The SaaS industry is fiercely competitive. Every company must find a way to stand out in the crowd. One effective way to operate more efficiently and improve profit margins is to have a good pricing strategy. A correct pricing strategy depends on the company’s products and services, its maturity level and scale of operation, and the type of customer it hopes to attract. A company that serves encryption API requests will use a different pricing model from a company that offers storage space.
Let’s take an in-depth look at different pricing models, their pros and cons, and where they can be used for the greatest rewards.
What is a SaaS pricing model?
As a SaaS founder, you’ve burnt the midnight oil and shed gallons of sweat and tears to create an exceptional product. And now it’s time to rake in the big bucks in exchange for the value you provide. Nothing affects your revenues more than pricing. Yet, most SaaS companies spend just a few hours, in total, on pricing their product.
A pricing model tries to balance value and revenue. A well-thought-out pricing strategy helps you to keep growing. Price setting is a critical and contentious activity, so many stakeholders are involved. Focus on the most important one – your customer. Your pricing should be designed not only to attract customers but also to delight them.
Why is SaaS pricing so important?
If you don’t have a proper pricing strategy, you may be leaving huge revenues on the table. You don’t understand your customers, so you might be driving them away with poorly framed pricing packages or passing up an opportunity to charge more for your offerings.
It always helps a SaaS company to take a second look at pricing.
Optimizing your pricing will give you room to expand. Keep a few key pricing points in mind. Charge according to the value you provide. Your prices should be attractive to the types of customers you’re targeting. You should offer packages tailored towards different customer groups and avatars. And finally, keep the pricing structure simple. Your paying customers and free users should understand upfront exactly what they are paying for and getting.
An introduction to SaaS Pricing Models
Pricing your SaaS often feels like a magical black art.
Why? Because how you price your product says a lot about your product. Whether you intend to or not, your price sends a message and gives your customers a certain feeling or emotional reaction.
This is the case for SaaS providers of every kind.
Price too high? You’ve turned people off and shuffled prospects away. But don’t make the wrong assumption that you have to price low to win more customers.
Price too low? When you price your SaaS product too low, people don’t know if they can or should trust you. You might turn people off and turn prospects away.
There’s a sweet spot that you need to hit with your pricing.
No matter the stage of your SaaS business, no matter your customer acquisition cost (CAC) or profit margin, how you price your SaaS product directly impacts the number of users you can acquire AND the lifetime value they create.
To put things simply, how you price your SaaS directly impacts your growth ceiling and the number of new customers you can acquire.
It can feel very confusing. No matter your experience in the SaaS market or knowledge of potential customers, the pricing issue can leave you feeling out of your depth and beyond your skill level.
But don’t feel like your pricing needs to be an obstacle that must derail your business. Small businesses of every type (and in every industry) go through the same struggle. The key is to find the best pricing for your market or niche.
And don’t worry, you’re not alone. Your pricing questions are the same ones that companies like Dropbox, Hubspot CRM, Slack, and Basecamp went through in the early days.
Flat-rate pricing. Tiered pricing. Pay-as-you-go pricing. Add-ons. Price points, pricing decisions, and pricing changes are the difficult decisions you have to make in the early days of your SaaS product. Such is the life of startups.
There are a million different pricing models to consider. Keep reading and we’ll walk you through a number of those pricing models and give you a SaaS Pricing Model Template to follow so you never have to doubt your pricing again.
Should you charge $20 a month? $100 a month? How do you decide on different pricing tiers and pricing options? What’s your strategy for active user pricing?
By the end of this post, you’ll know the right pricing strategy for your SaaS business. But note… you won’t find a Freemium pricing model here. Such a model may have a time and place, but we won’t talk about it here.
Types of SaaS Pricing Strategies
There are as many different pricing points and models as there are SaaS companies.
From freemium to feature pricing and cost-plus pricing. They all have a different impact on the LTV of your customers.
One of the earliest challenges in your SaaS is monetization – choosing the right pricing strategy for your target market. I’m going to walk you through 9 pricing models that you need to be familiar with in order to give yourself a strategic advantage.
