Guide to SaaS Pricing Models and Strategies

Guide to SaaS Pricing Models and Strategies

Introduction

This guide covers the most popular SaaS pricing models and strategies, which should help decision makers choose the best model according to their unique requirements.

Businesses, whether small or big, choose SaaS over traditional software delivery methods mainly because of low initial costs and the flexibility SaaS model offers. While most people think of SaaS as simple monthly/quarterly/annual subscriptions, there are a few other things to consider to ensure that you get the best value for the IT investment.

As a general rule of thumb, businesses should consider flexible subscriptions that help them easily scale as they grow. Businesses change over time and have to quickly adapt to the changing market trends. Regardless of the pricing model you choose, you should be able to upgrade or downgrade your subscription in less than a 30-days’ notice, allowing you to scale operations in real-time.

SaaS Pricing Models

Per-user Pricing

Per User pricing is one of the most popular pricing models due to its simplicity. You pay a fixed subscription fee based on the number of users. Per user cost usually includes all the features and businesses only have to decide on the total number of users.

Pros

  • Makes it easier for businesses to calculate costs
  • Scalable
  • Predictable, helps make accurate forecasts
  • Small businesses can cut costs by paying for fewer users while having access to all the features

Cons

  • Might not be the best option for large teams

Per Active-user Pricing

Per active-user pricing is a variant of the per-user pricing model and commonly used by enterprises. The model is suitable for businesses that have a lot of users but are not sure how many of them would actually use the software. This allows businesses to sign up for as many users as they want/anticipate without having to actually pay for all of them (if they are not using the software). Businesses are only billed based on the number of active users instead of paying for all the users.

Slack is a great example of per active-user pricing. You only pay for users who are actively using the service, while a prorated credit is made in case active users become inactive.

Pros

  • Businesses only have to pay for the active users
  • No wastage of money on un-used seats
  • Easier for businesses to roll-out the software company-wide

Cons

  • Might not be suitable for all SMBs, especially when the team size is small

Usage-based Pricing

The pay-as-you-go SaaS pricing model enables businesses to only pay for the services they use and works well for businesses that have predictable usage patterns. This model is mainly used in pricing IaaS (Infrastructure as a Service) solutions such as Amazon Web Services. Examples of usage-based pricing include data used in GBs, transactions processed, API requests and so on.

Pros

  • Reduces barriers-to-use
  • SMBs only pay for actual usage
  • Scalable

Cons

  • Costs are hard to predict if usage is volatile, making it difficult to forecast and plan

Tiered Pricing

Tiered pricing is essentially a hybrid pricing model that allows businesses to choose different software packages with varying features and subscription costs. SaaS providers design each tier around different budgets and features. For example, HutSpot offers tailored pricing for beginner as well as professional marketers who need specific features and functionalities. The main advantage of tiered pricing over other pricing models is the flexibility if offers, but businesses need to consider the features they need to opt for the most relevant option.

Pros

  • Packages are tailored to meet needs of specific segments
  • Businesses only have to pay for the features they actually need instead of paying extra for the whole package

Cons

  • Tiered pricing can be confusing, making it difficult for SMBs to decide between different packages

Features/Functionality based Pricing

Similar to tier-based pricing, feature-based pricing model allows businesses to choose and pay for features/functionality they need. Costlier subscriptions include more features and integration options and allow users to upgrade their package as they grow. This pricing model works well for businesses that are clear about their requirements and understand what to pay for and what to skip.

Pros

  • You only pay for features you need
  • Suitable for users who need a specific functionality/features

Cons

  • If can become difficult to determine which features you need and the ones you don’t
  • A package within your budget might not include all the features you need

Flat Rate Pricing

Flat-rate pricing is pretty similar to traditional software licensing i.e. a single software with specific features for a specific price. The main difference between the two is that SaaS flat rate pricing gives you the flexibility of paying on a monthly/quarterly/annual basis. Although this model has become a rarity these days, it does provide businesses with access to all the features at a fixed price, making budgeting and planning easier.

Flat-rate pricing model offers little room for scalability and customization and might not be a good option for growing businesses. Fixed-price software can also mean wasted money on features/functionality you don’t use.

Pros

  • The product is clearly defined
  • Simple and easy to understand
  • You get all the features, no separate pricing for different features

Cons

  • Does not work for all types of businesses
  • Very little flexibility, more like a black-and-white pricing model

Freemium Services

Freemium pricing allows businesses, especially SMBs to try a solution before going the paid route. Users can use the software for free (usually limited functionality, locked features) and buy paid packages if they are satisfied with it and want to unlock more/all features.

This pricing model is often used as part of tiered pricing in which users pay more for extra features. The key difference is that users can get started for free and upgrade as needed. Some freemium services are ad-supported and although they include most of the features, users have to keep watching ads or pay a fee to remove them.

Pros

  • Easier adoption, almost no barrier to use
  • Small businesses who just need basic functionality can access services without having to pay anything

Cons

  • Users may approach freemium services with a throwaway mentality

Customizable Pricing

Many SaaS providers allow businesses to roll their own pricing model in which they can customize the package keeping their unique requirements in mind. This allows users to hand pick the functionality/features they need. The pricing model works pretty well for small and medium businesses who have clearly defined requirements.

Pros

  • Highly flexible
  • No need to pay for bundled features you won’t use

Cons

  • Can be costlier than other options
  • Businesses may need more features/functionality in the future

Conclusion

There is no one-size-fits-all in the SaaS world when it comes to pricing models. Small and medium businesses don’t have the same IT budget as large businesses, while enterprises cannot skip on essential features/functionality. Different SaaS pricing models enable businesses of all sizes to pay for what they really need instead of wasting money on features they won’t be using.

Choosing the right pricing model mainly depends on the budget, current requirements and future growth forecasts. The popularity of SaaS model made it possible for small and medium businesses to take advantage of modern technologies, without having to heavily invest in their IT infrastructure, and choose form a variety of pricing models to get the best possible value for their IT investment.

Victor Maia

Victor Maia

CMO as a Service @Hack4Change, Head of Community @SaaSholic and Community Manager for Team GaryVee Brazil. Eventually writes on https://elemento.ag/blog/ and podcasts on https://growthdiaries.me/.

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