All these complications call for a deeper consideration when defining the prices of SaaS products. There is a wide range of pricing models and strategies that can be explored depending on the specifics of the product, the revenue goals, and the stage of development of the company.
What Sets Apart the SaaS Pricing Model from the SaaS Pricing Strategy?
SaaS pricing model and SaaS pricing strategy are two terms that are often used interchangeably but, in reality, have different meanings.
A pricing model is an approach you employ when charging your customers for the services you provide. It’s, basically, the methodology – where you charge by how often the product is being used, by how many people use it, or you have a solid flat rate, etc.
Pricing strategy, on the other hand, is how you present your different pricing models to the market and tackle them to acquire new customers.
In this article, we will focus on the pricing models you can apply to your SaaS business and point out the pros and cons each one of them has in regards to maintaining a balanced revenue.
5 Lucrative SaaS Pricing Models to Test for Your SaaS Product
Choosing a pricing model for your SaaS product is all about finding the optimal value-revenue ratio for your company at every stage of its development.
The ultimate goal of every business is to generate profits, but profits are directly tied to customer satisfaction. If your prices are too high and your pricing model is charging users way too much compared to the value they are receiving, this simply won’t do, and soon you’ll start to see customers churn.
On the other hand, if you are excessively undercharging for your products, your revenue will drop and your profits will soon go south.
The key is to find the right balance between your product(s) and the way your customers use them to design a pricing model.
Before we continue with the most often used models, let’s make another thing clear. The client should always receive more value than they are paying for. Or at least they should feel they are. People love good deals and if you are not the one who is providing that, they know that someone else will. So make sure you consider this when you are figuring out what model to use.
So without further ado, here are 5 pricing models to consider when you are deciding how to price your SaaS product:
1. Flat-Rate Pricing Model
Flat-rate pricing is the simplest path you can take. You’ve got a product, you set a price. Every customer pays the same amount, regardless of consumption, and they all receive the same access to its features and benefits.
- Simple and easy to understand. Your customers will not get confused trying to identify the best price for their particular case.
- Easy to market. You can focus your sales and marketing efforts on a single offer and develop it to perfection.
- Better growth tracking. When you have a single plan, it’s easier to track KPIs and monitor sales performance, revenue, and customer churn.
- Too broad an audience. Different people have different preferences. By offering only one option, you narrow your chances of acquiring customers who have specific needs.
- Clients might feel overcharged. Customers who only use a few of your product’s base features might find the price too steep and decide to look for other options.
- Limits extracting value from high-end customers. In the same way, small business clients might feel overcharged, high-end ones who use your product will be undercharged and you will miss out on an opportunity to grow your revenue there.
2. Usage-Based Pricing Model
As the name suggests, in this pricing model, customers are charged based on how actively they are using your SaaS product. Depending on the type of services you provide, they might be charged per action (like for example, sending an email, processing a transaction, publishing a social media post, etc.), per data used, over a percentage of the transactions made, etc.
The point here is that the more the client uses your software, the higher their monthly fee becomes.
- Correlates demand and price. Your revenue grows with your clients. The more they need your product, the more profits you’ll generate.
- Affordable to customers. Every customer pays for exactly what they receive. Users who are not very active will not have to pay much and your product is still available to them. If over the next period they become more active, they will be charged accordingly.
- The sky’s the limit. You receive more value from heavy users who otherwise might be undercharged.
- The price might become too high. If customers are really active, your product might become too expensive for them, compared to a fixed price for the plan.
- Uncertain costs. It might become difficult for clients to calculate their expenditures and thus, the bill at the end of the month could be an unpleasant surprise.
- Uncertain revenue. At the same time, you are not capable of predicting your revenue and might experience unexpected periods of low income.
3. Tiered Pricing Model
Tiered pricing is the most common model SaaS businesses use nowadays. It revolves around the idea of creating a set of different versions or pricing packages of the product. For example, there can be an entry-level package with only the basics, an advanced one suitable for more active users, and a premium one for heavy users.
An alternative to the tier model is the per-feature model. The two are very similar but the main difference here is that additional features or sets of features are sold to the customer as a separate package. They can be considered more as add-ons to the core product.
- User segregation. By providing different options, you can better target different buyer personas with different needs and budgets, and sell your product to them more successfully.
- Balanced value and price. The customers are charged based on the activity they intend to have. You receive a fixed income regardless of whether they take full advantage of the package.
- Upselling potential. You attract new customers with the basic plan and allow them to have a taste of your product at an affordable price. If you see they find your software useful, you can upsell them more advanced features with the next level tier.
- Might become too complicated. If your tiers are not clearly defined and targeted at specific buyer personas, they can potentially become confusing. Being faced with too many options makes it hard for people to make a decision.
4. Per-User Pricing Model
The per-user pricing model is also a very popular one, and, as the name suggests, the clients are charged by the number of users active on their accounts. The more people in a company that uses the product, the greater the price becomes.
An alternative version of this model is the per-active-user one, where clients are charged only for active users. This way they can encourage the adoption of your SaaS product in their company and pay only for the employees who actually use their accounts.
- Simplicity. This model is easy to understand and you can leverage this when marketing it to potential clients.
- Reliability. What the customer pays and your revenue are both easily predictable with this model.
- Hassle-free growth. The price scales with the company and clients don’t need to change their plan or think over their options as their business grows.
- Exponential revenue. A single client can rapidly grow your revenue while their business is growing. This saves you resources from upselling and new customer acquisition.
- Can become pricey. The more a company grows, the more they’ll have to pay for your product. The escalated price can make customers churn and your losses will be proportional to the size of the company.
- Potentially limits adoption. Companies can become reluctant to add more users to their accounts because the charges might exceed their budget.
- Encourages cheating. Users can decide to share an account in order to save money.
5. Freemium Pricing Model
The freemium pricing model can be considered a version of the tier and feature-based ones. The difference here is that you have a core product that is limited in features and functionality, but free of charge. For every potential upgrade, the customer has to sign up for a paid plan.
- Attracts new customers. People are more likely to try out something when it is free, and sometimes a free trial alone is not enough to help them make up their mind about a product.
- Accessibility. Small businesses and startups that can’t afford expensive SaaS solutions can adapt the product for free and upgrade to a paid plan when their company scales.
- Brand awareness. The more users you have, the more popular your product becomes. Freemium only users can spread the word just as well as any paying customers.
- No direct revenue. Free plans don’t bring in revenue to your company.
- Uncertain potential. You can’t be sure that users will eventually upgrade to a paid plan or that they will recommend your product to someone who will opt for the paid version.
- Hard to balance what to give out for free. If your free product is too good, people will not feel the need to upgrade. If it’s not good enough, it will not serve its purpose as a brand awareness engine.
Choosing a pricing model for your SaaS business is not a one-off job. Products evolve over time and so should the way you charge your customers for using them.
Regularly reviewing and updating the pricing of your products will enable you to maintain a balanced value-revenue ratio. By leveraging the right pricing model you are able to always offer your customers a good deal, all the while growing your profits.