You and I both know that the solution you provide is unique as a SaaS business.
So the pricing tiers, packages, and options that you offer your customers should reflect that.
If you’re trying to model your pricing by simply copying the blueprints provided by other successful companies, you might be making a fatal mistake that could kill your business’ future.
Because you will inadvertently fall in line with options that others are already offering instead of communicating to your users – and potential users – what sets you apart.
Through all my years in SaaS industry, I’ve learned a lot about the effective pricing models/strategies and made tons of mistakes.
In this extremely detailed article I will try to pass my experience to you as I:
- Briefly define SaaS businesses.
- Discuss why pricing tailored to SaaS products is an important business consideration.
- Provide 8 tips for SaaS pricing,
- Share SaaS pricing models that could actually make you scalable,
- and share 5 pricing strategies that fit well into SaaS.
I can’t wait to dig in, so let’s go!
SaaS – or Software as a Service – is a software distribution model in which a service provider hosts applications for customers and makes them available to these customers over the Internet. See the glossary…
As with other cloud services, companies typically pay for SaaS applications through a subscription fee, on a monthly or annual basis. This contrasts with the traditional model of paying for software through a permanent license, with an initial cost and an optional ongoing support fee.
But SaaS is determined to take over the software industry and become the new traditional.
SaaS Benefits and Pricing
Software as a Service provides the following benefits to users:
- Lower costs: SaaS resides in a shared or multi-user environment where hardware and software licensing costs are low compared to traditional models.
- Scalability and integration: SaaS solutions typically reside in a cloud environment that is scalable and can integrate with other SaaS offerings.
- Easy integration: SaaS applications stand out for their almost non-existent infrastructure because they are cloud-based and users only need an Internet connection to use them (along with local software installs, if needed).
These are the benefits of SaaS, but how do these benefits affect your pricing strategy?
- Thanks to how service delivery is designed, with SaaS pricing, you can quickly iterate price changes to test price levels and packages until you reach the optimal mix.
- You can introduce tiered pricing and set different prices for different customer segments.
- You can deliver services without intermediaries, giving you greater flexibility to test different pricing points and package options.
- SaaS products, thanks to how they are delivered, lend themselves well to per-use (and even per-user) pricing. Individual customer usage can be properly tracked and measured as the software runs from the service provider’s side.
As it will become clear in the following sections, these benefits and features of SaaS products open many different pricing strategies to SaaS companies.
But before moving on to the models and strategies, I just want to share my tips on SaaS Pricing with you:
8 tips for a better SaaS Pricing
I know its weird to include the tips before providing any valuable information.
But hold up!
I’m just going to give these fundamental tips right now so that in the following section you can understand what tips each model/strategy could use.
Without further ado, here’s the first tip:
1. Set prices based on the value of your product to your customers.
As part of an effective value-based pricing strategy, take the time to determine the actual value of your product or service and simply communicate that to customers in your marketing material or as soon as they land on your pricing page.
Your pricing strategy should be based on robust data, customer surveys about the services and products that matter most to them, and other assessments of what your target customers would pay for a product, service, or a package of products and services.
Reevaluate your pricing strategy on a regular, ongoing basis and make sure that all your major departments perform basic pricing analytics as well.
Once you have a solid understanding of who your customer is and what they respond to, pick a starting point from which to discuss your product based on the target audience. Do not use highly technical language on your pricing page if most shoppers are not experts but use technical language if they are.
Make it easier for customers to know which product is for them.
One of the best ways to do this is to use single-word labels that show which option is best for which customer (e.g. bootstrap option vs. startup option vs. growing company option vs. large, established company option.) Price each option based on the price tolerance of the group it was tailored for.
2. Keep the options simple.
Most customers who land on your pricing page will have already been funneled through other more story-focused pages on your website.
By the time they hit your pricing page, they are looking for useful comparison points that will help them make a purchase decision. Finding the right balance of information that gives them what they need and is polite but not distracting can be difficult.
It is a good idea to tie together three different dimensions of your pricing strategy on your pricing page:
- The right positioning that aligns with the right customers.
- The right packaging that shows a mix of features based on customer needs.
- The right price points that represent value and what your customers are willing to pay.
If you know who your target audiences are, what they are willing to pay, and what features they want in a given package, you can keep your pricing page clean and minimalist while highlighting your most popular plans – as this will encourage customers to upgrade – and having clear tiers with bundles of popular services will allow users to quickly and easily sign up for the package that best suits their needs.
Try to focus on breaking down the exact cost of each product within a bundle to show why it is worth the customer’s money but do not clutter the page.
3. Give your customers the information they need.
When your customers land on your pricing page, they are already in the final stage of the sales funnel.
While your pricing page should be as clean as possible, as outlined above, your customers may still need some information to help them cross the finish line.
