SaaS product pricing is a two-way street. You, as a business, need to make a healthy profit from your investment of time, materials, skills, and effort. Your subscribers need value for money, meaning the solutions your service provides are worth their cost.
Indeed, it can’t be that hard, can it? But, as it turns out – especially for SaaS startups – it can. Finding the perfect balance between SaaS cost and income can be the difference between success and failure.
Too low, and you fail to cover costs. Too high, and you’ll drive away subscribers. It’s a tricky balancing act and a tough call for new managers whose skillsets are more likely based around the technical side of operations – not running the business.
Today, we’re going to look at the range of SaaS billing models and strategies, explaining a little about each one and why, when it comes to picking the ideal option for your service, you should put plenty of thought and research into the matter. There is a range of SaaS pricing best practices to follow, but first, you need to know your options.
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SaaS pricing models and strategies
1. Flat-rate pricing
How it works: You charge a single price for your service. One product, one set of features, one price.
Examples: TV and entertainment streaming services, website add-ons, eCommerce carts
- It’s easy to understand and easy to sell.
- There are no complicated tiers, add-ons, or extensions to consider.
- Forecasting revenue is simple and accurate.
- You miss additional revenue opportunities selling to SMEs and SMBs with multiple or high-usage users.
- There’s no opportunity for upselling extra features and upgrades.
- A single, simple price won’t work for everyone. Many businesses will expect a custom pricing plan.
2. Usage-based pricing
How it works: SaaS usage-based pricing is a pay-as-you-go pricing method. Users pay for what they use and nothing more. It’s only an option for SaaS with measurable usages.
Examples: Email campaign delivery, website hosting, infrastructure, and platform-related operators.
- The more users engage, the more revenue you receive.
- Accessible to budget costs for users.
- No subscription cost for periods without use.
- Unpredictable revenue.
- Unpredictable customer behavior and costs.
Usage-based pricing is one of the most expected SaaS trends in 2023. Do you want to learn about more expected SaaS trends? Download our free e-book with expert interviews and predictions from various industries!
3. Tiered pricing
How it works: Packages with different price levels appeal to users with different needs and budgets.
Examples: Appropriate to most SaaS operations.
- Appeals to various user groups.
- Maximizes revenue from different user types.
- Clear route of upselling.
- Too much choice can be overwhelming.
- Heavy-user subscribers can exceed expected limits, draining resources.
- Frustrating for users who can’t justify the cost of tiers with the features they need.
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4. Per-user pricing
How it works: For a service that provides multiple accounts on the same package, providers charge a set price for each user.
Examples: CRM software, project management, marketing, and communication tools.
- Simple pricing structure.
- Super scalable.
- Predictable revenue.
- High churn when user numbers reach a certain point.
- The price doesn’t reflect the service value.
- Little incentive for businesses to add new users.
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5. Per active user pricing
How it works: It operates as per-user pricing; however, the service only charges per number of users utilizing the software during each period.
Examples: CRM software, project management, marketing, and communication tools.
- High sign-up rates, offering possible high revenue.
- Encourages product use and brand loyalty.
- Great for small teams but not so good for large operations, SMEs, and SMBs.
6. Per feature pricing
How it works: Each tier gains access to additional features, seemingly ‘unlocking’ upgrades or higher usage levels.
Examples: CRM packages, marketing platforms, etc.
- High incentive to upgrade.
- Savings for operations that don’t need the complete set of services.
- Tricky to balance features to price points.
- Without the option of a custom plan, users might feel forced into higher tiers to use the features of personal value.
7. Freemium pricing
How it works: Free-to-use products can create alternative revenue streams through advertising, additional paid-for features or packages, or access to full paid-for versions.
Examples: Video chat services, file transfer or conversion services, communication, and project management tools.
- Generates leads.
- Potential for viral marketing.
- May fail to produce revenue.
- Unpredictable revenue.
- May devalue the brand and core service.
8. Blended pricing
How it works: The pricing model caters to various strategies. For example, plans may include varying user/account numbers, usage rates, and features.
Examples: Video streaming platforms.
- Appeals to operations with varying needs.
- Clear growth plan.
- Low to high-cost options offer various entry levels.
- Often confusing.
- Alienates subscribers who fall outside predetermined plans.
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9. Penetration pricing
How it works: A service enters the market with a high-value, low subscription price, but as they gain users and market share, they bump up the rate to increase revenue to an acceptable level.
