7 best pricing models for SaaS businesses
There are few things that can impact SaaS revenues as much as pricing.
SaaS business models are marked by an overwhelming pricing model flexibility that often scares software vendors. This often ends up in contradicting and weak pricing models, which are simply wrong for that service.
In this article, we will focus on the 7 most used (and successful!) SaaS Pricing Models to help software vendors to define the best pricing for their product.
Your Pricing Strategy is not (just) your Pricing Page
Many software vendors still believe that their Pricing Strategy begins and ends with the pricing page they developed on the basis of what they think is the value of their service. Wrong!
Defining a price is about finding the balance between the ability to solve a problem and the compensation for that help.
The pricing model will determine the market position of a product, the ideal target and the level of service customers will require.
Before defining the pricing models, software vendors need to consider different aspects.
In this article, Lincoln Murphy suggests that software vendors should ask themselves at least two kinds of questions when defining their pricing model:
1- Strategic Questions: software vendors should determine whether they want a massive amount of customers or fewer and the market position they want to have, meaning whether they want to target premium customers or low-spending customers.
2- Customer-Facing Questions: software vendors should ask themselves questions about the customers to understand who the target is and what will be the value of the service. Typical questions include: who is the ideal customer? Which value are ideal customers getting from the service? What will the ROI be? What metric(s) will the price will be based on? What is the buying process? What level of service does the customer expect? What do competitors do?
Not answering these questions means choosing random prices: what are the chances that they will work? (tip: few.)
SaaS Pricing Models
As mentioned above, the flexibility of the SaaS business model means that there is an extreme flexibility in the pricing model. Anyway, there are 7 main pricing models for SaaS businesses.
1- Usage Based Pricing Model
The Usage based pricing model relates the cost of the product to the usage: the more you use the service, the more you pay. This model typically works with data services, cloud storage services and recurring billing services.
It reduces barriers to use and correlates price and usage. However, it makes harder to predict revenues.
Stripe is a good example of this model:
2- User Based Pricing Model
User Based Pricing is one of the most popular pricing models for SaaS businesses. It is really easy for customers to understand this pricing: the more users they add to their account, the more they pay. It is appreciated by SaaS businesses, because it makes it easy to forecast revenues. On the other hand, often customers avoid adding new users to keep costs low, and by limiting the adoption of the service within the company it increases the chances that they will change product at some point.
Salesforce is a successful example of this pricing model:
3- Per Active Users Pricing Model
As mentioned above, one of the limits of the User Based pricing model is that customers tend to avoid adding new users so that they do not have to upgrade plan, but this makes churn too easy. The solution is the Per Active Users pricing models: customers can add as many users they want, but they will be billed only for active users.
This pricing model works very well if you are targeting large enterprises, while it could not be a real incentive for small companies.
Slack is an example of this pricing:
4- Per Feature Pricing Model
The Per Feature pricing model has different pricing tiers according to the functionalities available in each plan. The more features you need, the more you pay. Usually this kind of limitation is a strong upgrade incentive, but vendors need to get the right balance between the features.
Leadpages offers a good example of this pricing model:
5- Freemium Pricing Model
The Freemium Pricing Model offers a basic free-to-use product, supplemented by additional paid versions. Typically, it encourages users to upgrade using feature-based/capacity-based or use-based limitations.
Even if it is a good way to persuade customers to use your product, software vendors should consider that free users do not generate revenues and they could move to another product as soon as they find a similar service that offers more features/capacity for free.
Wistia is an example of this pricing:
6- Flat Rate Pricing Model
The Flat Rate Pricing Model is probably the easiest pricing model: vendors offer a product with some features at a defined price. Usually it is billed monthly or annually, with a discount on annual subscriptions.
Even if it is really simple and clear, it does not offer any kind of customization and is now getting less popular among SaaS businesses.
It is now so unpopular, that we could not find a good example of SaaS businesses offering this kind of pricing model.
7- Tiered Pricing Model
The flat rate pricing model is often replaced by the tiered pricing model. This model offers different plans (usually 3) with different features and different pricing points.
Typically, it is used by companies that know their buyer personas and can define the right features for each target. Anyway, this could be quite confusing for customers so it requires a deep knowledge of the market and the target.
Hubspot uses this kind of pricing model:
Pricing Models and the Cloudesire marketplace
With the Cloudesire marketplace software vendors are free to use any SaaS pricing model.
Moreover, the platform allows vendors to sell services and physical goods together with the application through the extra resources billing feature so that they can customize their pricing model and have a simple and frictionless onboarding experience.