The last thing you want is for them to feel confused, uncertain, or rushed to decide due to incomplete information.
You can overcome this issue by including a link to useful FAQs, a link to customer support, reviews from other customers, and additional information about returns, trials, warranties, and similar options on your pricing page.
4. Convert your currencies.
If you work in more than one global market, you can make the purchase decision easier for customers by providing them with pricing in their local currency.
Companies that show this type of localization – and, indirectly, an understanding of local market dynamics – have been shown to enjoy better growth rates than companies that do not offer services with a local touch.
There is more to local prices than simply converting your base-country rate to the currency of the target market.
There are two ways to go about this:
- Using cosmetic localization, you simply quote local prices based on the prevailing exchange rate.
- A true market-based localization change, however, considers unique target market data points such as local market saturation and buyer demographic data to re-calculate your price as we did in #1 above.
5. Leverage psychology.
In addition to explicit details about your products and their prices, there is a positive correlation between customer responses and page design.
This fact brings consumer psychology into the equation.
With the right design elements and the right words, you can communicate why your customers NEED (and not just want) your product.
Using an anchor, you can highlight your most popular (yet discounted) plan to instantly draw your customers’ attention to it and create a favorable opinion of that plan over others. You can also use a different color, layout, font, or other design elements to highlight the preferred option.
Psychological pricing can also help. For example, a price of $79.99 is preferred over a price of $80 even though both are almost identical.
6. Make actions both obvious as well as urgent.
Once your customers have decided to buy your product or service, they will look for a clear and important way to take the next step that they need to take.
Make sure your call to action is actionable.
You can use a standard “Submit” button, but you can change that to “Buy Now” to clearly communicate what happens once the customer clicks.
Phrases such as “Add to Cart” and “Download Our Report” usually perform better than generic buttons.
Options such as “Go” or “Proceed to Review Cart” have been found to consistently outperform other more popular terms that are less directed such as “Submit,” “Download,” or “Sign Up.”
You can use this approach to phrase your CTAs so that they convey the desired message, such as “Start Saving Time Now” or “Increase Customer Retention Today.”
A few final points for perfecting your CTA are as follows:
- Choose a bright, high-contrast color for your CTA button, but choose a color that matches with your overall branding.
- Do not force customers to scroll to reach the CTA button. Keep it visible toward the top of the page.
- A/B testing can be used to generate the CTA that delivers the best response or click rate out of all available options.
7. Encourage early annual payments.
While monthly plans and multiple tiers may seem tempting to have, annual plans that are paid upfront are better for them – and you.
Customers get a discount, and you get quick access to cash.
While offering discounts can create an expectation of getting more for less in the minds of consumers, giving them a substantial price-cut based on an annual subscription can increase the long-term ROI from that single customer. It also increases the chances of building a long-term relationship with the customer.
To encourage customers towards choosing an annual plan, offer discounts based on how much they pay upfront, and incentivize them with a deal on the specific product they most likely need.
A great way to do this is to offer multiple tiers of discounts based on different payment periods. The cheapest, longest-term plan should be listed first, followed by an intermediate plan, and the least-discounted plan at the end.
Some companies go for aggressive, time-bound price discounts. Most customers are aware that discounts come and go for different products from different providers, making them less likely to stick with you over the long run if you try to get them to commit based on a sense of losing an opportunity because of a closing discount window that spurs them to jump at making a decision.
8. Learn from experience.
Pricing is an iterative game, so it is worth investing in page performance metrics and web analytics tools to guide pricing decisions.
A/B is generally not recommended with pricing because price fluctuations of this sort – especially if different prices are shared on social media or elsewhere – can put off customers who paid more.
Instead, gather data by tracking current and potential customers or conduct surveys in which you ask your customers the following:
- What do you want most and least out of all product options?
- What price would be too high for you to consider?
- Which price would make you question quality?
- What is the right price that is just borderline expensive?
- What price would make a great deal?
Survey about a quarter of all customers every quarter to obtain a statistically meaningful picture of your customers’ view.
Now that we have a general idea about how pricing should work, I’ll deep-dive into several pricing models that can work for you based on your product offerings and target markets.
SaaS Pricing Models to become Scalable
Scalable pricing models allow you to capture more of the revenue that your customers are willing to pay without losing small customers who are unwilling to pay higher prices.
It also provides a good way to keep increasing revenue from your current customers.
There are many dimensions to it:
Consider the emotional willingness to pay.
There is a significant difference in willingness to pay between different types of customers.
For example, in the automotive sector, most car makers have a highly profitable model in its highest category (often called the flagship model) aimed at buyers who are not price-sensitive and simply want the best product available. In many cases, the flagship is only slightly different from the base models, but by providing additional add-ons, you can extract a great deal of value from buyers who are willing to pay to be different.
