Pricing your SaaS product is something you should do with keen attention to detail. A major reason for this is that you intend to generate revenue for your business to run effectively. Also, considering the amount of time and resources you invest in the creation of your SaaS product, you need to get adequate returns on your investment.
While developing a pricing structure may seem complex, it helps to know the various strategies you can adopt based on your business needs. In this article, we’ll show you six SaaS software pricing strategies you can explore to find the best fit for your product.
» What Is SaaS Pricing?
SaaS pricing refers to how companies charge customers for using their software. This is often a subscription-based payment that the customer makes periodically—monthly, annually, etc.
Your SaaS pricing should be simple and accommodate your target audience. This is why you do not want to risk going too high. On the other hand, it should also be sufficient for you to regain value for all that you’ve put into it so you don’t want to price it too low. Therefore, striking a balance is key.
But how do you achieve this? Atlassian’s guide to SaaS pricing advises that it’s better to start early even if it’s with lower pricing which you can update as the business progresses. Additionally, you can take a strategic approach to price your SaaS product by developing a flexible framework that’s based on a thorough understanding of your target audience, and reflects the value that they’ll receive.
Your SaaS pricing decisions should not be left behind when you’re setting up your business. In other words, you shouldn’t just plan to get a business license, build your team, and determine what your product is. In your business planning stages, you should also determine your product’s pricing.
Now that we’ve established what SaaS pricing is, let’s talk about some SaaS pricing models you can adopt.
» 6 Types of SaaS Pricing Models
SaaS pricing models help SaaS business owners develop a payment structure that fills the gap between the value a software product offers and what the customers pay for it.
Here, we look at six types of SaaS pricing models you can adopt. You may want to work with a SaaS consultant to gain more insight and choose one that serves you best.
1. Flat-Rate Pricing Model
The Flat-rate pricing model is one where you offer a single price for a single SaaS product based on a single set of features. This is perhaps the simplest SaaS pricing model you can use. You charge your customers a specific and pre-determined price monthly or annually.
For example, Squibler is software for screenwriters and offers them a wide range of features. They use the simple fixed-rate pricing model. Below are the features users can get for a single price:
Flat-rate pricing is a straightforward pricing model so it’s pretty easy for the customer to understand. Also, there is less confusion for prospective customers about what to choose since there’s only one option. The pricing model is based on a clearly-defined value proposition that’s easily identifiable.
However, the model hinders the flexibility of your pricing and may not effectively attract everyone in your target market. For example, if your customer base comprises freelancers and business organizations, the flat-rate price may only be affordable to the businesses. As a result, you lose the additional revenue you may generate from freelancers.
Further, while you may offer a free trial for a limited period, say 14 days or seven days, the lack of pricing options may not encourage potential customers to subscribe. Also, with flat-rate pricing, you don’t get upselling opportunities because there is typically no option for your customers to upgrade. If you introduce a new set of features, your only option may be a price increase, which is not always appreciated by some customers.
2. Per Active User Pricing Model
With the per-active user pricing model, the price of your SaaS product depends on how active its users are. So, while there may be multiple users in a subscription plan, your customers will only pay based on those that use it. Normally, the pricing is based on users who log in within 30 days.
The typical per active user pricing scenario is where a customer adds a specific number of employees, 100 for instance, to your SaaS platform but pays for only those who actively use the tool. So, if only 25 employees log in a month, you’ll bill them for the 25 employees and not 100.
A popular example of the per active user pricing strategy is what Slack uses, as seen in the screenshot below:
The per-active user pricing model has a few advantages. An obvious one is that it allows your customers to pay for what they use instead of spending extra on inactive users. It also allows large organizations to try out your platform before full adoption.
For instance, an enterprise company may want to gain a thorough insight into what your paid plan offers before introducing the software to the entire organization. To achieve this they can start by using the software in a particular department. Since the payment is based on active users, they won’t have to bear any extra cost on a test run. Hence, they’ll be able to save costs or cushion the roll-out risk if the software doesn’t suit their needs.
However, the disadvantage of the per active user pricing model is that it’s not very feasible for small teams because they’ll pretty much be paying for everyone. Also, because some users may not use the software at all, it’ll be hard to evaluate how much revenue will be generated within a specific period.
Additionally, it’s easier for multiple users to log in through a single account, that way you can’t get accurate details about the actual number of active or heavy users.
