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Top 6 SaaS Pricing Models & 3 Best SaaS Pricing Strategies

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When you’re launching a new SaaS company or new product, it could be challenging to set the price. Sure, you also need to think of your sales strategy, marketing campaign, and many other factors. But your pricing structure can make or break all of those foundations.

You want to set a price that would attract users to purchase your SaaS product. Delivering the best value to your clients is also a priority. But if you set it too low, you might be bringing more harm to your businesses, especially if proper evaluation hasn’t been conducted. So how do you set a fair price while making sure that you have a sustainable profit margin?

The key is coming up with a suitable pricing model and pricing strategy. There are several to choose from. And it is a matter of choosing the ones that would best suit your product and its features. Before you create your own SaaS pricing model template, however, you might want to check what your competitors are using and adjust your billing base on your findings.

 

SaaS Pricing Models

 

There are many different SaaS pricing templates out there. And each has its own pros and cons. What’s more, there’s no one pricing model that fits all SaaS products. The right model is the one that would maximize your SaaS offering and simultaneously bring the best value to your users.

Now let’s talk about them one by one. Here are some SaaS pricing model examples.

 

Flat Rate Pricing

 

    Pros     Cons
  • Simplest pricing model
  • Easy to market
  • Caters to a limited group of users
  • Limits your potential for growth

Flat rate pricing is the easiest way to price a SaaS product. You offer only one plan with a complete set of features to all users. Since there is only one offering, it is easier to market and sell.

While very few SaaS companies use this model nowadays, it is still useful in a few specific cases. One such case would be having a simple SaaS product that offers only a small set of features. Another would be targeting a small group of users. In cases like these, your focus would be on retaining existing customers rather than expanding your client base.

Still, there is a good reason that flat-rate pricing is rarely used today. It limits the growth of your product and your client base. Offering the same set of tools to all your users hinders you from knowing which features are in demand and which are not. Additionally, not offering cheaper plans or more advanced ones also closes the door to securing more diverse customers.

It also doesn’t account for the resources it takes to serve different kinds of customers. Larger businesses take up more storage space, more server bandwidth, and more customer support than small businesses. But they would be paying the same amount.

 

Usage-based Pricing

 

    Pros     Cons
  • Attractive option for users
  • Scalable pricing model
  • Can reach a wider customer base
  • Unexpected high bills may upset customers
  • Revenue is hard to predict
  • Users can easily discontinue without notice

Usage-based pricing, also called pay-as-you-go pricing, is somewhat similar to post-paid data plans or a hotel fridge. Customers only pay for what they get. You only charge users based on what they actually use. One example would be Twilio’s SMS solution. It charges its users according to the volume of messages they send and receive.

One advantage of this model is that it can be attractive to users. Some may want more flexibility and less commitment to features they may not even use.

Additionally, it allows them to scale up much more easily. Instead of going through the hassle of upgrading a plan, they simply pay more. This may be due to an extensive campaign they’re planning to launch or they’re conducting a deep study on their market.

However, its lack of upfront cost and commitment may also lead to complications down the line. Unexpected bills may take users off guard and cause them to churn. Since it is a “pay-as-you-go” model, customers can easily choose not to “go” at all. So if you’re going to use this structure, make sure you clearly communicate everything that you will be charging from the outset. That way, everything is clear and there’s no future misunderstanding.

 

Usage-based SaaS pricing model

 

Tiered Pricing

 

     Pros      Cons
  • Most widely-used SaaS pricing model
  • Reaches a wider variety of users
  • Easier upselling
  • Potentially confusing to customers
  • Needs different levels of customer support

If you look at a random SaaS pricing page, you may see a table showing a tiered pricing structure. This is the most popular pricing model in the SaaS space right now. With this model, you offer multiple subscription plans with varying access to your solution’s features. The higher the plan’s price, the more features the customer can use. Most SaaS businesses even offer customized plans for big enterprises. Take Apptivo’s pricing page, for example.

Tiered pricing is the most widely used model for good reason. Its variety in terms of cost and included features attracts a wide range of customers. The more customers you can cater to, the higher your conversion rates and revenue will be. What’s more, having distinct pricing tiers will make it easier to upsell.