Some may eventually find their way to your pricing page, while most may not. What’s important is that you UNDERSTAND and DECIDE on the right pricing model for your SaaS business.
What are the most frequently used SaaS pricing models
Without question, the most commonly used pricing model in the SaaS world is flat monthly pricing, often referred to as flat-rate pricing. We’ll explore more of its details in a moment, but simply put:
A simple monthly rate (for example, $50/month) gives the user access to all the features and functionality of the product. Whereas a free version may offer some features, the paid versions offer more.
As noted, we’ll explore this option more in a moment.
But first, let’s look at the Usage-Based Pricing Model.
Usage-based pricing model
Essentially, the more the user uses the product, the more they pay or the higher a subscription level is required.
The benefit, both from a user- AND SaaS-company perspective? The price can scale up or down based on how much (or little) it’s used. Users have the opportunity to downgrade their plan to continue receiving the benefits of the product before they become another churn statistic.
If, on the other hand, the user needs to utilize the SaaS product more, the upgrade into a higher price point becomes nearly automatic.
Zapier offers usage-based pricing based on how many tasks you automate every month (but note that it also offers additional features as the package price increases).
Pros & Cons
Of course, the more a company uses the service, the more they are (in all likelihood) willing to pay for such service and usage.
As a general principle or rule-of-thumb, file it as a net positive: the more a customer uses your product, the more they’re willing to (and will) pay.
This also, as a net positive, allows you to price your tiers of services (see below) based on specific knowledge of the user and what they cost you to deliver.
But it also (obviously) has an impact on your CAC.
Speaking of which and on the negative side, estimating or predicting your actual costs can be a tricky game to play. It can also be hard for users to know and predict their expected usage in each coming month.
Per-user pricing model
Often labeled as a go-to SaaS pricing strategy, companies are often willing to pay based on their known number of team members or users.
While they may not understand or know how to measure or monitor their usage (thus making future cost expectations difficult), most companies have a solid and steady understanding of their staff or department size.
So while they may not know the “range” they’ll fall into for your usage categories, they know they have X number of employees working in their marketing or sales departments, so they can predict which pricing category matches the set of features they want and the number of employees they have.
A per-user pricing model makes the expense much more predictable for the user and the costs much more manageable for the SaaS business.
Unfuddle Stack, a Project Management and Time Tracking tool, provides per-user pricing.
Pros & Cons
The biggest PLUS to a per-user pricing model is the simplicity, both for the user and the SaaS business.
From the user’s perspective, it’s easy to find the right user range (pricing plans) needed based on the number of employees in a given department or organization.
While many other pricing models require the user to have an in-depth understanding of their specific needs and wants, the per-user pricing model only requires the knowledge of how many individuals are inside their department or on their team.
Of course, one of the biggest downsides to a per-user pricing model is the incentive for users to share passwords or use one another’s accounts instead of paying for the real-world number of staff on the team.
To put it in SaaS terminology you might be familiar with, a per-user pricing model may limit adoption.
Tiered pricing model
Tiered pricing is another model many SaaS users are used to.
If you’re unfamiliar with thinking in “terms” then it might be easier to think of “packages.”
So, in “Package A” the user gets a certain stack of features, in Package B, users can access those features from Package A plus some additional features. Package C adds to the features listed in Package B.
The SaaS company may label these tiers as Lite, Basic, and Pro levels.
Or perhaps Starters, Professionals, and Enterprise levels.
The names of the levels matter less than the fact that the Tiered Pricing model has multiple levels for users to join and pay.
The tiers typically include a low, medium, and high option in terms of price point.
While theories vary, you’ve likely seen pricing pages that include a “Recommended” or “Featured” banner to draw attention to the mid-price tier. The idea is that you may convince prospective customers considering the lower price-point option to instead try the mid-range tier AND you provide an extra piece of social proof to those already considering the mid-price price point.
Of course, if it makes more sense for your business model (from a cost perspective) to feature the high option price point with a Featured or Recommended banner, that’s acceptable as well.
