Choosing the right SaaS pricing model is critical for startup success. We explore five popular models to help you choose an optimal pricing structure for your burgeoning tech business.
Pricing your SaaS service correctly can mean the difference between recurring revenue growth and stagnation. That’s why it’s essential to nail your pricing from the get-go so you’re not losing out on sales. It’s not enough just to determine your costs and add a profit margin to ensure profitability anymore — today’s SaaS companies have to forgo traditional pricing in favor of SaaS pricing models that add value and boost recurring revenue.
Many SaaS companies gloss over the pricing strategy portion of SaaS startup, focusing on other activities like B2B marketing and building sales funnels. However, when you uncover the potential of various SaaS pricing models, you can understand why it’s worth getting hyper-focused on which one will work best for your business.
This article explores five popular SaaS pricing models, including the pros and cons of each, to help you narrow your options, optimize your SaaS platform pricing, and scale revenue predictably. We’ve also included a few extra pricing tricks to keep up your sleeve as you get familiar with your audience’s preferences.
What is the SaaS model pricing?
A SaaS pricing strategy defines how SaaS companies generate revenue through cloud-based software that they license to individuals or other businesses. Popular monetization methods include monthly or annual subscriptions, pay-as-you-go agreements, or single-use models.
Many SaaS companies offer several pricing options to serve diverse audience needs, from enterprises requiring multiple user seats to solo entrepreneurs or consumers only needing occasional services. However, subscription services are ideal for growth because they provide reliable, recurring revenue, often with lengthier commitments.
It’s essential to strike a balance between profit margin preservation and user preferences — so pricing is neither too high nor too low. If you deliver enough value, you can charge a premium without gouging your customers. In turn, they’ll feel like your pricing is fair and preferable to competitors’ pricing, helping to build a loyal customer base and increase referrals.
5 types of SaaS pricing models used by real companies
Here are five types of SaaS pricing models:
Let’s look at the pros and cons of each one.
1. Flat-rate pricing
A flat-rate pricing model involves charging a single, fixed price for all users, who pay a consistent fee regardless of usage, number of users, or features. This model appeals to customers who like a “one size fits all” approach versus complex pricing levels with more or fewer features available at different tiers.
The downside of flat-rate pricing is that it may not work for light users, who might perceive your service as overpriced if they only occasionally use it. It can also back your company into a corner where you can’t offer premium services at a higher price because everyone’s paying the same price to access your entire service portfolio.
An example of a SaaS company using flat-rate pricing is Instacart, a SaaS app specializing in the grocery vertical. Users pay an annual fee for unlimited delivery of groceries and other consumer goods from participating local retailers. (Instacart also allows users to use the platform without a membership, paying for delivery and service fees as they go.)
Instacart’s flat-rate pricing appeals to consumers who lack the time or desire to shop in stores and enjoy the convenience of home delivery. This pricing model works well because Instacart can focus its marketing and sales efforts on a targeted audience that prefers to outsource its shopping, not those who would rather do it themselves.
- Simplicity: The primary advantage of flat-rate pricing is its simple pricing structure. Customers can easily understand what they’re paying for without navigating through complicated pricing tiers with varying features.
- Predictability: With a fixed cost, customers know what to expect on their monthly or annual bills. Costs won't fluctuate based on usage, freeing them up to enjoy your service without encountering restrictions if they want to increase usage or access additional features.
- Potential overpayment: Some customers may feel like they’re paying for a set of features they don't need or overpaying for a service they don’t fully utilize. For this reason, many SaaS businesses will roll out lower or higher tiers with different pricing for each to ensure customers see value in their investments.
- Limited scalability: Flat-rate pricing may not work for your business if your customers’ usage patterns fluctuate frequently or at certain times of the year. For example, a photo-sharing SaaS platform might run into scalability limitations if usage increases seasonally but customers still pay flat-rate pricing.
