The average time that a SaaS company spends on choosing their pricing strategy is a total of 6 hours.
…And that’s it!
No planning, strategy, revisions, or even trying different models.
But here’s the thing – when you don’t give your SaaS pricing enough thought, you might end up leaving a lot of money on the table.
The right pricing might enable you to:
- Generate more revenue with the same product
- Stand out from your competition
- Convert traffic better
There are, though, a ton of different pricing models and strategies you could use – so, which one is the right for YOU?
In this guide, we’re going to help you make that choice. We’re going to cover both SaaS pricing models and strategies, so let’s dive right in!
The Flat Rate pricing model is probably the simplest one. You offer a set of features at a predetermined price no matter how many users use the service.
It’s a one-size-fits-all solution. There are no complicated plans with different combinations of features.
That kind of plan usually comes with a free trial and you bill your clients monthly or annually.
A good example of the Flat Rate SaaS pricing model is Basecamp, one of the most popular project management tools on the market.
The software has only 1 pricing plan – $99 per month for unlimited access and an unlimited number of users.
So, it won’t matter if you’re an enterprise or a small startup. The price will be the same for everyone.
Flat Rate Pricing Pros:
- Simple and easy to understand. You offer a single product, with a single set of features, at a single price.
- Perfect for a new SaaS product for a single use-case. You acquire new customers much faster since the simple pricing is straightforward and the decision-making is a no-brainer.
- Easier to forecast your revenue since there are no complicated pricing variables.
Flat Rate Pricing Cons:
- To get maximum revenue, you would ideally charge enterprises much higher prices and SMBs much lower. However, with flat-rate pricing, this is impossible.
- The standardized offer won’t fit all customers. Some businesses need customized services and features. The flat pricing model is quite rigid in this sense.
The Feature-Based pricing model lets you choose between pricing plans that offer various functions and features for clients with different needs. The more features there are, the higher the price and vice versa.
Quickbooks is an accounting software service and it has 3 feature-based pricing plans. The Simple Start plan has only the most essential features, while the rest offer more advanced functions.
Feature-Based Pricing Pros:
- You bring more value to your customers. They can choose whether they need the bare minimum, or will use the premium features of your services. This way, more people with different needs can opt-in.
- You can charge a premium for features that require more resources.
- It’s easier to sell the service on the basic plan and then incentivize customers to opt-in for the premium features.
Feature-Based Pricing Cons:
- It’s hard to understand what features to include in each plan. You might make the mistake to include an essential feature in the premium plan only, or put premium features in the basic plan.
- Some customers might not like the add-on features which will prevent them from upgrading.
The Per User pricing model is most popular with team-oriented SaaS solutions.
That’s project management, CRM, and other team collaboration tools.
The way it goes is you pay for the number of users that register for the software. So, if you pay $5 for 1 user, you’ll pay $10 for 2 users, $15 for 3 users, and so on…
Some pricing plans will first let you choose the features as with the feature-based pricing model, and only then you specify the number of users you want to purchase it for.
Calendly is scheduling software that has per-user based pricing. However, the pricing varies based on the features you want to have access to. So, for Premium features, you’ll pay $8 per user while for the Pro plan the price increases to $12 per user.
Per-User Pricing Pros:
- It’s easy to understand. Your customers will only have to know how many people they’re subscribing to the service and that’s it. To understand their expenses they’ll just need to multiply the number of people by the price per user.
- You (potentially) get significantly higher revenue from larger organizations.
- It’s easier to predict your revenue. Once you know how many people signed up, you can forecast your revenue generation with precision.
Per-User Pricing Cons:
- Large enterprise companies might be put off by this pricing model since they might have too many employees who need to use the SaaS. Which, in turn, will simply drive the cost of your SaaS product way too high.
- To cut costs some users might share their account with others while some organizations might limit the number of users they’re signing up.
Committing to the Per-User based pricing could be a huge commitment, especially for larger organizations that have hundreds of employees.
