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The Ultimate Guide to Pricing Models for SaaS Companies

SaaS Pricing Models: Ultimate Guide to Choose the Right SaaS Price Model

Published on March 2nd, 2021

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Over the past few years, SaaS industries have seen rapid growth and have proven to be progressive and scalable. In fact, Gartner Group the growth of SaaS technologies has been forecasted to reach $278 billion by the year 2021.

According to a McKinsey study, a 1% change in price can cause an 8.6% change in profitability.

Pricing is something that requires a lot of thought and not something you should choose by just looking at your competitors. You should approach it with methodical thinking, the same way you carefully design your product strategy, business model, and other elements of your SaaS business.

To come up with an effective pricing strategy, you need to consider your target audience, service level, market position, and customer satisfaction.

(Note: Customer is the main input when developing a price)

In this blog, we’ve enlisted 7 SaaS pricing models companies use, along with some advantages and disadvantages of each, so you can pick the best one for your business:

ultimate-pricing-guide-for-saas

  1. Tiered User Pricing
  2. Per Storage Pricing
  3. Feature-Based Pricing
  4. Usage-Based Pricing
  5. Freemium
  6. Subscription
  7. Per-User Pricing

The pros and cons of these pricing models will not only help you identify the optimum way to market but also sell and grow your SaaS business.

1. Tiered User Pricing

Tiered User Pricing is the most popular pricing strategy implemented by popular SaaS companies like HubSpot, Confluence, Hootsuite, etc.

In this pricing strategy, you can charge based on the number of users who may use that service. For instance, a SaaS company might charge a particular price for, say, up to 5 users, and as the number of users increases the price goes up.

Pros:

  • It enables you to customize packages to suit multiple buyer personas
  • If a customer outgrows their current package, they’re left with no option other than sign up for the next price point

Cons:

  • As appealing as it sounds to startups it might, however, be beneficial for solopreneurs, or freelancers who may need additional features but not additional users
  • When a user regularly exceeds the allocated service usage, you won’t be able to collect extra revenue to compensate for that
  • While offering tiers be sure about the number of options and the way you display them as this could affect revenue

Pricing Model Example:

Hootsuite: Offers different pricing options based on the number of social profiles and users, each pricing can be customized for specific buyer personas, considering that not all users will need the same set or amount of features.

Hootsuite-Pricing-model

2. Per Storage Pricing

For cloud storage companies, the most suitable pricing model has to be this one as it is based on the storage people might need.

For example, cloud storage companies like Dropbox give their customers a certain amount of free storage, and for additional storage – “Cha-Ching”.

Pros:

  • This will help people understand the service, which may encourage them to upgrade once they reach the limit
  • Customers don’t need to upgrade unless it’s absolutely necessary, they can continue with the service as it is

Cons:

  • Just the one – it can only be implemented by cloud storage providers
  • A lesser chance for upselling in case a company decides not to upgrade for more storage

Pricing Model Example: 

Dropbox: Offers 2 sets of pricing models – for businesses and individuals. 

Dropbox business pricing – is based on the amount of storage user requires, starting with 3 users, and can be billed monthly or yearly.

dropbox-pricing

Dropbox individual pricing – is based on the amount of storage a user requires, and in the case of Family it also increases the number of users; this can also be billed monthly or yearly.

dropbox-pricing-family

3. Feature-Based Pricing

As is evident by the name, this SaaS pricing model differentiates prices based on services and upgrades available to customers, i.e.,  to unlock more features customers need to loosen their wallet-strings. 

Pros:

  • It offers a clear motivation for upgrading – unlocking extra functionality
  • The feature-based pricing also allows you to compensate, by putting delivery-heavy features into your top-tier packages

Cons:

  • It’s difficult to understand what features your users want for free and for what they might pay for
  • Users might feel resentful since they’re paying for a month to use a product, and still missing out on some functionalities

Pricing Model Example:pandadoc-pricing-model

PandaDoc: Pricing is primarily focussed on the set of features they offer their users and as the number of features or add-ons increases, so does the price.

4. Usage-Based Pricing

This pay-as-you-go SaaS pricing model charges customers based on their usage, the more they use a service the more they’ve to pay, simple! 

Companies like PandaDoc, Dropbox, Intercom, etc. allow customers to pick the add-ons they want.

