There’s hardly a thing that impacts your software-as-a-service product revenue more than SaaS pricing models. Still, for many companies choosing the right monetization strategy is no easy feat.
To shed some light on this matter, we have prepared a detailed guide on the most popular SaaS pricing strategies. You will find out the pros and cons of each option and learn how to adopt them properly from well-known SaaS companies.
Finally, we will discuss the required steps to take when choosing between different SaaS business models.
What is a SaaS pricing model?
In layman’s terms, a SaaS price model is a method companies use to set the best price for their cloud product or service.
Your main task is to discover the proper balance between value and revenue. On the one side, you want to help customers with your product. On the other side, you expect to get fair compensation for that help. The right balance will help you establish a stable and profitable SaaS business.
When picking the best pricing model for SaaS, you need to consider the following factors:
- Internal: revenue goals, brand positioning, target audience;
- External: consumer demand, competitor price, overall market trends.
Why is a suitable pricing strategy important?
We all know that the right revenue model is crucial for the SaaS industry. What about specific reasons for its paramount importance? Why do you need to optimize your prices instead of setting it on instinct once and for all?
The chances are that other companies also find SaaS pricing models challenging. They may be hesitant to optimize their SaaS business models for the same reasons as you are. Still, the right pricing is what will help you stand out from the competitors offering similar products.
You can offer customers true value
Consumers like to buy products that can be easily justified. They want to consider their purchases as wise investments. By setting the SaaS price that users are ready to pay, make the real value of your product your top priority.
It helps strengthen the unit economics
Basically, the success of your SaaS business hinges on the right balance between two key metrics. These are customer lifetime value (CLV) and customer acquisition cost (CAC). The first metric should be significantly higher than the second one. Otherwise, you will not see any growth.
With the optimal pricing model for SaaS, you can nail two birds with one stone. You can reduce customer acquisition cost through better positioning. In addition, you can increase customer lifetime value through improved retention.
Top 8 SaaS pricing models
Below you can see the most popular SaaS pricing strategies. Consider each option carefully to make the right choice. Thus, you will be able to get lots of loyal customers and make your business thrive.
With this model, you charge customers based on the number of people using your product. Per-user SaaS pricing is popular among project management software, CRMs, and other team-based tools.
- The SaaS pricing model is pretty simple for customers.
- It makes it easier for you to calculate and forecast the revenue per month.
- Your revenue grows along with the adoption of your product.
- Large companies and enterprises with lots of users can find this SaaS model pricing too expensive.
- Customers may abandon your services much faster.
- This revenue model does not reflect the actual value of the SaaS product.
Below, you can see the per-user SaaS price model adopted by project management platform Asana:
As a rule, this SaaS pricing model comes together with a feature-based revenue strategy.
In simple terms, customers can pick the package based on the required features, and then you charge them per user.
This term means providing customers with several packages with different functionality for a different price. This approach is especially helpful if the SaaS product you sell has various use cases.
- You can appeal to several buyer personas with this pricing strategy for SaaS.
- Customers get the power of choice: they can pick the package that satisfies their business needs better.
- By offering their SaaS product to multiple buyer personas, a SaaS company can maximize the revenue you get from each customer type.
- The diversity of packages can put users off their stride.
- You may find appealing the idea of offering a great number of packages to suit every possible business need. However, you cannot be everything for everyone.
See the different packages provided by Hubspot, a platform for marketing, sales, and customer service:
It is one of the simplest SaaS pricing models. The cost of the solution depends on the amount of storage space required.
You can follow the lead of such leading SaaS companies as Google or Dropbox and offer a small amount of storage for free. As soon as customers hit their limit, they can choose a paid package. It is a great sales pitch since you allow them to get to know your product first.
- Customers often find this model the fairest and the most transparent one among all other SaaS pricing strategies. It is because the price they have to pay for cloud services is directly proportional to the storage space they need.
- This revenue model is flexible enough to be easily adapted to fluctuations occurring in your customers’ business.