After all, what’s the guarantee that everybody will use the software all the time? Some employees will use the software occasionally and some won’t use it at all.
To mitigate the risk of charging such organizations for users who won’t use the software product, you can adopt the Per Active User pricing model.
Basically, you get to charge only the accounts that are actively using your software. That increases the number of clients who are willing to opt-in for your service in the first place.
The popular communication platform Slack uses the Per Active User pricing model. So, even if you sign up for all of your team members, you’ll get charged only for the ones who are actively using the software.
Per Active User Pros:
- Customers pay only for what they use. No money is wasted on inactive accounts.
- Enterprise companies are more willing to opt-in for your software since it’s less risky if the software turns out to be an ineffective solution.
Per Active User Cons:
- This pricing model offers great incentives for larger organizations. But at the same time, you’re potentially missing out on more revenue from SMBs.
- You’ll have to figure out a way to track the activity of each account, which might require additional development resources.
This pricing model is also known as “Pay As You Go”. Basically, the more a customer uses your SaaS service, the more they’re charged and vice versa.
SaaS companies that adopt the Usage-Based pricing model can charge:
- For storage used
- Per action (transactions, clicks, emails, posts, API request)
- Percentage of the revenue made
- Percentage of transaction made
Twilio is an SMS platform that charges for each text message you send.
Usage-Based Pricing Pros:
- Low barriers to entry. Since there’s no big commitment, more people are willing to try your services and pay only for what they use.
- More usage, more revenue. The more your customers use your service, the more your revenue increases. This way, you don’t get to overcharge people who don’t use your services often, and people who use it more get charged accordingly.
- More transparent way of charging with no hidden fees.
Usage-Based Pricing Cons:
- Harder to predict your revenue since you don’t know how much your customers will spend on your product each month.
- Users who use more of your service might be paying way too high and might potentially want to switch to a competitor with a different pricing model.
With the Tier-Based SaaS pricing model, you offer different versions of your service at different prices.
The number of tiers that SaaS companies offer usually varies from 2 to 5, but the average is 3.5. Most companies settle for low, medium, and high price variations.
The Tier-Based pricing is great if you have a few buyer personas like individual users, SMBs, and enterprises. This way, you make customized plans tailored to the customer-specific needs with different features at different prices.
Example: Fomo is a marketing service platform that has 4 tiers for its customers depending on how developed their business is.
Tier-Based Pricing Pros:
- Maximized revenue for each type of client.
- Upselling opportunities. Once your clients need more features, they’ll have to upgrade to the more advanced plan.
- Higher customer satisfaction. Your customers can choose the plan that works best for them.
Tier-Based Pricing Cons:
- You need a clear idea of who your customers are, so you can build tiers that will be just what they need.
- Too many choices might confuse your customers and that can hold them back from making a purchasing decision.
The Freemium SaaS pricing model is a popular choice among many SaaS companies. To adopt this model, you can just add a free version of your SaaS service additionally to other paid tiers.
This freemium plan will have only limited features. So, if your customers want access to more functions, they’ll have to upgrade to a paid plan.
The email marketing platform MailChimp includes a Freemium plan that gives you limited features and a limited number of contacts and audiences.
If you want to use more advanced marketing features, you get to choose from the other 3 paid options.
- Easier acquisition of new customers due to the low barriers to entry.
- Increased popularity since so many more people have access to your service.
- Ability to monetize freemium customers by advertising the premium features, prompting them to upgrade.
- Freemium users don’t bring any revenue and have a higher churn rate.
- Freemium users also take up server resources, while generating no revenue.
The Free Ad-Supported pricing model is a good option if you want to offer a freemium plan but still earn some revenue from it.
You still give free access to some limited features of your service but your users will see ads across your software. If they want an ad-free version, then they’ll have to switch to a paid plan.
The website builder Wix automatically transfers you to their free ad-supported plan when you sign up. You get Wix ads everywhere while you use the platform. If you want to remove the ads and get some extra features you can upgrade to a premium plan.