The idea is to highlight one specific pricing tier that you want your prospective customers to consider that they might otherwise not.
So the idea behind the “Most Popular” banner featuring the mid-tier price point is to cause potential customers who were considering the low-tier option, to think of spending more money than they initially planned.
If your mid-tier price point is the most popular, you might consider featuring the high-tier price point with an eye-catching banner to cause prospective customers to consider paying the higher monthly fee.
It can be as simple as moving the “Most Popular” or “Recommended” banner to your high-tier pricing option. It’s a strategic decision that many SaaS companies have used to succeed.
ConvertKit offers its subscribers a tiered pricing model. Paying more lets you access more features.
Pros & Cons
One of my favorite reasons to consider a Tiered-Pricing model is the ease it provides in positioning your upsell to next-level tiers.
Customers have used your SaaS product. They’ve stayed on board and presumably achieved some level of success with the product. All of which provide you with the natural transition to more features and additional tiers for the user to consider.
The potential downside?
While tiered pricing often appeals to many buyer personas, it can also potentially confuse users. The choices available can become confusing or overwhelming. One simple solution is to limit the number of tiers available.
Most SaaS companies provide 3-4 pricing packages or pricing tiers. By limiting choices to only a few options, you also limit the overwhelming prospects may experience.
Flat-rate pricing model
Think of a “flat-rate pricing model” as the bare bones, simplest version of a pricing model available. There’s no complexity, no confusion, no ifs, ands, or buts.
A flat-rate pricing model means this:
Everyone either signs up for your product or they don’t. There are no multi-layered offerings. No upgrades. Nothing beyond ONE price point and ONE level.
Every customer is at the same point and paying the same price per month.
Essentially, you’re asking every prospect: “You in?” It’s not, “Do you want THIS or THAT?” because there aren’t those multiple options. You’re saying, “Here’s your ONE option. Yes or no?”
Basecamp offers a flat-rate pricing model to all paying customers. (They do have a different tier for free customers, though).
Pros & Cons
Sometimes, providing a binary option works best for customers. That’s the main advantage of flat-rate pricing. It’s either YES or NO. The flat-rate pricing model avoids confusing or overwhelming the prospective customer. You avoid the danger of offering so many levels or packages and pricing options that the prospect gets confused or doesn’t understand which level or tier is best for them.
When you simply offer them ONE level and ONE package, decision-making becomes easier. And easier to share on social media.
It’s also easier to forecast revenue, as everyone pays the same rate (assuming no discount offers, etc.).
Yes. No. They’re IN, or they’re OUT.
Of course, the downside is the risk that comes from not offering levels or options. When the prospect is only offered a binary choice, it becomes a 50/50 decision… which means you may have (at least) 50% of prospects choosing NO when they may have said YES if there was an option or tier that fit their needs or their budget better.
That being said, binary decisions also can be positive. If the prospects know they NEED what you have to offer, but you only have one price point, they become a faster YES.
Feature pricing model
There’s only a slight difference between tiered pricing models and per-feature pricing ones.
In the former, features are bundled into packages or levels and the customer determines which package or bundle is the right one for their needs. They may be able to increase or decrease their level or package as their needs change, but a package model assumes customers are willing to pay for a level that may or may not include features they do NOT (presently) need.
The per-feature pricing model is slightly different in that users ONLY pay for EXACTLY what they need now.
They’re not paying for additional features they don’t need or wouldn’t use.
QuickBooks offers sufficient granularity of features, so users know exactly what they are getting.
Pros & Cons
From a customer perspective, the biggest benefit is that no one pays for something they don’t need or use.
They’re not paying for features within a level that they can’t fully utilize. While it might sound antithetical, removing tiers or pricing levels can sometimes confuse customers.
Think of how often we are used to seeing pricing packages or levels. It creates a seamless user experience that may feel missing if you use per-feature levels instead.
The plus side, of course, is the intended lack of confusion. Users will know EXACTLY what they’re paying for and won’t have any surprises in billing or platform usage. Users should be clear on and understand their expectations of the feature they’ve chosen.