Pros:

  • It correlates usage and price, so no big up-front costs
  • This model works well with customers with fluctuating service usage
  • With fixed-price packages, there’s always the danger of “heavy” users taking advantage of your delivery resource and there’s really no way to compensate for that. But this model successfully tackles the “heavy user costs” effectively

Cons

  • For customers, the only disadvantage this SaaS pricing model has is that they won’t be sure of their resource usage which will make it difficult for them to predict their costs
  • As a company, it will be harder to predict revenue as billing amounts will vary month-to-month, making it much more difficult to forecast revenue

Pricing Model Example:

Amazon Web Services: AWS has a pay-as-you-go pricing model for over 160 cloud services, i.e., you pay only for the services you need, no matter the duration you’re using them for, more like the way you pay for electricity.

aws-pricing-model-saas

5. Freemium

You can also provide some awesome functionalities of your software for free and have a range of upgrades. 

Like on LinkedIn. 

Users get a lot out of LinkedIn with the free version, but they have numerous upgrade packages like LinkedIn Premium Account to help job seekers, recruiters, and business owners.

According to Manan Shah, CEO of recruiterflow, “The user acquisition of the freemium model is about 50% for SaaS company’s cash flow.”

The only drawback of the Freemium model is that there’s always a chance that most people won’t need or wouldn’t want to sign up for a paid version. This model is being actively used by some top companies like Slack, Evernote, and Dropbox.

Pros:

  • The freemium model makes it easy for customers to get started and understand your product

Cons:

  • It’s a revenue killer because obviously, you won’t be generating any revenue from the free users
  • It also means that you need to generate enough revenue from your paid users to support the cost of serving both your paid and your free users
  • It can easily devalue your core service. Even if your product solves a painful problem, your users may resent having to eventually pay for the service

Pricing Model Example:

Slack: With a basic freemium model with limited features, slack allows its users to experience the product and hopefully upgrade to leverage some key features.

slack-pricing-model-saas

6. Subscription

When you move beyond the freemium model, some companies charge a flat or a subscription rate for all their upgraded services, with no further difference. In simple words, it’s a single service, at a single price with a single set of features.

It’s a very simple and easy option for customers as it makes it easy for SaaS companies to be sure of the revenue they’ll be getting.

Pros:

  • This model makes it easier to focus all the sales and marketing energy on just selling one defined offer
  • It’s easier to communicate

Cons:

  • It’s a one-shot at securing potential customers because of the lack of flexibility of this SaaS pricing model

Pricing Model Example:

Evernote: Offers a single subscription price with a single set of features, this makes it easy to select as users don’t need to think a lot about their subscriptions and the individual set of features they want.

evernote-pricing-model-saas

7. Per-User Pricing

It’s the most common SaaS pricing model, where users are charged depending on the number of people who use that service. But according to Patrick Campbell of Price Intelligently, “SaaS companies might hurt their business with this pricing model, especially a company with multiple users.”

The disadvantage of this model is that you need to cut down on the number of people who can get to know and use your software. 

It also limits the potential number of active users, which is not at all good for your SaaS company.

Pros:

  • It’s the simplest and direct SaaS pricing model and makes it easier for your monthly users to forecast their monthly costs
  • It also offers a predictable revenue generation

Cons:

  • By charging per user, companies might hesitate on adding new users to the tool

Pricing Model Example:

Calendly: Depending on the number of users who are using its services, calendly offers 3 sets of pricing options to its users; billed monthly and yearly.

calendly-saas-pricing-model

How to Choose the Right SaaS Price Model?

Finding the right SaaS pricing model is like playing Jenga, a single wrong move can collapse the entire thing. You need the perfect balance between what your customers are willing to pay with what will make your business profitable. Your product pricing model is not a “mere landing page” on your website, it’s the center of your business because, to state a fact you might have put in all your efforts to acquire customers, in the end, it’s your pricing model that will decide whether or not they will actually sign up for your product.