One thing you need to watch out for, however, is creating a complicated pricing structure. You don’t want to confuse your customers, do you? Make sure that the difference between your plans is clearly understood.

Moreover, be prepared to provide different levels of customer service for the different tiers. In fact, most SaaS providers include varying access to customer support in their plans. You’ll find that your tiers with the most features will require stronger customer service.

 

Tiered Pricing

 

     Pros      Cons
  • Most widely-used SaaS pricing model
  • Reaches a wider variety of users
  • Easier upselling
  • Potentially confusing to customers
  • Needs different levels of customer support

If you look at a random SaaS pricing page, you may see a table showing a tiered pricing structure. This is the most popular pricing model in the SaaS space right now. With this model, you offer multiple subscription plans with varying access to your solution’s features. The higher the plan’s price, the more features the customer can use. Most SaaS businesses even offer customized plans for big enterprises. Take Apptivo’s pricing page, for example.

Tiered pricing is the most widely used model for good reason. Its variety in terms of cost and included features attracts a wide range of customers. The more customers you can cater to, the higher your conversion rates and revenue will be. What’s more, having distinct pricing tiers will make it easier to upsell.

One thing you need to watch out for, however, is creating a complicated pricing structure. You don’t want to confuse your customers, do you? Make sure that the difference between your plans is clearly understood.

Moreover, be prepared to provide different levels of customer service for the different tiers. In fact, most SaaS providers include varying access to customer support in their plans. You’ll find that your tiers with the most features will require stronger customer service.

 

Freemium Pricing

 

    Pros

    Cons

  • Can improve brand awareness
  • Free beta testing
  • Can collect usage data
  • Low conversion rate
  • Support for free users can be an additional expense
  • High churn rate

The freemium model is popular not just in the B2B SaaS space, but in B2C as well. Some freemium products put ads as an additional revenue source. Consequently, customers can pay to remove those ads. One popular example is Spotify, which puts ads in between tracks until the user pays for a premium account.

Most B2B SaaS solutions mix this model with a tiered pricing structure. They add a free plan as a subscription option. But they usually give access to the most basic tools for a limited number of seats.

Free products can quickly become popular, which is an advantage the freemium model presents. If your solution reaches a significant number of users, you can count it as free beta testing too. Moreover, it is a good opportunity to collect user activity data. You can utilize this to improve the user experience or develop a better incentive for them to purchase a paid account.

But the Freemium model comes with its risks too. One is coming up with a convincing reason for your free users to upgrade to a premium account. Otherwise, they’ll be content to stay with their current pricing tier. As a result, that would lead to a low conversion rate and poor MRR/ARR.
Another thing you may need to prepare for is additional expenses on customer support. Some customers may use your product for free, but providing support for them would still be costly. But you can always choose to not offer support for free plans. In fact, it is a common practice in freemium B2B solutions to offer live support only in the paid pricing tiers.

 

Per-user Pricing

 

    Pros

    Cons

  • Easy to implement and adopt
  • Scalable pricing model
  • Easier revenue forecasting
  • Vulnerable to abuse
  • Potentially high churn rates
  • Pricing does not reflect the value of the product

Per-user pricing is one of the simplest pricing models for SaaS. With it, you offer all of the features but charge only for each seat your customer needs. The beauty of it is that it scales while your customer grows. What’s more, having this insight into your customer’s growth makes it easier to forecast revenue.

But while it’s relatively simple to adopt, it also has considerable drawbacks. For instance, it is prone to abuse, with multiple users sharing a single account. Additionally, the pricing won’t reflect the value your users get from the product. That means you’re not getting data that you need to convert these free users.

Still, per-user pricing may work for specific SaaS solutions. A work chat software, for example. Per-user pricing would make sense here, especially for businesses with a lot of employees as each user would need their own account.

Some SaaS businesses mix per-user pricing with tier-based pricing. Just look at PipeDrive. It offers different tiers with various access to features. But each tier is charged per user.

 

Per-user based SaaS Pricing Model example

 

Hybrid Pricing

 

    Pros     Cons
  • You can come up with your own pricing model for your solution
  • Combines the strengths of different pricing models
  • Easy to scale
  • Complex pricing structures may confuse customers
  • May need a billing software

You may have noticed in our examples that you can mix different pricing models. This is a good consideration if you have a scalable SaaS solution with a lot of features. Since the choice of pricing models is up to you, you can make one that fits your product perfectly. You can combine the strengths of different pricing models and address their weaknesses at the same time.