3. Per Feature Pricing
As the name implies, the per-feature pricing is based on the features or functionalities the users have access to. Here’s how it works: The pricing comes in various packages, and each package has a collection of features that the software offers. The higher prices are paid for packages with more features. The common feature packages you’ll find for this pricing strategy are:
- Basic – Including simple features that the user can enjoy
- Advanced – Includes the basic functionalities with some extra features
- Pro – Includes all the features the software offers
These feature packages can be named differently depending on your brand or company preferences but the science is quite similar. Here’s an example from Jira, a software solution for project managers and teams:
The per-feature pricing gives your potential customer a strong motivation to upgrade. It also gives you the perfect upselling opportunity. It also allows customers to pay for the specific features they need, depending on the nature or scope of their work.
However, with feature-based pricing, it may be difficult to determine which features should go in various packages. Therefore, it’ll require in-depth research to know what your average customers need in a basic feature.
The feature-based pricing is a dynamic model and gives you a good level of flexibility. If you want to adopt this, it’s advisable to have clearly defined buyer personas for different users within your target audience and the features that are relevant to each of them.
4. Per User-Based Pricing Model
The per-user-based pricing model is a popular pricing model that is based on the number of users of your product. Typically, there is a specific price for one user every month. The price doubles if there’s a second user, triples if there’s a third, and so on. The per-user pricing model is more predictable when compared to the per-active-user pricing model.
An example of the per-user-based pricing plan is what’s used by Trello below:
The per-user-based pricing model is quite easy to adopt, especially for start-ups that need more certainty when predicting their revenue. Also, by adopting per-user-based pricing packages, your revenue is more likely to grow as your users’ increase.
One disadvantage of this model is that it restricts organizations from adopting your products on a large scale. Also, the cost of paying for each user may not be feasible for small organizations.
5. Tiered Pricing Model
Tiered pricing model is a common pricing strategy used in SaaS that offers different product benefits to the customer at various prices. The pricing could be based on features, usage, or the number of users. It depends on the customers’ needs. In the tiered pricing model, your SaaS product is offered at different price points and certain features are added or limited based on each tier price.
Here’s a breakdown of how each price point works:
- Low – The first level, commonly used for a basic package. Here, customers have enough features to meet their basic needs. It could be the starting point for new users who want to explore your product.
- Middle – This is the mid-level package. It caters to the average customer. In some cases, it’s what the majority of your customer base would opt for because it brings together some benefits and features from the basic and premium levels. Here, the cost strikes a balance between the lowest and highest price points.
- High – This is the highest level. Typically, it has the highest number of features and benefits. Depending on the type of product, it can come with some personalized services like a custom setup, onboarding, and so on. It’s offered at the highest cost.
SaaS brands typically use three to five-price packages in the tier model. Here’s an example from BigCommerce:
One benefit of the tiered pricing model is that it can help you break into a competitive market by offering low prices to attract customers and encourage them to upgrade. It’s also recommended if you cater to a wide range of users. However, the tiered pricing model is quite complex and hard to implement, especially with deciding what to offer in each package.
6. Usage-Based Pricing Model
The usage-based pricing model charges customers based on how much they use your software. The usage-based pricing model is commonly used by companies that provide infrastructure software like database programs, security applications, email servers, or data integrations.
A good example is a platform like Amazon web services (AWS), which charges users based on the amount of data used, the number of API requests, and so on. With usage-based pricing, customers pay more as their usage increases, much like paying utility bills–according to how AWS puts it.
With usage-based pricing, clients can have better coordination with their expenditures. Also, there is no limitation to adopting your product since customers know they’ll be charged based on usage.
On the downside, revenue prediction is difficult with a usage-based pricing model because you can’t always tell how much customers will use the software. Also, your revenue potential largely depends on how much of your service customers’ use.
» In Closing
SaaS pricing models are important because they help you strike a balance between what you offer and what you receive. When planning your pricing model, it’s best to choose one that considers your target market and the resources you have invested.
In this article, we’ve looked at different pricing models and how they can be adopted. These models include:
- The flat-rate pricing model
- Per active user pricing model
- Per feature pricing model
- Per user-based pricing model
- Tiered pricing model, and
- Usage-pricing model
Each of these models comes with its unique pros and disadvantages. So it’s best to thoroughly access your company’s needs before choosing. Also, it’s okay to start simple and expand as your business grows.
Author Bio: Austin Andrukaitis – Entrepreneur Leadership Network Writer
Austin Andrukaitis is the CEO of ChamberofCommerce.com. He’s an experienced digital marketing strategist with many years of experience in creating successful online campaigns. Austin’s approach to developing, optimizing, and delivering web-based technologies has helped businesses achieve higher profit, enhance productivity, and position organizations for accelerated sustained growth.