Your pricing strategy is too important to get wrong in SaaS. Too high, you'll lose lots of deals. Too low, and you'll fail to generate the ARR needed to reach your growth goals.
94% of B2B SaaS pricing leaders update pricing at least once yearly. Almost 40% of them update as often as once per quarter. But how do you know what will happen once you make the change?
With so many SaaS pricing models, it can become incredibly overwhelming for RevOps managers to choose and set the right price for your business.
This article will explain what SaaS pricing models are and the five best models with some real-life examples. We’ll also include best practices for SaaS companies to follow.
SaaS pricing models are different ways to charge users for your software.
As we explain the different pricing models you’ll might notice a lot of cross-over. Most SaaS companies opt for a combination of these approaches. A hybrid (combination) pricing model drives more revenue as your customer grow, while limiting your risk, with clauses like minimum commits.
Choosing the right pricing model can significantly impact your business. Your pricing model should be the best path to monetization and revenue growth. Let's explore some benefits of choosing the right strategy.
Product teams invest a lot of effort and resources in creating a remarkable product that attracts new customers. However, all this hard work can be meaningless without a well-defined pricing strategy. Setting the right price helps boost conversions, improve MRR, and grow your bottom line.
Setting the right price can help you zero in on your competitors. Category competition is healthy to a degree, but you want to avoid racing to the bottom on price. You don’t have to be the cheapest option, but you do want to provide the most value per dollar spent.
For most SaaS companies, the common focus is on acquiring more customers. While that’s important, having a strategy to monetize payments gives SaaS companies an additional revenue stream. All this while enhancing the customer experience and reducing customer churn.
The right pricing strategy ensures that your customers feel they are getting fair value for the money they’ve invested compared to alternate providers. This can lead to higher customer satisfaction and loyalty, reducing churn and increasing customer retention.
In addition to choosing the suitable pricing model, integrating a fast and flexible CPQ enables you to test pricing changes fast. Without one, it can take weeks updating new pricing rules across your CRM, quotes, finance department, invoices, and more.
Each model has its own logic and suits different customer needs. Selecting your pricing model depends on product type, customer/market preferences, go-to-market motion, and unit economics. Here’s an overview of some of the most common types of pricing models.
Flat-rate pricing is when you offer a single fee for a single product. While customers can choose between paying monthly or annually, they cannot customize their pricing any further. With this model, fixed, variable, indirect, and direct costs are all factored into the final price.
Flat rate eliminates the need for complex calculations or negotiations, simplifying the purchase. However, it is a one-size-fits-all approach and leaves less room for personalization. In general, SaaS companies do not adopt flat-rate pricing. In SaaS, you must have a flexible pricing structure that can quickly change with market fluctuations.
If you have a simple product with a limited feature set–go for flat-rate pricing.
The New York Times employs a flat-rate pricing model. It offers unlimited access to the digital version of its newspaper for $17 every four weeks. The price stays the same whether you read only one or 100 articles weekly.
Also called the “pay as you go” model or consumption-based pricing, this option is directly proportional to how much a customer uses your product. The price increases when they use more and decreases when they use less. You can charge your customers on various units such as the number of emails sent, API calls, number of phone calls, number of transactions, etc.
A significant challenge with usage-based pricing is billing. It requires incorporating two worlds of data:
For billing, you must combine these datasets and the outputs with your finance stack to generate invoices, manage collections, and recognize revenue. Quote-to-cash platforms like Cacheflow make the entire payment process smoother by helping you connect product usage for Usage-based billing via webhooks and auto-bill based on usage.
Go for usage-based pricing if you’re a smaller start-up and your customers have volatile demand in their businesses.
Amazon Web Services (AWS) charges customers based on computing, storage, and outbound data transfer. It facilitates payment for services on an as-needed basis.
The tiered pricing model consists of a series of plans or ‘levels’ with escalating price points. These tiers can be based on features, number of users, or usage. Customers can choose the plan that best suits their needs depending on the volume of features, functionality, and customer support required. Your ideal number of tiers will vary depending on your product and competition. But to avoid overwhelming your customers, don’t go higher than 6.