Free Ad-Supported Pros:
- The ads can incentivize some customers to upgrade to a paid ad-free version.
- You get to monetize your freemium users.
Free Ad-Supported Cons:
- Ads might deter less loyal customers from your service.
- You’ll need a department to handle the ad sponsorships and payments.
The Penetration pricing strategy means you offer very low prices when you just launch your SaaS product. Sometimes, you even charge SO low that you’re operating at a loss, just to get more users.
The benefit here, however, is pretty obvious – you get to attract a lot more customers than your competition.
Once you have a large user-base, you can always just increase your rate.
A real-life example of the SaaS penetration pricing strategy is Disney+. At launch, they decided to go with a price of $6.99 per month – which is roughly 50% of how much Netflix costs.
This made it more likely for existing Netflix subscribers to subscribe to both streaming services, or even make a complete switch.
While Disney+ still hasn’t raised their pricing, it’s very likely to happen once they capture a large enough chunk of the market.
The Captive pricing strategy is when you offer the core product for an unusually low price.
However, to get the most out of the core product, your customers need the add-on features. And for them, you charge extra.
A real-life example of this is razors and blades. You can get a razor for a very low price. But the razor is useless without a blade. So, even if you get a cheap razor, the blades are times more expensive.
A good SaaS example would be Adobe. Their users can use the older version of the software for free. But then it gradually eliminates the functionality and compatibility of this older software and the users are forced to upgrade to the newest more expensive version.
The Skimming pricing strategy means you enter the market at super high prices and you gradually lower them.
A famous example of that strategy is Apple. They usually roll out their products at very high prices but make huge promotions and discounts on Black Fridays and other holidays.
This way, you get more revenue from people who are willing to pay more, and then get access to the rest of the market through the discounts.
The Prestige or Premium pricing strategy allows you to charge high prices if your SaaS company has a high reputation or is used by high profile companies.
This way, you maintain a small group of high-value customers that get your premium features and get a premium client recognition.
The Free Trial pricing strategy is widely used by many SaaS companies. When a customer is searching for a specific SaaS tool, they usually want to first try a few options and then pick the one they like the most.
Some trials are time-based meaning they finish after a certain amount of time (e.g. 14-day free trial). For example:
Some are usage-based (expiring after 1 invoice, transaction, limited storage etc.) like:
- Google Drive
Cost Plus pricing is when you calculate your total costs as a company, come up with a base product price that can cover all those expenses, and then put a margin on top.
The cost plus pricing is a good place to start brainstorming your initial pricing strategy, especially if you’re just building your SaaS.
However, that strategy is only good to consider if you really don’t know where to start, as it comes with a lot of disadvantages.
For example, it doesn’t take into consideration your competitors’ pricing, the value of your product, and customer price sensitivity. So, you’re likely to make an inaccurate estimate.
While Cost Plus SaaS pricing is mainly a company-oriented strategy, the Value-Based pricing is centered around your customer. With this strategy, you assess the value you bring to your customers.
You can also look into ways in which you can increase that perceived value and improve your product, so you can charge higher prices.
Keep in mind, though, that this strategy usually takes more time and research, as it requires you to really understand how your customers value your product.
With the Competitor-Based SaaS pricing strategy, you look into the pricing approach of your direct competitors and decide on your pricing based on that information.
This one’s a useful strategy if your SaaS company is new on the market and you are unsure about the value of your product.
However, don’t just blindly take your competitors’ price for a given. Understand their value proposition and compare it to yours. Think, what makes your product better than theirs and how much more can you charge for that.
If it’s well thought out, this strategy can give you a considerable advantage to your competition since you’ll have a more lucrative offer at a better price.
Pricing is as important as the product you’re offering.
Choosing the right pricing model and strategy for your SaaS company can seem overwhelming at first, but once you know all the options you have, it gets a lot easier.
So, don’t hesitate to experiment with your SaaS pricing model! Try out some of the strategies and models we’ve covered so far, and see if any of them works better than your current model.
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