The SaaS Pricing Model Quick Reference Guide
Published: March 18, 2021
Last Updated: March 31, 2021
Every SaaS startup is different and they all face their own unique challenges. One of these that’s important to get right is choosing the right SaaS pricing model. Just picking one and going with it because you saw a competitor or similar product using it and assuming that is what the market will want is mistake that dims startups chances of success.
You don’t have to follow this skewed script.
We get it—there are dozens of SaaS pricing models out there, and it can be daunting to pick one that fits your product and is based on research from your target market. You may have to educate your prospective customer on the options available to them and get their feedback on how they’d like to pay and use that to take into consideration with what will make money from a business perspective.
Maybe you haven’t thought about all the options available though.
Well, today’s your lucky day! In this blog, we’ll take you through eight common pricing models, including their pros and cons, so that you can make the best decision for your startup. Read on to learn more.
Your Pricing Model Is at The Heart of Everything You Do
Pricing can earn you a fortune, but only if you get it right from the word go.
With the SaaS market size estimated to reach $307.3 billion by 2026, the industry is flourishing. To stay ahead of the curve, forget about customer acquisition, support, and retention strategies for a moment and focus on how to price your SaaS services instead.
Most startups we’ve come across take one of the following two approaches to SaaS pricing:
- They either set their prices purely on instinct when they launch their businesses.
- Or, they’re too scared of driving away potential clients to make the changes needed to grow the company and keep it profitable.
If you can get over the fear of failure, though, the benefits of picking the right SaaS pricing model are worth it.
You’ll not only gain the upper hand over your competitors (who themselves are too scared to handle their own pricing), you’ll also unlock new growth opportunities and provide true value for customers.
The benefits of appropriate SaaS pricing are all there in black and white—time to make a choice.
8 Types of SaaS Pricing Models
Before we dive into the common pricing models, there’s one crucial thing to note: pricing makes or breaks your SaaS marketing strategy.
If the service is underpriced, you’re leaving revenues on the table.
On the other hand, if the service is overpriced, you might miss out on potential long-term, high-paying clients.
Therefore, it’s crucial to understand the common pricing models to price your SaaS product appropriately.
Here are the eight common SaaS pricing strategies:
1. Flat rate pricing
This is probably the simplest SaaS pricing model out there.
Here, you charge a simple rate for using all the features of your SaaS product/service on a subscription basis. Typically, that subscription is on an annual or monthly basis.
- It’s simple and straightforward for customers.
- Predicting revenue is far easier and accurate as there are no complication or differing price points to account for
- For a startup, adopting the flat-rate pricing model can help gain clients faster as they’ll spend less time making purchase decisions.
- As there’s no option to upgrade pricing packages, you’ll lose out on any scaling opportunities.
- The “one size fits all” pricing approach doesn’t work for all clients. Appealing to clients who want custom plans would be next to impossible. They’ll up disqualifying your SaaS as soon as they see its pricing structure.
2. Usage-based pricing
In usage-based pricing, you charge clients based on how often they use your SaaS product. Essentially, you’re charging them ‘per-use’. So if clients use more of your product, their bill goes up. The converse is also true (think: purchasing metered services such as water or electricity from public utilities).
For instance, you might charge users based on the number of processed units (e.g., fill forms or requests processed), bandwidth consumption, or data consumption. The choice is yours.
- Minimizes barriers to usage—clients only pay for the actual use of a SaaS product/service, instead of paying for features they are interested in or those they might not fully use.
- Aligns price with usage—customers who don’t use as much don’t pay as much, which is fairer to them. After all, no one wants to feel like they’re being forced to use a product or service.
- Potential for a wider customer base—With usage-based pricing, you’re less likely to “price-out” your prospective clients. Whether they’re startups, enterprise clients, or solo business, they won’t have any trouble using your SaaS product.
- Hard to predict revenues—Billable units will likely vary from one month to the next. This makes it difficult to forecast revenue.
- Difficult to forecast customer costs—Since usage varies from month to month, you might have varying customer costs.
- Not all clients want flexibility—Startups or smaller businesses might appreciate the fact that the price of your product or services can scale up or down every month depending on usage. However, larger businesses might need something different. They might want more predictable usage costs. You need to understand your ideal target audiences and their preferences.
