Setting up the right pricing strategy for your SaaS company is essential. This guide into various pricing models will help you understand the different options available and which are best suited for your company!
Why is Pricing Strategy Important?
The pricing strategy you select for your SaaS products is critical. If you charge too little, you will be leaving money on the table, and your bottom line will suffer. On the other hand, if your pricing level is too high, you will not attract the number of users you had hoped for.
When you optimize your pricing strategy, you create a competitive advantage and position your startup for success!
The Basis of Pricing Strategies
The pricing models used for SaaS companies are developed based on cost, competitors, and value.
Cost-based pricing is what most businesses start with when they begin to determine the prices for their SaaS products. It is very basic and consists of adding up all your costs plus additional percentage points to create your profit margin.
The cost should include everything required to develop and maintain your product, including product design, development, and maintenance.
Competitor-based pricing is just what it sounds like. Rather than relying on your costs for a baseline, you instead benchmark your prices against your competitors.
You can gauge where your competition is setting their prices, and depending on how well they are doing, your company can adjust the pricing accordingly. It is a strategy that can help you get close to the right price for your brand, especially for new companies that do not have a lot of user data to go off of yet.
The best way to develop the pricing for your SaaS products is to look inwardly at the value provided and go from there. With this strategy, the cost you set matches what customers are willing to pay for your product. You can develop several packages that meet their unique needs because you understand what your customers are looking for and the value that they assigned to each of those features!
Overview of SaaS Pricing Models
Let's dive into nine different SaaS pricing models so you can get an idea of what might work best for your organization.
1. Flat-Rate Pricing
Flat-rate pricing is a simple model where there is only one product available at a single price.
This model is very easy for customers to understand since they don't have to figure out the differences between the packages you're offering but, usually, the cost must be higher for the company to get any value out of it. As a result, the price point may be a barrier for customers, and the inflexibility may cause them to move elsewhere.
2. Per-User Pricing
Another pricing option is per-user pricing, which involves charging a fee for each user that is utilizing your SaaS product. In other words, customers pay for the number of accounts they have.
This pricing model allows businesses to tailor the price of their solution based on the number of employees that they have, allowing them to incorporate the software throughout their organization.
The downside to this option is that businesses will end up paying for licenses even if users are not active.
3. Per Active User Pricing
Per-active user pricing addresses the issue mentioned above and allows customers to only pay for the users that are actively using the system instead. This is a great way to get your product deployed across an entire organization - you can onboard as many individuals as you'd like but the business will only charge for those users that are active in the system.
4. Feature-Based Pricing
Number 4 on our list is feature-based pricing. With this pricing model, your company will develop several different packages that vary based on features and functionality. More the features available, the higher the price.
Pricing based on the number of features allows customers to purchase exactly what they are looking for, but some may be frustrated that they are missing out on certain features unless they upgrade to a higher-level package.
5. Pay-as-You-Go Pricing
If you want your customers to pay based on how much they use your services, consider pay as you go pricing. Charging based on usage allows customers to only pay for what they need but will also generate more revenue for your business when you have a high volume of users.
The drawback with this model is that customers will have a hard time estimating what their monthly fee will be, making it difficult for them to commit to this package.
Let's talk about a freemium model, where you encourage your customers to try out your system for free but offer additional paid functionality later down the road.
The lack of upfront costs provides a great way for new SaaS companies to get their product in front of customers and determine what users would be willing to pay for their services.
7. Tiered Pricing
The tiered pricing strategy is another popular option for SaaS companies. Think about the last time you purchased a subscription - you likely arrived at a screen with three or four different packages to choose from, with the details of the benefits of each laid out for you to see.
This allows you to sell different use cases to various customers so that you can maximize the revenue that you receive from each group of clients.
Be careful to clearly define the packages so that customers know exactly which one they need!
8. Free with Ads
The free with ads pricing model is a modified version of the freemium option we described earlier. The main difference is that the ads allow you to monetize the free users who are taking advantage of your free SaaS product.
Although this is a great way to maximize a freemium model and incentivize your users to upgrade to a paid version, it can detract from the customer's experience and make them less likely to want to use your software.
9. Time-Based Pricing
One of the most common pricing models utilized by SaaS companies is time-based pricing. The basic idea of this strategy is to give customers a discount if they pay for a lengthier subscription.
There are so many benefits to this pricing model, including reducing churn, boosting brand loyalty, and improving revenue forecasting. If users feel like they're getting a discount, they will be more likely to make a purchase, but because they purchased a longer subscription you have now solidified a long-term customer base.