For SaaS companies, what is important to recognize in this is the mindset of the consumer. In the world of software buyers, emotional thinking is slightly different. With the right emotion management, you can make your buyers want or expect to pay a higher price for differentiated products.
There are 8 SaaS pricing models that can help you become scalable, which are:
1. Per-feature Pricing Model
A common way to differentiate prices is to pack different versions of the software, with more functionality available for a higher price.
In all probability, this is probably one of the best known and most widely used models in the SaaS space. The feature-based pricing model is one that charges subscribers a dynamic rate depending on features offered or used.
The user only pays for the functions they need so the more features the user wants, the more they must pay for them.
With the feature pricing model, SaaS companies can offer different price levels depending on the features and functionalities available in each plan. The most basic functions will have lower prices than increase as the functionalities on offer increase.
It is important to design packages in such a way that they offer a good service but that their superior features increase their benefits with guarantees. This is an effective model as long as you balance between functions and their prices.
2. Per-chair Pricing Model
The theory here is pretty simple: the more people use the product, the more value the customer receives.
But if your provision/deployment costs do not rise, you can charge less per additional account and offer a discount while reeling in more revenue per client.
3. Usage-based Pricing Model
The intensity of usage can be measured in different ways.
For example, it can mean the size of a database deployment that is needed, the number of people on a mailing list, the amount of storage used for an application, and so on.
All these factors indicate that a customer is getting more value from a product and is therefore likely willing to pay more. Other metrics of usage can include:
- The number of websites created.
- Support quality, such as responses in 2 vs. 24 hours, email support vs. phone support, a cap on support requests, or dedicated support representatives.
- The number of user dashboards or server installations.
As your SaaS business grows, it begins to accumulate a large customer base.
An important factor to consider when selecting a pricing point is to look for ways to automatically get more and more revenue from that same customer base.
A good example of this is pricing around storage usage. Businesses have a hard time throwing things away, and the number of things they want to store keeps increasing. As a result, storage growth in a typical company large source of fixed costs.
If you can tie your pricing to something like storage that will continue to grow annually, you’ll have a great way to grow your business without having to sell more.
Depending on the metric you choose, pricing based on the intensity of usage is an especially useful pricing tool for the following reasons:
- It creates a lower barrier to product adoption. Users face lower upfront costs when registering for the service since they know that their expenses will be adjusted according to how much they use the service in question.
- Pricing by use also allows the service provider to better align its costs with its profits since the profit it receives is tied to costs and it is contracted to charge for the service. For the customer, the cost/benefit ratio is clearer, and for the provider, it can prioritize the development of features and services based on the needs expressed by the customer.
- Pricing based on the intensity of usage leads to higher adherence. Because per-use pricing is based on variable costs, users may not be tempted to lower them. Also, it is exceedingly difficult to change SaaS providers once the application is deployed within the processes of the business. SaaS customers, by definition, decide to have an external provider to manage the service in question, so you can improve your long-term adoption rates using this pricing strategy.
- Finally, usage-based pricing allows subscription pricing, which helps with financial planning. There is a very clear cash flow trade-off between switching between licenses and switching to per-use pricing. Usage pricing provides a more stable and predictable cash flow cycle which helps with financial planning. This helps explain why most SaaS products are priced on a monthly or subscription basis.
4. Cross-Selling Pricing Model
Another important way that you can sell more to an existing customer base is to cross-sell or up-sell.
By cross-selling or up-selling, we mean selling them an additional product or service. For a SaaS business, there are many interesting ways to do this:
- Buy or build additional products that are closely related to your existing products.
- Sell additional modules that integrate very well with the existing product.
- Create an app store and sell third-party products, taking a cut of the profits.
- Create a service marketplace where you connect partners who offer service offerings around your products and reduce transaction costs.
Look for other charges that are created based on the use of your product (for example, e-commerce payment transaction charges, advertising revenue, etc.) and ask yourself if it is possible to extract a portion of that revenue.
These options provide more and more value to your customers, and as you can apply them, you can increase customer satisfaction and loyalty, as well as charge more.
All SaaS businesses will experience some level of churn. Extracting more value – through more offerings or smarter pricing – can help you recover revenue lost from customer churn.
5. Freemium Pricing Model
Freemium is a pricing model where users have limited access to features for free.
This means that users can have access to other functionalities when updating or uploading the subscription. It is an attractive model for the user since the SaaS product is offered free with limited functions, which encourages users to buy paid plans to enjoy additional functions.
It is a widely used model to create a tiered pricing method.
Also ideal for users to begin to familiarize themselves with the product.
For startups, it is the best method to put their products on the market. It is not the ideal model for just earning income, though, but is a great first step in attracting customers and thinking about income from there. It is important to note that freemium models suffer a high rate of abandonment by users.