- When it comes to predicting your revenue, it is one of the challenging SaaS pricing strategies. Your revenue depends solely on customers’ usage of your SaaS product and cannot be measured accurately.
- If you provide customers with enough free storage, they may never see the necessity to pay for a more expensive package.
See per storage saas pricing model example from Dropbox below:
In this case, the price for your cloud solution is defined by the functionality available for your customers. The more features they need, the higher price they will have to pay.
- With feature-based SaaS pricing, consumers get a clear motivation to upgrade their packages. This way, they will get extra functionality.
- If your SaaS product development is resource-consuming, you may charge customers premium prices for the most complex functionality.
- It is cost-effective for your clients since they do not have to pay for unnecessary features.
- It can be challenging for B2B SaaS companies to predict what features consumers will need more than others.
- Some customers may find this pricing model disappointing. You can see the problem - they pay monthly fees but still cannot access the full functionality.
QuickBooks, the accounting software, provides customers with the following packages:
Pay As You Go
This model suggests charging customers based on the usage of your product. In a nutshell, the more customers use it, the higher your revenue will be. B2B SaaS companies offering infrastructure cloud products often adopt this pricing model.
- A barrier to entry is low for consumers. They can start by paying a small fee for a product. Then, you can gradually increase prices for those consumers who use it most frequently.
- SaaS business charges grow together with product usage. The popularity of your product increases your revenue.
- Power users may find the cost too expensive. Consequently, they may go to a competitor that adopted other SaaS pricing models (e.g., fixed monthly or yearly fee).
- Predicting revenue may be somewhat challenging. You cannot know exactly how much a particular consumer will use your product.
- At the same time, it can be difficult for customers to calculate the cost since they cannot forecast their resource usage.
As you can see below, CDN provider BunnyCDN charges users rest upon the GB of data served in a month.
Another great approach to SaaS pricing is to offer some free functionality. You can always supplement your free offering with additional paid packages. The Freemium model works best when your add-on services bring real value to the customers.
- Adoption for customers is simple - it has never been easier to start using your SaaS product with this SaaS pricing strategy.
- The free version serves as a perfect testing ground for experimenting with new functionality.
- Statistics tell that less than 10% of free users become paid customers. It means an unwanted burden on your limited sources if you have more free customers than paid ones.
- Customers give up free products eagerly. In fact, customers tend to value those things that cost them a heavy price. In case users are not interested in switching to paid packages, the freemium model can kill your revenue.
See the available packages within the Mailchimp platform below:
It is probably the most straightforward option among all SaaS pricing models. There is only one product with a definite set of features that is sold for a single price.
- Customers can easily understand this pricing model for SaaS.
- Having one clearly-defined product gives you more time for marketing and promotion.
- Brand-new SaaS startups can use this model to stand out from the established competitors with complicated and tricky revenue strategies.
- You cannot get the maximum revenue from your diverse customer base. Both startups and established enterprises will be paying the same price for your services.
- Since you do not offer upgrade packages, you will miss upselling opportunities.
- It can be tough to engage different types of customers who have opposing opinions about SaaS pricing. Some customers may find your product too expensive, while other ones can consider it too cheap.
The classic example of the SaaS company using this strategy is Basecamp:
By the way, did you know that Basecamp was built with Ruby on Rails?
Read our article to learn how RoR framework can benefit your SaaS application: SaaS Product Development: Why Choose Ruby on Rails Framework.
Free (Ads Supported)
This model reminds the freemium one, however, monetization comes from ads. It works best if you offer a very consumer-centric SaaS product, and you have lots of free users you tend to monetize.
- It works well for software-as-a-service companies that offer customers a free option but still want to get revenue from those users.
- This model will suit you If you would like to adopt a freemium model but do not want to cut the available functionality. You can add advertisements to encourage customers to upgrade.
- Intrusive ads can hurt user experience and, as a result, your brand.
You will have to hire specialists responsible for ad selling.
With the Premium SaaS price model by Spotify, users can listen to music without ads.