You can tailor the tiers to specific buyer personas. But be extremely careful in deciding the value metric and the cost for the respective tiers.
Freshdesk from Freshworks has priced its services in incremental tiers based on different feature bundles. These four tiers can attract a customer base from small businesses to enterprises. As the business scales and their requirements increase, they can upgrade to the larger tiers.
This pricing model uses features to determine the price. It involves creating different packages and listing all the features contained in each one. Your customers pay more when they need more features/functionalities. When they scale, they might need new solutions to their problems during growth.
Map each set of features to a specific customer persona. Each level’s features must relate to a particular set of users and should not be a fit for all customers.
Wix, a low-code website builder, uses feature-based pricing. Customers receive additional features with each plan, such as a website domain, storage space, professional logo, and customer care.
Freemium is more like a try-before-you-buy approach. This model is widely adopted in the B2B SaaS domain. Nearly 41% of SaaS companies offer a 30-day free trial. In this model, customers can access your product for free, but the free tier usually limits features, capacity, or types of use cases. The main idea here is to hook the users and nudge them to sign up for a paid version.
This model is great for demonstrating value early on to your customers. Converting freemium customers into paid ones is easier because they already know your product and its value.
Go for this model if you have a product that can benefit from awareness and virality.
Slack, a collaboration platform that offers a generous freemium to its customers. Users can get started quickly, with enough free functionality to get them up and running. Once their free trial period ends (90 days), they can opt for any paid plans.
Selecting your pricing model highly depends upon your target audience and the type of product. Here are some best practices to ensure your chosen pricing model aligns with your product, market, and customer needs.
A product’s type, including its functionality, features, analytics, automation, or integrations, influences its ideal price. Products with advanced functionalities may benefit from a tier-based or feature-based model. Similarly, products with basic features may use a flat rate pricing.
While deciding on the pricing strategy, assessing your offering’s value to the customer is necessary. Typically, it's not the actual pricing but the customer’s perception of the value that influences customer decisions. Consider your product’s features, the problems it solves, and how it can increase efficiency.
Research your target market, develop buyer personas and understand who your customers are. This will help you position your product’s pricing based on their needs. SImilary assess what your competitors are doing and how they are pricing their offerings.
When deciding on a pricing structure, choosing an option that aligns with your customer's usage patterns and preferences is essential. You can achieve this through a tiered model that grows with the customer or a per-user model that scales with the size of the customer team. Your pricing structure should be scalable and can accommodate growth over time.
SaaS pricing isn’t permanent. You’ll have to make ongoing adjustments based on market changes, new feature releases, shifts in customer demands, etc. Regular reviews and adjustments help keep pricing relevant and competitive.
Once you’ve zeroed in on your pricing strategy, you have to figure out how to quote, bill, report and collect payment for the new plans. Setting new prices without good quote-to-cash processes will eat up all of your sales and finance teams time. This is where Cacheflow comes in.
With Cacheflow, you can test your pricing strategies without disrupting the back end billing. Easily configure usage-based, tiered, and other pricing models with just a few clicks. This platform simplifies bundle pricing and ensures each product is accurately priced.
Cacheflow enables companies to track all transactions over time to evaluate their performance and make adjustments when needed. Book a demo today to understand how we can help you bridge the gap between pricing and implementation – removing the heavy lifting from your financial team and making billing operations automated, scalable, and efficient.
A pricing model in SaaS is how, when and why software companies charge customers for using their product. SaaS has different pricing models: subscription-based, usage-based, tiered, per-user, and per-feature.
A SaaS value-based pricing model is one where companies price their products based on how the customers perceive the product's value. The more value customers perceive, the higher you can price it.
Calculating SaaS costs includes subscription fees, usage charges, implementation costs, user licenses, infrastructure costs, and more.
Flexible CPQ and Subscription Billing platforms can help you test and iterate your pricing strategy. You can combine the insights from these tools with your market knowledge and customer understanding for a more effective pricing strategy.