Ad-supported pricing model
Don't overthink this one; it’s as simple as it sounds, at least from a revenue perspective. This idea can also be combined with any other pricing model to add revenue top-up or additional income to your business no matter the pricing model you decide.
For instance, you decide on a tiered-pricing model but then find that you’re missing your revenue metrics. So you add in the extra revenue with ads. It’s not a great long-term model, but in a pinch, it can work. More on hybrid-pricing options soon.
The WordPress website hosting service is an example of an ad-supported model. Paying customers can disable ads but not free customers. See the bottom row of the table:
Pros & Cons
The big PROS: a revenue top-up and perhaps the ability to under-price competitors based on additional advertising revenue.
The big CONS: Not everyone loves ads. Prospects may be turned off if you don’t find the perfect-fit ads. There may also be a slight reputation-hit… but this is less of a concern nowadays.
Hybrid pricing model
As the name implies, the hybrid pricing model allows you to COMBINE two or more pricing models to suit your business model OR your customers best.
You’ve got a LOT of options here.
In effect, hybrid pricing models allow you to create almost custom bundles for your customers. Your options are nearly limitless and allow the user to have more control over what they need and/or want from your SaaS business.
Slack offers a good example of a hybrid pricing model. Its charges are based both on the number of users (per user pricing), and features (tiered pricing).
Pros & Cons
On the PLUS side, the hybrid pricing models allow the SaaS founder (you) as much control as you need AND allow the user as much control as they need to become a customer. Essentially, a hybrid approach allows prospects to become customers by removing as many obstacles as possible.
On the downside, hybrid pricing may take feel as if too much control has been taken out of your hands. This is something to monitor and plan for at the outset. When properly positioned, messaged, and controlled, a hybrid pricing model shouldn’t be outside consideration for SaaS companies.
Roll your own/bundling pricing model
Of course, you may find that NONE of these main pricing models work for your particular SaaS business.
In that case, you’re able to create your own customized pricing model. You can decide to create bundles based on user feedback OR based on whatever your developer team tells you that makes the most sense from their perspective.
The idea is… if no model fits your business quite right, then you have the freedom and flexibility to create your own.
Pros & Cons
There is a HUGE pro that comes with the freedom to create your own pricing as you see fit. We’ve listed many of the main or typical pricing models found throughout the SaaS industry, but there’s no hard-and-fast rule that you MUST stick within these bounds.
Of course, the CON may be that users have come to expect these pricing models since they are so often found with your competitors.
Popular SaaS Pricing Strategies
The strategies and pricing models that have been outlined here are based on the MOST popular pricing models for B2B SaaS companies.
Of course, that doesn’t mean you HAVE TO stick to one of these models (as justed noed)… but you should remember that these are the most POPULAR because they’ve been proven to get results for SaaS companies of all sizes.
Of course, there is one model we’ve yet to include: cost-plus pricing.
To remove the confusion around the label cost-plus and its meaning, you’re likely already familiar with this type of standard pricing from the retail world. When you think cost-plus, think: “markup.”
Essentially, calculate your business costs and add a reasonable mark-up. You ensure your expenses are covered with the pricing model and then add 5%, 10%, and so on until you reach the pricing structure you’re comfortable with.
In many ways, a cost-plus model can (and should) be built into every other pricing model we’ve looked at so far.
For instance, if your monthly operating expenses are roughly $10 per month per user, you may decide to build a $2 margin (cost-plus) into your pricing strategy, so your SaaS package levels would start at $12/month/user.
The profit margin (in this example, $2) is the sweet spot.
You have to find the number that the market (and your SaaS company) will support. Users may be willing to pay more than the $2 / month/user in the above example. You might be able to charge $15 a month (profit margin of $5). However, you may also find that the market is not willing to pay any margin at all OR may not even be willing to support the base price per month, in which case, you’ll need to adjust your business expenses to meet consumer demands of a cheaper price point OR introduce the ad-supported model.
In your analysis of the market and the price points customers are willing to pay, you also need to include an analysis of the competitive landscape.