2. Usage-based pricing
Unlike flat-rate pricing, usage-based pricing centers on customer usage, aligning costs with the value they receive — consider it value-based pricing. Anyone who has ever purchased a phone plan understands usage-based pricing, a dynamic model whereby customers pay for the services they use — such as the amount of data consumed or the number of SMS messages sent and received. Costs might also vary during peak hours — think of Uber’s surge pricing where pricing increases as demand escalates.
Usage-based pricing works for SaaS platforms where the value is clear to its audience. For instance, Uber riders understand the value of accessing driving services on demand. They think of Uber as a flexible option that allows them to pay as they go and stick to their budgets without paying for ongoing subscriptions.
- Cost efficiency: Customers pay according to their usage, ensuring they only pay for the services they use.
- Scalability: Businesses can adapt this model with fluctuating usage patterns, enabling flexibility as their needs evolve.
- Revenue uncertainty: Usage-based pricing can be unpredictable for businesses, especially industry newcomers, making it more challenging to predict revenue. You’ll need to rely on effective marketing, advertising, and referrals to establish a broad, steady customer base.
- Consumer confusion: Usage-based pricing might surprise and confuse customers if you bill monthly for services versus having customers pay on demand. Returning to the phone company example, imagine getting billed double what you paid last month because you were traveling and accessing roaming services.
3. Tiered pricing
Tiered pricing involves offering multiple pricing tiers, each with different add-on features or usage limits, catering to a diverse customer base with varying needs. This model allows customers to choose a tier that aligns with their requirements. Consider it a per-feature pricing model.
Common tiers include a free plan or one for light usage, a growth plan for startups and small businesses, and an enterprise plan for larger organizations with multiple team members. There may also be monthly or annual billing options, with discounts for paying the yearly cost upfront.
Ideal for businesses with a wide range of features, tiered pricing appeals to customers who don’t need every bell and whistle or want the ability to start small and scale. Often, SaaS companies using tiered pricing will incorporate a free trial with access to premium features, allowing users to access the entire platform and determine which features they need. The idea is to hook users on a paid plan, ideally a higher tier with features they enjoyed using during the free trial.
For example, Spoak, a cloud-based interior design platform, offers five different pricing tiers, from a casual user (“Play”) to a large firm (“Enterprise”). The platform allows users to try any plan for seven days at no cost before committing to a subscription. It also offers discounts for annual versus monthly billing.
Many SaaS companies stick with three pricing tiers, or packages, at low, medium, and high price points with additional features available at higher tiers.
- Customization: Customers can choose a tier that best suits their needs without paying for features and capabilities they don’t currently need.
- Scalability: Tiered pricing suits businesses with different usage levels, as customers can upgrade to higher tiers as their requirements grow.
- Analysis paralysis: When presented with multiple options, some customers might have trouble choosing one — and might abandon the endeavor altogether. Offering a free trial is one of the best ways to avoid customer indecisiveness; you can also include a chatbot and a call to action to “book a demo,” giving customers a chance to ask questions before making a decision.
- Potential overpayment: Customers may pay for features included in higher tiers they don't need. Again, free trials and demos can help in determining which tier works best for various use cases.
4. Per-user pricing
A per-user pricing model is common among B2B SaaS models where teams or enterprises access services. This pricing model involves charging customers based on the number of users accessing the software, allowing customers to manage costs according to their team size.
One example of a B2B SaaS platform with per-user pricing is project management platform Asana. The SaaS company offers Personal, Starter, and Advanced pricing based on the number of active user seats. The Personal plan is free, allowing small teams and individuals to get their feet wet before investing in a paid plan.
- Transparency: Per-user pricing is easy to understand, with costs increasing according to the number of user seats. Many SaaS companies offer a lower price per user as customers scale up to higher user counts.
- Predictable revenue: When you know a company’s or team’s size, you know how much profit to expect, and you can focus your sales efforts on multi-user teams.
- Potential for reduced usage: If not all users access the service, customers may downsize their plans — essentially calculating who needs it and who doesn’t. A comprehensive onboarding with all users can help everyone commit to using your platform and finding value in the service.
- Limited flexibility: Per-user pricing may not be suitable for businesses with fluctuating team sizes.
