When it comes to your business’s revenue, and consequently, your cash flow, a pricing model that makes sense is crucial. But many SaaS companies spend comparatively little time fine tuning their SaaS pricing structure, which can have a significant effect on the sustainability of the business, particularly in the early stages. We’ve put together a comprehensive guide to help you navigate the minefield of SaaS pricing models and work out how to price your SaaS product.
Understanding SaaS pricing models
Pricing models are structures and methods for determining the price of your product or service. It’s important to strike the right balance between revenue and value. If you undercharge, you could run into cash flow problems, but if you overcharge, you could slow growth and lose out on potential customers. Here are some of the most common SaaS pricing models to consider for your business.
Tiered pricing – By far the most popular SaaS pricing structure, tiered pricing essentially means that you offer multiple packages at multiple price-points with different sets of features. This allows you to appeal to a broad range of potential customers, while also offering clear upselling opportunities for customers who want to take their usage to the next level.
Usage-based pricing – Similar to pay-as-you-go cell phone plans, usage-based pricing directly links the cost of your SaaS service to its usage. Basically, the more your customers use the service, the more they’ll have to pay. As price scales with usage, it makes your platform much more accessible, although it’s worth remembering that you may find it more difficult to predict revenue.
Flat rate pricing – Flat rate pricing is the simplest type of SaaS pricing model; you sell a service at a single price-point. It’s much easier to communicate the benefits of this type of model to customers, but it can make it more difficult to appeal to disparate user segments. For example, a service priced for SMBs is unlikely to be suitable for enterprise companies.
Per user pricing – Per user SaaS pricing models offer fixed monthly prices for each user. It’s simple and ensures that revenue scales alongside adoption, but as you’re charging per user, there’s always an incentive to avoid adding new users to the platform, potentially limiting growth.
Per feature pricing – In the case of per feature pricing, the amount you charge depends on the features that your customers want to use. The more features they want, the more you charge. This provides your users with a strong incentive to upgrade, but it can discourage adoption.
Freemium model – Finally, there’s the freemium model, wherein free-to-use products are supplemented by paid packages. In a crowded market, this type of SaaS pricing model can help you get your foot in the door. However, it makes it more difficult to turn a profit and can diminish the value of your product.
Understanding SaaS pricing strategy
When you’re developing your business model, you also need to think about what SaaS pricing strategy you’re going to use. Depending on your objectives, there are a wide range of strategies you can employ to fuel your company’s growth.
Penetration pricing – When you first launch your service, penetration pricing could be key. Essentially, you’ll rapidly reduce your prices to inspire rapid adoption and secure first-mover advantage. This enables you to take a grip on the market, and while your prices will be unsustainably low in the short-term, you can upsell/cross-sell over the long-term to make a healthy profit.
Prestige pricing – Maintaining high prices to convey a sense of quality and exclusivity, prestige pricing is a SaaS pricing strategy used to maintain a base of small, high-value customers. This can help your company secure a vaunted reputation and enable you to charge higher prices as a result.
Skimming pricing – Often used when a product has just entered the market, skimming pricing is a great tool for maximizing revenue. In brief, you set a high price for the product or service before lowering it over time. This enables you to broaden your appeal as the product matures while providing early adopters with bragging rights.
Free trial pricing – Time-limited free trials are widely used within the SaaS space, providing your customers with the opportunity to try your product without any obligation to buy. If your product solves an expensive problem, there’s a strong incentive for the customer to purchase after the trial period ends.
Captive pricing – Used mostly when the value of the core product is relatively low, captive pricing strategies offer a basic package for an affordable price but charge extra for features that allow users to get the most out of the service.
Cost plus pricing – Finally, there’s cost plus pricing, which refers to a SaaS pricing strategy wherein you add a target profit margin to your costs (i.e. for development, marketing, selling) and use that to price your product. This is often used as a basic pricing strategy by companies in the initial stages of their rollout.
Getting your SaaS business model right
It’s important to spend a bit of time before launching your product figuring out how to price your SaaS product. Above all, ensure that you’re targeting the right buyers, you’re charging based on value, and your pricing structure is as simple as possible. Of course, you can also test and reevaluate your SaaS business model when the need arises; just be sure to explain clearly and concisely why you’re making this change to your customers.