However, since freemium models are designed so that you can give away something for free and still provide a great deal of value to the customer, you may be able to become relevant enough that your users choose an entry-level package from which you can start making money.
Again, scalable pricing is the answer.
6. Flat-Rate Pricing Model
The flat-rate model is used when companies charge users a single flat rate, regardless of how many people use the product.
With a flat fee strategy, a fixed set of features and functionality is offered for a fixed price. There is no additional charge for an exclusive feature or a superior add-on.
It is a simple model for both companies and customers and understanding the price you will have to pay is simple.
One of the biggest advantages of this pricing model is that you will have a single, clearly defined price offer, and this helps you focus on marketing and other tasks. On the other hand, it is not a recommended model if you have different types of target customers with different needs.
7. Per-user Pricing Model
This is another well-known pricing model used by SaaS companies, especially in B2B.
In the per-user pricing strategy, the price varies based on the number of end users of your customers.
This pricing model is good if customers actually experience growth in their user base..
At first, they are lured in with low prices, and then revenue will increase as they grow.
8. Per-active-user Pricing Model
The price per-active-user is different from the price per user model in that the final amount charged to customers is linked to the end-users who were active during a billing period.
Even if the number of users increases, you only charge for those who actually use your customer’s product.
SaaS Pricing Strategies
For many SaaS companies, strategic pricing is one of the most overlooked ways for you to drive growth.
While most companies spend much of their energy on customer acquisition, pricing and the smart monetization of what you have to offer has an almost four-fold impact on profits.
One way to improve how you monetize your offerings is to focus on developing a value-based pricing strategy. Value-based pricing establishes the price of a product or service based on how much the target customers think it is worth it.
This is a commonly recognized pricing strategy, but there are many more as well.
Before launching any product or service, every SaaS business must plan an appropriate pricing strategy. Setting the price for a product or group of products should not be a random act.
In principle, a thorough analysis should be performed on:
- Market positioning.
- Target market.
- The number of clients to be served with the SaaS service.
- How long the customer’s lifespan will last.
- Benefits obtained at different levels of service.
By assessing these factors, you will have a clearer and more realistic idea of the true value of your SaaS offering and it will make it easier to think about price levels and packages.
In fact, this information-gathering exercise should be done periodically, as pricing strategies need to be reviewed over time to meet market needs.
Here are the most common pricing strategies among SaaS businesses:
1. Reference pricing
Your users will inevitably do some research and compare your prices to those of the competition.
If you can create a unique product, you can charge whatever price fits into your marketing strategy, but if you have a product that is similar to others already on the market, you can price your offerings below a given reference point which can be, say, the best offering of your closest competitor.
2. Fair pricing
This means pricing at a level that is close enough to the user’s perceived ideal price for them to say:
OK, this price is fair.
You can only do this if you have conducted adequate research into what your target market perceives as the ideal price.
3. Cost-Plus Pricing
How can I ever forget about the oldest pricing strategy on the books, the Cost-Plus.
Cost-plus pricing refers to calculating the cost of the value you are providing, and adding your desired profit on top of that to determine a price.
It has been used for centuries all over the world simply because it is effective and easy. You don’t have to do all-hands research on the market or user’s perspective or your competitors, you just put a price on your own work.
4. Shared-cost pricing
You can decrease the price of a product or service without affecting its perceived value by having the cost shared over more users.
This is similar to usage-based pricing but approaches pricing from a psychological perspective instead of a cost-based perspective.
A non-negligible side effect of the shared cost is that the user who wants to save will convert other buyers to your cause to save on what you offer.
5. Difficult comparison pricing
We discussed pricing that makes it clear what the customer gets for a certain amount of money can be good for you, but a little ambiguity in pricing can also help.
If making a straightforward comparison is difficult to make but you have branding or other bells and whistles that are clearly communicated, buyers tend to focus on easy-to-see features and will be less sensitive to the overall price they have to pay.
Kudos to you for reading all the way down here!
If you paid attention to the points I was trying to make, you might be having a hard time selecting the pricing you must use.
And it’s OK.
Because that means you care, and at the end of the road you’ll establish the best pricing strategy for your SaaS company.
Frequently Asked Questions
How can I develop a SaaS Pricing model?
You won’t be able to develop a pricing model from scratch for your SaaS. You must choose a combination of different pricing models used in SaaS.
How do I set a pricing for my SaaS business?
You can establish a pricing using one of three ways, 1) charge close to your competition, 2) calculate your cost and add desired profit on top of that, and 3) ask your customers how much they are willing to pay for the value you offer.
What is SaaS Pricing?
SaaS pricing refers to the models and strategies used in SaaS companies to charge customers with a decent price for their product/service.