5. Freemium pricing
With the freemium pricing model, you offer a free basic version of the software, with premium features available at a cost. A powerful way to lower your CAC (customer acquisition cost), freemium plans can attract a broad user base and provide opportunities for upselling.
Some SaaS companies will combine freemium pricing with other SaaS pricing models such as a tiered pricing model, providing customers with various options while encouraging them to invest in paid pricing plans. Often, the upsell opportunities are capability-based, requiring users to upgrade to access specific features or functionality.
Dropbox is one SaaS company offering a freemium plan in addition to paid options. Those who simply need limited file storage and sharing capabilities can use Dropbox free of charge. Those who need more storage and additional features can opt for paid plans starting at $9.99 per month, paid annually.
- Lead generation: The freemium business model can be a lead magnet, allowing you to build your pipeline and provide an entry point for customers to start using your SaaS product.
- Referral potential: Everyone likes getting something for free, and many people enjoy sharing their free finds with colleagues, friends, and family, increasing referrals.
- Revenue challenges: Free users don't contribute directly to your company's income. You can expect to invest resources into upselling accounts and acquiring enough paid accounts to cover the costs of serving all users.
- Greater risk of churn: The absence of a financial commitment may lead users to quit using the service and realizing value from it.
- Devaluing of your core offering: Offering a product that solves a significant problem for free may cause friction for those who must eventually transition to a paid model to access more features.
Additional pricing models based on psychology
Once you decide on a pricing model, that doesn’t mean your work is done. Testing different strategies and fine-tuning your approach can help you create an optimal pricing structure that benefits you and your customers. Working with pricing psychology, you can reduce friction in the buyer journey and achieve your sales goals. It’s not about tricking people into buying something they don’t need or want but rather guiding them to your high-value offerings.
- Price anchoring: Use the psychology of relative pricing to increase customers’ willingness to spend. For example, highlight an expensive package first to make other packages seem more affordable.
- Charm pricing: Price your items to end in “9” to take advantage of the "left digit effect." Pricing a product at $39 instead of $40 can significantly boost sales.
- Odd-even pricing: Use odd or even numbers to create a sense of novelty and trigger the left digit effect — products priced at $7.47 or $97, for example. This pricing technique works well on landing pages where you create urgency around a special offer and need to attract users’ attention.
- Product bundle pricing: Bundle several products for a single price to simplify the sales process and encourage cross-product sales. You could offer several products under a single subscription price, for example.
- High-low pricing: Alternate between a high and low price to generate perceived value and encourage short-term sales — for instance, with Black Friday discounts.
- Limited choices: Avoid overwhelming customers with too many options, keeping the number of pricing options manageable and preventing decision fatigue.
- Decoy pricing: Introduce a seemingly less desirable pricing option to sway customers toward a more favorable choice — a print-only subscription alongside a combined print and web subscription, for example.
- Center stage effect: Leverage the psychological preference for the middle item in a selection of three choices — for instance, highlighting a middle-tier package as "Most Popular" to guide customer choices.
While not exhaustive, the list of pricing models and techniques above gives you a starting point for determining which model will resonate most with your target audience. The key to sustained success is to continually test and adapt these strategies based on customer behavior and market dynamics.
Factors influencing pricing decisions
If your head is spinning as you decide on a SaaS pricing model, slow down, take a deep breath, and remind yourself that your pricing strategy is one of the most critical determinants of startup success. Taking the time to evaluate all angles isn’t wasted time; it’s the thoughtful process you need to choose a pricing structure that will allow you to start strong and scale.
Consider the following factors as you weigh your options. Addressing these points will help you pinpoint the pricing strategy that makes the most sense for your business.
Consider the maturity of your SaaS business. Are you an established player, or are you entering the market as a newcomer? For established players, pricing decisions may revolve around maintaining market share, building customer loyalty, and responding to market trends. Newcomers, on the other hand, might focus on competitive entry pricing, gaining initial traction, and showcasing value to attract early adopters.