One example would be Freshworks CRM’s pricing structure.

Its pricing page shows a hybrid of freemium, tiered, per-user, and usage-based pricing models. It is a customer relationship management (CRM) software that offers a wide variety of features, thus the need to offer them in tiers. Its per-user pricing makes sure it caters to companies with varying sales team sizes. And since it also offers telephony solutions, it also charges phone calls based on usage.

If you’re looking to create a hybrid pricing model, make sure that it doesn’t get too complicated. You wouldn’t want to drive away potential customers with intimidating pricing tables. What’s more, if you do successfully implement a hybrid model, tracking billings can be complex too. In such cases, you may need to use accounting and billing solutions. That’s an additional resource that would eat at your revenue.

 

Hybrid SaaS Pricing model example

 

SaaS Pricing Strategies

 

More than setting the right pricing model, it is even more important to set the right price range. Set it too high and you may lose customers. Set it too low and you may lose revenue. That’s why you need to choose the right SaaS pricing benchmarks.

Let’s talk about the three major pricing strategies you can use.

 

Cost-plus Pricing

 

Cost-plus, also called cost-based pricing, is a good starting point in setting a price for your SaaS solution. It is the most basic form of pricing not just in SaaS, but in the business world as a whole. With it, you simply add up all your costs and profit margin, and that’s your price. For a SaaS business, this may include product development, labor cost, and the company’s SaaS expenses. Not to mention the SaaS certification cost.

And sure, this pricing strategy is the easiest one to implement. It also ensures that you cover all your costs and get a bit of profit. But that’s just it— it’s just some profit. You might end up limiting your own product’s real value.

What’s more, costs are constantly changing. You still have to spend on marketing, sales, maintenance, and other customer acquisition cost. As your SaaS business grows, so do your hiring expenses. These volatile expenditures would not only complicate your projected revenue, but it may also damage it too.

 

 

Competitor-based Pricing

 

Another simple approach that you can start with is competitor-based pricing. With it, you price your products based on how your competitors are charging for theirs. Aside from being an easy way to price your products, it also ensures that you have a price range that is acceptable within your market.

The thing is, if you use this strategy, it’s not really your strategy. It’s your competitors’. Sure, you are setting a safe price for your product. But is it the best price? You’ve seen what your competitors’ products are worth. Is it really what your product is worth too?

As a SaaS company, you would want to offer something unique in the market. You are offering more value to your customers. And that alone deserves a unique basis for pricing.

That’s where this last, but certainly not least, pricing strategy comes in.

 

Value-based Pricing

 

Right off the bat, I’d say this is THE BEST pricing strategy for any SaaS business. It’s not only based on your costs or competition. It is based on your customers themselves and how much they are willing to pay for your product. That willingness to pay will be influenced by the quality of your product and how you package it.

With value-based pricing, you need to have a thorough understanding of your target market. You need to ask yourself: how can my product make their lives easier? How can it increase my customer’s revenue? And the most important question of all: how can you make your product part of your customer’s daily operations and future campaigns?

Getting to know your clients paves the way to several advantages for value-based pricing. One is that you’ll know what kind of product and features would serve them best. Another is that you already know how much they are willing to pay for your product. This makes setting the price easier.

The downside is that value-based pricing takes a lot of time and effort. Knowing your customers takes enormous effort on your end. Also, it won’t give you one definite price point, but a range. It is still up to you to decide where in that price range you would settle on.

Still, these downsides would turn into benefits in the long run. As you get to know your customers more, you’d slowly get an idea of how to value your product. This learning process may be slow but it’ll eventually lead to a more profitable SaaS product and lower churn.

 

Final Thoughts

 

Don’t get me wrong. Cost-plus and competitor-based pricing still have their uses, especially in other industries. But in SaaS, data on expenditure and competition are just a means to an end. The end being a value-based price point.

If I haven’t emphasized it enough yet, the customer data you gather will be your key towards making the right decisions. If you haven’t decided on a pricing model yet, maybe your research will give you a clue.

For more SaaS strategies that can help scale your business, visit our blog here.

 

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Ken Moo
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