Be aware that choosing the right revenue model is important for any business, not just for SaaS companies. To get more insights on revenue models, check our article on the best monetization strategies for online marketplaces.
Psychological pricing tactics
Your work does not end with choosing the appropriate SaaS pricing models. You need to improve your SaaS price off and on to stay relevant.
That’s when psychological SaaS pricing strategies can save the day. Consider them as creative experiments for optimizing and fine-tuning your revenue model.
Below we have picked several SaaS revenue models that worth your attention:
- Charm pricing - this term refers to the prices that end in number nine.
- Odd-even pricing - this pricing strategy for SaaS is somewhat similar to the previous one. You reduce the price by a few dollars to get it closer to the so-called “rounded” price point.
- Product bundle pricing - it means providing consumers with a free package for a single price.
- High-low pricing - B2B SaaS businesses alter between high and low prices. At first, you offer your SaaS product at a premium price, then reduce it to a lower one.
- Trial pricing - this model suggests selling your product at a discounted price for a limited time.
- Center stage pricing - you offer three different packages. Consumers may consider the middle solution a safer bet compared to the cheapest and the most expensive option.
- Decoy pricing - some software-as-a-service companies add a less than desirable option. This way, they encourage users to pick one of the remaining solutions.
How to choose the right SaaS pricing strategy
As you can see, there are plenty of SaaS pricing models to pick from. Your task is to define which option is the right solution for your business.
The steps below will help you make the right choice.
Step 1. Analyse market research data
As soon as you come up with an idea of creating a SaaS product, you need to conduct market research. This way, you can test the feasibility of your venture.
What is more important, you will get useful insights into your target audience. When you learn about your potential customers, you will know what solution to offer them. Also, you will find out what pricing strategy for SaaS you should choose.
Decide what consumers you want to attract. Are you going to gain as many consumers as possible? Or will you focus on the biggest clients that will bring you more profit?
Step 2. Define the value for the customer
You may think that the specific functionality of your product brings your customers the highest value.
In fact, the ability to fix their issues with your SaaS solution is what users appreciate the most. So you need to understand their pain points to provide them with excellent customer service.
Besides, it will help you define your product’s true value and, thus, get the differential advantage.
Step 3. Clarify your market position
Your next step is to define your position on the market. For this purpose, conduct the market analysis. Define the most prominent industry players, their merits, and flaws. What SaaS pricing strategies do they use? Think carefully, where you can do better than them.
Besides, it would be a great idea to carry out SWOT analysis. This approach will give you insights into the strengths and weaknesses of your SaaS business. In addition, you will know what threats and hidden opportunities your industry is associated with.
Step 4. Choose the right metrics
Thus, you will be able to find out which SaaS pricing models suit your customers the most.
Suppose you provide consumers with storage. In this regard, your metric should be storage capacity. As for SaaS pricing strategies, the per storage pricing model will work the best in this case.
Other widespread SaaS metrics include price by functionality, user, or tier SaaS pricing.
Step 5. Define the deal
So you have chosen the pricing strategy for SaaS and the key metrics. Now it is high time to define your deal.
Will your consumers pay for one plan? Will there be several different packages? Will customers be able to upgrade?
Step 6. Calculate the customer lifetime value
It would be a sound idea to measure customer lifetime value. You need this data to find out what revenue you will get from an average customer over the whole time they have been using your product.
Thus, you will understand whether this revenue model will work for you, or you will have to consider other SaaS pricing strategies.
You may calculate this figure easily. The formula looks the following way where ARPU stands for average monthly revenue per user:
Step 7. Define the value of free trials
It only makes sense to offer a free trial if customers see the SaaS product value when the trial is over. If you notice that consumers using a free trial do not convert into paying customers, try to do a feature audit. Find out what functionality satisfies customers and add it to your free trial.
We hope that our guide on SaaS pricing models will be useful for you. We have discussed plenty of SaaS pricing strategies and hope that you will be able to choose the right one. Don’t forget to revise your pricing from time to time. Thus, you will be able to stay in the game and grow your software-as-a-service business.