Identify your competitors, and analyze the value they bring to potential customers. What unique benefits do they offer? How can you do it better? Focus on areas where you can excel or provide added value, whether through advanced features, superior customer service, or greater value for the cost.
Craft a compelling value proposition that resonates with your target audience. Consider how your features, functionalities, and overall user experience create value, and articulate the unique benefits and solutions your SaaS provides. Your value proposition should be a concise, memorable statement you can share across all customer touchpoints in marketing, sales, and customer success messaging.
Consider your product’s level of complexity and how it aligns with customer expectations. A simple, intuitive solution may warrant a different pricing approach than a feature-rich, complex product. Tailor your pricing model to reflect your product's perceived value, ensuring customers are willing to pay for the features and capabilities you’re providing.
Define your short-term and long-term business objectives. Are you aiming for revenue growth, market establishment, or market dominance? If your primary focus is rapid market penetration, a pricing strategy that encourages quick adoption might work best. Alternatively, if your goal is sustained revenue growth or market dominance, you may need a more strategic and scalable pricing approach.
Develop detailed buyer personas to gain insights into your target audience's needs, preferences, and pain points. What specific needs or problems does your product or service address for your buyers? Understand the factors that influence their purchasing decisions. Align your pricing strategy with the perceived value your product brings to your buyer personas, verifying your pricing page resonates with the specific problems your product solves.
Best practices in SaaS pricing
Getting started with SaaS pricing models is a sizable undertaking for SaaS founders. Following a few best practices will help you start strong, pivot when needed, and adapt your pricing strategy with market fluctuations. Here’s a look at the top best practices that successful SaaS startups employ to identify an optimal pricing structure and keep up with the times.
Conduct market research
The best pricing decisions begin with a deep understanding of your target market. Comprehensive market research involves identifying pricing trends, understanding customer expectations, and evaluating competitors' strategies. Conducting thorough market analysis enables SaaS businesses to align their pricing models with market dynamics, gain a competitive edge, know what metrics to track, and stay relevant with their target audiences.
Gather customer feedback
The best SaaS pricing models are rooted in customer centricity. Through surveys, interviews, and continuous feedback loops, SaaS companies can gauge customer satisfaction, identify pain points, and discern the new features users value the most. Adapting pricing based on customer preferences strengthens customer relationships and increases the perceived value of your offering.
Conduct a competitive analysis
To stay ahead in the dynamic SaaS industry, businesses must conduct ongoing competitive analysis. Studying competitors' pricing strategies allows you to identify gaps in their pricing models and capitalize on opportunities. By learning from their successes and challenges, SaaS companies can refine their pricing models for optimal market positioning.
The market can change on a dime, and SaaS businesses must stay agile — or risk getting left behind. What works today might not work tomorrow as customer needs evolve. Being flexible will help you anticipate user preferences and adapt to market shifts.
Learn from others
Examining SaaS pricing models of businesses like yours will help you identify the most common pricing structures and plan accordingly. You don’t have to mirror what they’re doing to a tee. However, you also don’t want to stray too far from what your competitors are doing. Focus on delivering a greater value so that if customers compare their options, they’ll choose your SaaS product based on its benefits instead of making decisions on pricing alone.
Which Saas pricing model is best for you?
Ulrik Lehrskov-Schmidt, a B2B SaaS pricing expert, wrote a LinkedIn post describing the lessons learned when designing pricing for his clients. One of those lessons was, “The pricing model is 100x more important than the price point.”
To put this concept another way, your product’s value is much more critical than the price tag. If you deliver exceptional customer experiences, advanced technology, and desirable features, people will pay for what you’re offering — even if it means paying a little more than they would with competitors.
Remember, as the SaaS landscape evolves, so must your pricing strategy. Adapting in response to market changes, customer feedback, and emerging trends will help you stay relevant and encourage customer loyalty.
Keeping up with SaaS pricing models isn’t always easy when you’re busy starting and growing a business. At Marketer Milk, we aim to help our readers stay on top of the latest trends. Sign up for our free weekly newsletter to have industry insights delivered straight to your inbox.
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