The price you decide to charge is about more than the value of your product OR your competitors’ pricing.
What are other (related) SaaS products charging each month?
Do they use the same pricing model?
How are they positioned to differentiate themselves from you?
How are you optimizing the opportunities left in your market (which is about more than a low price)?
Your findings may provide important insights into how to successfully price your product. You may find you need to re-think your entire pricing model OR it may confirm your existing model and existing prices.
In general, competitor-based pricing means you base YOUR pricing decisions on what others in your market are doing. The idea is to avoid sending prospective customers to the competition based on a pricing difference.
However, the goal is not to simply “meet” or “match” the exact pricing model or scheme of the competition. Your analysis may show that you have low-hanging fruit opportunities where the competitors are not positioning themselves well enough and you can take advantage.
The screenshot below compares how Azure and AWS price Linux compute instances. The closeness of the prices indicates that competitor-based pricing is in play.
There is also value-based pricing to consider.
This pricing model is based more on the perceived VALUE provided (time savings, expense savings, etc.) for customers. This idea is less based on your operating expenses and more based on the actual VALUE your customers will assign to your product.
In other words, DO NOT limit yourself to whatever price point your competitors have.
To use the previous use cases example, if you’re charging $12 per user per month, but your SaaS product is SAVING your customer base $100 a month, your market research may discover that you’re able to charge more than the $15 you previously mentioned.
Don’t use value-based pricing as an excuse to over-charge or gouge the market, but as a reminder that the price you charge per seat doesn’t need to directly match your expenses per user.
Value-based pricing factors in more than dollars and cents.
What value will prospects and customers assign to you? What messaging will help users and prospects (potential customers) assign a higher value to your SaaS product?
When it’s late in the evening, and you try to book a ride using a ride-share service like Uber, only to run into one of its infamous “surge” prices, you have encountered value-plus pricing.
How to Choose the Right SaaS Pricing Strategy?
You have evaluated the many pricing models available, but now it is crunch time. You need to pick one strategy. How do you go about it? We layout a framework for you to decide.
Think about the best possible outcome
Think about the best possible result you can hope for, and work backwards to achieve it. The type of customers you will attract will change with different pricing models. So, start by thinking about who your ideal customers are and select a pricing model accordingly.
Take a hard look at the value you are providing
Ultimately, you must provide value that matches the cost that people pay. Create subscriber personas and see what they value and how much they are willing to pay. Keep your finger on your customers' pulse so that you know what they like and what they dislike about your product.
Keep your friends close and your competitors closer
Check to see what pricing strategies your competitors are using. Chance are, this is what your target customers expect anyway. Look at your competitors’ data critically. Are there holes in their pricing that you can exploit - are they overcharging or undercharging for some features?
Make pricing a team effort
Different people in your organization - the business leaders, product managers, engineers, and sales - interact with the product and the customer in different ways. All of them would have unique insights into the pricing.
Iterate, not experiment
You will never get your pricing right the first time. And even if you do, you may still need to tweak your strategy from time to time. It is easy to change the pricing, but once you have set it, make sure you follow a rigorous process and optimize it to the max to see if it really works for you. Don't fall into the trap of making unrelated changes that don't give you any data.
Finally, consider hiring a consultant to help with the pricing. An outsider is not emotionally attached to your product, and may be aware of some realities that you are not.
Validate your Pricing Model and Hone your Pricing Strategy
For a SaaS business, the cost per customer and COGS (Cost of Goods and Services) are significant factors to keep in mind when finalizing a pricing model. After spending time and effort fixing your pricing, you can’t simply ignore it. It’s unlikely that you’ll get it right the first time.
An effective pricing model will help improve your conversion rate by turning browsers into buyers (customers), thereby increasing your market share.
Keep thinking about how you add value to your customers and how you can keep increasing it. You must also keep evaluating your costs and revenues across different customer segments and tweak your pricing. It’s okay to raise prices once in a while. Remember that your pricing directly affects your bottom line so do what it takes to optimize your revenue.