SaaS Pricing Models: a Comprehensive Guide
The average time a SaaS company spends determining their SaaS pricing model is less than six hours. Despite pricing determining revenue, perceived value, and potential growth in the future, pricing is vastly overlooked. With the right pricing strategy, SaaS companies can greatly increase revenue over time and serve customers a product at the right value. Without looking into and adjusting to the optimal SaaS pricing model, SaaS companies run the risk of alienating potential customers, losing revenue, losing upsell opportunities, and more impacting revenue over time.
There are plenty of different ways to price SaaS products. It can be overwhelming. But SaaS products all have different values and features serving different markets so it’s important to find what works for your specific product and your market. This is a huge part of understanding and serving your market correctly for long term success.
“If you’re improving your pricing the same amount you’re improving your volume, you’re going to get three times the impact compared to getting more leads in the funnel.”
– Patrick Campbell
Here is a comprehensive guide to a few of the most popular SaaS pricing models:
Determining which pricing model is right for you can take some understanding of what your product’s unique value is and what’s the best way to charge your customers for it. It may be that this is something that needs to be determined over time and changed as you start to learn more about what features are most important to your customers and better understand what the value is to them.
Flat rate pricing
This is probably the most simple SaaS pricing model and one you’ve probably seen on more simple SaaS tools. Flat rate pricing is where you charge a simple rate for using all features of your SaaS product on a subscription basis. Usually that subscription on a monthly or annual basis.
Flat rate pricing is simple. It’s as simple as it gets in terms of SaaS so for this reason it’s favorable for simple SaaS tools that are not costly in overhead. It’s also simple and straightforward for customers. With one option, usually very affordable, the decision is a “no brainer”. On the technical side, there is less development work in creating different access levels for a growing user base.
The cons of flat rate pricing is you may actually end up alienating customers if you do not offer different service levels. They may see your flat rate and write out your product as an option all together based on that. They may feel that they are overpaying for features or service levels they don’t need and look for a more tailored solution. The other issue is you really have one change to sell the price. They either buy in or they don’t.
Tiered pricing is where you offer different levels of service or features in tiers of varying prices on a monthly and annual basis. Usually, you’re offering a very simple, barebones version of your product as the cheapest option, a mid-tier with additional features and or a higher level of service, and a “pro” level with access to all of your product and the highest level of service.
One of the biggest pros of tiered pricing is that you can appeal to different customer levels. You’re able to offer customers with a smaller budget an option and not lose their business while also offering your full product for your full price to higher budget customers. This maximizes the revenue per customer and also increases conversion rate. You also create the opportunity to upsell to higher service levels if customers sign up for limited tiers.
The problem with tiers is it can make your pricing complex and diverse and potentially alienate customers in the sales process. They may feel overwhelmed by options and feel there is not an option that fits their needs exactly or be confused as to which option to pick. This creates more work for your sales team.
For SaaS products that require a lot of overhead to deliver the core service, usage based pricing can be a good option. For example, Dropbox: there are different pricing tiers for data storage. For Mailchimp and other email marketing platforms it’s not uncommon to see pricing based on the number of contacts in your list.
The pros are that it is simple and straightforward like flat rate pricing. It also covers the cost or allows for more cost control for your team. With other pricing options, users’ usage can get out of control as your user base grows. It also can make customers feel like they are paying the right price tailored for them based on their individual usage. This strategy can also reduce churn as customers don’t feel they are over charged month over month. Learn other ways to reduce churn.
One issue with usage-based pricing is that it can be difficult to track and is a complex system to manage for growing user base. Additionally, usage can fluctuate greatly. Some months, depending on the business climate for users, you may not have the same revenue. This makes it more difficult to predict revenue. Usage-based pricing may also make customers feel the product is of less value if its price essentially has no premium.
Per user pricing:
Some companies, similar to usage based pricing, will choose to charge per user instead of the usage of a resource like data or storage. Instead, for each user your team adds, you will be charged “x” amount per user. This is popular with chat tools, productivity tools, collaboration platforms, etc.
There is a huge opportunity here to start small and grow the lifetime value of customers. It fundamentally rests in your product service users well for them to bring on but the revenue per account can be much higher very quickly if they choose to do so. In addition, your team can onboard large accounts through the same sales time as smaller companies and make much more with hundreds more users.
One of the main cons of user-based pricing is that it may scare off larger accounts, especially those with a budget that is not massive. They may look for a flat rate solution.
Per feature pricing:
Another way that can be used on its own or in conjunction with other pricing models is per feature pricing. It depends on the complexity and nature of your product. In this model, you charge customers by the additional features they use.
Per feature pricing helps customers feel like they have selected exactly what they need and are getting good value on what is important to them for the right price. They feel as though they are not overpaying for features they don’t need. Especially when you combine service tiers with feature selection. This also makes it very easy to upsell and diversify revenue from existing customers. It’s a great way to sell more with a product-led strategy.
It can be difficult to set up and sell because of the complexity. Working with a lot of features takes a lot of explaining and clear sales and marketing to help customers select exactly what they need. It may scare off customers who don’t know exactly what they need yet.
Customer success is key to upselling customers once they are on your product. They won’t be willing to pay for features they don’t know about. Your team needs to effectively communicate the various new features and levels of service. Beamer can help you do this. Beamer is an in-app change log where you can post announcements for new features and updates. Users click on an icon in your interface or “What’s New” tab in your navigation to open up a native-looking newsfeed. You can add photos, GIFs, videos, and colorful CTAs to upgrade to your announcements to make them actionable. You can also enable push notifications so that you can bring users back when you announce a new feature or update. You can use segmentation to target users based on demographic, language, location, and past usage so you can better upsell.
The freemium model is a classic SaaS model that you’ve often seen and tried. Within this, customers sign up for a free account where they can use your product, limited in service and features, and use it free or upgrade to a higher service level with more features as they see fit.
What’s great about the freemium model is that it’s easy to onboard and to sell to users. Free products are easy to join. Your sales team doesn’t have to negotiate prices or have to try to work on long contract processes for larger companies to get them using the product. The revenue comes in keeping them loving it and switching to the paid version. This means much less work for your sales team.
There are some cons to freemium like you are literally giving away your product for free for a certain percentage of your user base. Unless they switch to pro and see the value in doing that, you’re not making money. The other issue is free users are costing you overhead which may get expensive. You will need to be converting to paying customers frequently to keep up with free user costs. With a free product as well, there seems to be high churn.
Without spending the time researching what is of value to your customers, what competitors are doing, and looking at data to determine your core product and features, it’s likely you may miss out on higher revenue and higher CLV. Try Beamer for the best way to announce new features and better engage users.