3. Tiered pricing
A tiered pricing plan is where you offer different “tiers” of features or services of varying prices on an annual or monthly basis.
Typically, you’re offering an elementary, skeleton version of your product at the cheapest rate, a mid-tier option with more features than the first tier, and a “pro” level with access to your entire catalog of features and the highest service level.
- It’s quite easy to appeal to different levels of customers, whether beginners or pros. This goes a long way in increasing your ROI potential and market share.
- This strategy gives your clients the power to choose a plan that works for them. The more flexible your packages are, the more your customers are likely to stay.
- The problem with service levels is that they can make pricing complicated and potentially sideline customers in the buying process. Clients may either be confused about which option to pick or feel overwhelmed by the many options and wonder whether there’s an option that fits their exact needs. This creates more legwork for your sales team.
4. Per-user pricing
This SaaS pricing model is used quite commonly in higher ticket B2B SaaS products and is sometimes referred to as seat licensing. Per-user pricing is very much what it sounds like: every new client requires a separate login and has to pay for a new access license.
Straightforward, simple, and tempting to implement, right? But like every other SaaS model on this list, it has its own pros and cons.
- You are poised for growth—each new user who buys your SaaS product helps expand your bottom line.
- The price is predetermined—no surprises for the customer, and you know what to expect every month in terms of revenue.
- It discourages adoption—if only a single user in an organization uses the software, it’s not likely to gain popularity across the company.
- There’s potential for login abuse as users can share logins among themselves to avoid spending on additional licenses.
5. Per-feature pricing
In feature-based pricing, you define different pricing levels based on the features available on each level/tier, and clients are charged for the features they use.
- Allows users to purchase what they’re looking for and what’s in their functional scope
- It saves money for clients as they don’t have to pay for unnecessary features.
- You might be tempted to develop an infinite number of features to justify additional revenue. Ultimately, you’ll end developing features that don’t add any value to the end-user.
- Creating new features is time-consuming and expensive.
- It can be tricky to find a balance between the features that are wanted and features that customers are willing to pay for.
- It can be hard to find the fight pricing per feature relative to other features
6. Freemium pricing model
Probably the most well known SaaS pricing model, and one that’s fraught with perils. In this plan, you get to offer both free and paid versions of your product. Users are allowed to engage with a free but limited version of your SaaS product. However, if they need to access any premium services, they’ll have to upgrade to the paid version.
- Marketing engine—adopting a freemium pricing approach is the way to go if you want to attract more customers.
- Product feedback—having many users is a great way to get free but valuable feedback on your SaaS offering.
- “Free” equals bad—For some skeptical clients, being free also means not being good enough. How can a SaaS product be good if it’s free?
- Scaling a freemium pricing model is very difficult. Very few startups pull it off.
- Ultimately, your operational resources bear the brunt of satisfying the many free users.
7. Per-active user
This is a variant of the classic per-user pricing strategy. The only difference here is that you charge users based on how active they are. Typically, this means you’ll bill a client/organization based on the number of users who’ve logged in over the past month or so rather than all available slots. Slack is a perfect example.
- Clients only pay for users who use the product.
- More likely see company-wide adoption compared to others on this list.
- It doesn’t work well with annual packages.
- Multiple logins through a single account in order to reduce baseline costs can affect the health of your ROI
8. Ad Monetized
Under and ad monetized SaaS pricing model, you offer your service free in exchange for showing your customers ads or affiliate links.
- Free services can experience rapid growth in user base
- Minimal friction involved in the acquisition process
- There can be a long time horizon before reaching profitability
- It can be tricky to line up the right sponsors and affiliates
- People don’t like ads
Wrapping Up The SaaS Pricing Model Quick Reference
There you have it, a complete breakdown of the eight best SaaS pricing models available today. Now the ball is in your court. While at it, remember that choosing a pricing strategy should be a well-thought-out decision. Don’t rush it. The good news is, your initial pricing decision doesn’t have to be final. You can continually experiment and iterate until you find the perfect model for your startup. All the best in your future endeavors!
At Tortoise and Hare Software, we believe that it’s slow and steady that wins the race. Need help choosing and executing a digital strategy that can drive your business forward one percent better every day? Get in touch with us today!