According to a survey conducted by OpenView, “more than 40% of the SaaS companies never test their pricing strategy, and about 55% haven’t conducted a research to understand what amount their target customers are willing to pay.” This is definitely not the right approach for any SaaS business, so here’s a list of the essential things you need to consider and some critical questions you need to ask while evaluating and choosing a SaaS pricing strategy. Here are some key points to consider that can help you choose the right SaaS pricing model:

  1. Create a Buyer Persona
  2. Understand Your Market Position
  3. Check the Pricing Strategy of Your Competitor
  4. Ideal Pricing Range to Stay Profitable
  5. Is Your Onboarding Process Effective?
  6. Price Your Ideal Customers are Willing to Pay
  7. Pricing Models That Will Work For Upselling

Let’s dig in! 

Create a Buyer Persona

You need to define your target market and conjure a buyer persona to understand the pain points of your potential customers. To use personas more effectively you can also conduct surveys and polls. You will get a clear understanding of what problems you are solving for them which will help you understand the value of your product, your USPs and decide on the right price.

Once you understand what problems are you providing a solution to for your customers, you’ll be able to better communicate the value your product plays in solving that issue.

Understand Your Market Position and USP

You also need to analyze the industry you are in and this will help you narrow down your competitors, the loopholes (if any), the strengths and weaknesses of your product, referred to as a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis so you can leverage your USPs and design a killer Marketing Strategy.

For instance, if you don’t have any competitors in the market – your product is unique, you can easily get customers to pay for it as in this case they won’t have any options with offering a free trial.

What’s The Pricing Strategy of Your Competitors?

Having a completely unique product is indeed an ideal situation, but that’s not the case most of the time. Having competitors can actually be beneficial as they have already gone a long way and have tried and tested a lot of strategies and concepts, you can analyze their strategies and see what worked for them to implement as a part of your business strategy. 

Check for your Primary Competitors – they are your direct competitors as they are either targeting the same audience or have a similar product — or maybe both.

Research every aspect of your competitors – their traffic sources, backlink profile, onboarding process, their email campaigns and social network strategies, and most importantly their pricing strategies.

What do you need to charge to stay profitable?

The first thing you need to understand is how much you need to charge your customers to maintain a perfect balance between customer satisfaction and your profitability. To deduce that you need to calculate:

  • Customer Acquisition Cost
  • Customer Lifetime Value

A CLV greater than 3 to 5 times your CAC is what you should be looking for as this ratio helps you determine the efficiency of your pricing model. 

Note: Your CLV is the variable quantity and is based on the pricing you end up choosing. 

Effectiveness of Your Onboarding Process

First impressions are always important, this makes it vital to delivering an amazing initial experience to your customers. A great onboarding experience is imperative especially if you are offering a free trial. You can also offer a complete walkthrough or a video call to help them through the onboarding process.

What Are Customers Willing To Pay?

To decide on what should be the ultimate price of your product you need to analyze both sides of the coin, what will keep your business running, and what your customers will be happy to pay for your services. To understand this, you need to ask your customers the following questions:

  • What amount did you spend on solving this problem the last time?
  • Have you researched any products?
  • Which products did you consider?
  • What’s your budget for software like this?
  • Who makes the software buying decisions within your company?

The fact is that it might make sense to charge some customers more or less than others based on their needs and what they’re using it for.

When you charge customers more or less than others based on their needs and the pain points they are using, this software is called “differential pricing.” E.g., student discounts offered by many stores.

What SaaS Pricing Models Will Work For Upselling? 

One way of making SaaS businesses grow exceptionally is through upselling (the growth of your acquired customers), known as “Expansion MRR”. It costs very little as compared to acquiring new customers and can increase MRR by strategically creating pricing tiers.

The most common model used to leverage the benefits of upselling is the “feature-based” or “value-based” pricing. You need to research your customers – analyze each stage of growth and understand at which point in their buyer journey they will most likely need an upgrade. Once you understand your customers you can tailor your services accordingly thus leading to growth at every stage of the buyer funnel.

Conclusion

Although selecting a SaaS pricing model will depend on several things, the value-based approach is seen to be one of the best and most effective SaaS price models. As we have seen with some companies, a better approach to deciding which strategy you should implement is – mix and match pricing depending on your audience. 

It’s you who will decide which of the aforementioned SaaS billing models will work the best for your company and which ones you can combine to get the most benefit out of.

Remember that pricing isn’t a decision to be made by a single department. You need to take suggestions from your Marketing, Sales, and Product Department as they help you a position, target, and manage your audience effectively.

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