Example: Disney+ entered the market charging considerably less than other mainstream providers, only to increase their charges once they established their user base.
- A great way to enter the market, attracting high numbers of users.
- Appear competitive, offering value.
- Easy to market.
- Builds brand loyalty.
- Establishes a fast route to sales and initial revenue sources.
- Low revenue – making less money over early phases.
- The service could be perceived as ‘cheap’ or poor quality due to its low price.
- Increased churn – you’ll lose users when you put your price up.
10. Captive pricing
How it works: Similar to freemium pricing but the entry-level option holds a lower-than-expected subscription cost, with its main revenue streams coming from additional services or product charges.
Examples: Design and print or web-building software services that sell stock images, additional media files, domains, hosting, etc.
- Foot in the door.
- Eliminates the risk of zero revenue.
- Users may choose to avoid the upsell and source alternative options.
11. Skimming pricing
How it works: Skimming is almost the opposite of penetration pricing. A service enters the market at a high price point while demand is high, lowering it as the market changes.
Examples: Video games, tech products and services.
- Takes advantage of high demand.
- Optimizes revenue in early release periods.
- Limited lifespan.
12. Prestige pricing
How it works: Maintaining high prices to reflect a sense of quality, typically operated by high-end and luxury brands.
Examples: High-profile luxury brands leveraging high-cost digital services.
- High revenue per user.
- Builds brand value.
- Creates desirability.
- Improved marketing options.
- Creates elitism among users.
- Small target audience.
- Low user numbers.
13. Free-trial pricing
How it works: Time-limited use of a SaaS (typically one month/30 days) or limiting the number of downloads, data use, or other measurable utility before applying the regular cost if the account or service isn’t canceled.
Examples: Applicable to most SaaS opportunities.
- A great way to introduce a service to new users.
- Lead generation.
- Strong incentive to upgrade.
- High churn rates.
14. Cost-plus pricing
How it works: The provider adds a markup to the cost of the product to establish the selling price. In SaaS, this means adding all the business costs, dividing the total over the number of users you expect, and adding a percentage to ensure you make a profit.
Examples: Manufacturing and retail are ideal for cost-plus strategies. It can be a challenging pricing strategy to apply to SaaS as ongoing costs are unpredictable.
- Simple for those with a uniform cash flow forecast or a predictable or consistent budget.
- You’re guaranteed to operate for profit.
- It can lead to high prices that your customers aren’t comfortable paying.
- It fails to account for competitor prices as an entirely insular pricing method.
15. Value-based pricing
How it works: The business determines what each user considers good value for the service and predicts an ideal price point. It doesn’t view production costs or competitor pricing, only what your target audience or focus group suggests.
Example: High-quality market leaders Adobe and HootSuite charge premium rates for features, reputation, and functionality.
- Higher costs lead to increased brand value.
- Encourages user loyalty due to its strategically-placed price.
- A high-quality product delivers greater profits.
- It may be too costly for low-budget SaaSbusinesses and operators.
- It tends to draw a smaller target audience, making it more vulnerable to competition.
- High production costs—the service must prove itself, which requires additional development costs.
16. Competitor-based pricing
How it works: Using competitors’ pricing levels and methods to determine a competitive price.
Example: A lesser TV streaming service pitching below mainstream operators.
- Easy to pitch comparative pricing.
- Less risk of losing users.
- Less chance of miscalculating.
- Straightforward – delivering a price range within days, if not hours.
- Inaccurate and unsustainable.
- Risk of making the same mistakes as competitors.
SaaS pricing models and strategy to deliver the ideal SaaS price
Deciding how to position your SaaS in the market and the best way to drive revenue is complicated. It’s one of the least invested but essential parts of running a startup.
So, why is SaaS pricing strategy so often overlooked? Well, how to price your SaaS product is no easy task, as there isn’t an easy formula to uncover your ideal options.
Apptension helps hundreds of technology operations define their optimum strategies and prices, so why not speak to one of our experts as part of your process?
We’ll provide SaaS pricing examples that work within your SaaS business plan and budget to ensure you meet the needs of your users yet remain competitive and profitable. Want more information? Just contact us!
Regardless of the pricing option you pick, our open-source SaaS Boilerplate contains all the necessary technologies to help you build your product. Read more about the SaaS Boilerplate features and technologies it supports, and check out the Github repository.