Building and running a SaaS startup can take time and effort. More so, if you start going deeper into the SaaS pricing models, they are another world to explore. Still, you need to know your options with regard to pricing your product so that you can achieve the right levels of the two most important SaaS metrics: Customer lifetime value (CLV) and customer acquisition cost (CAC).
The end result should always be a satisfied customer who wants to climb the product ladder with you. However, that’s only doable when your product pricing hits the bull’s eye. If you overprice, you will get an underwhelmed customer who thinks your business isn’t good enough—and if you underprice, the cost of business will kill you.
So, to stay afloat as a SaaS startup, you must know everything about the strategies and the practical SaaS pricing models to price your product correctly. I happen to have an eye on the current trends, and a knack for advising SaaS providers, so here’s a rundown of all the current strategies and SaaS pricing models for you.
The Anatomy of SaaS Pricing Strategy
There's no one-size-fits-all answer when it comes to SaaS pricing. Of course, every SaaS product is different and caters to a specific audience only. But there are some general principles that can help you come up with a strategy that works for your business and scales its functionality.
SaaS products are usually priced based on the number of users or licenses, so your first step is to decide how many users you want to support with your price point. If you’re just starting out, you will take a baseline number of users, for example, 200 customers in the first quarter, and optimize the pricing later.
From there, you can consider other factors like features and customization options to come up with a price that meets your needs.
One thing to keep in mind is that SaaS pricing tends to be flexible, so you can come up with your rates as your business grows and evolves. The important thing is to start with a pricing strategy that makes sense for your target market and then make adjustments as needed. With a little trial and error, you should be able to find a SaaS pricing strategy that works for you and helps you grow your business.
9 Popular SaaS Pricing Strategies
The term pricing strategy determines which approach a company will take in regard to pricing its products. Based on product differences, here are a few most popular SaaS pricing strategies you can choose from:
1. Penetration Pricing
Penetration pricing is a SaaS pricing strategy where you charge a low price for your product or service in order to gain market share. The goal is to increase sales and market share while still maintaining a profit margin.
This strategy can be risky, as you may not be able to make enough money to cover your costs. In addition, if your product or service is not well-received, you may have to lower your prices even further in order to compete. But if done correctly, penetration pricing can help you build a successful SaaS business.
2. Captive Pricing
Captive pricing is a smart choice for SaaS products with multiple layers. The idea behind the captive pricing strategy is that you offer the core product at a market-competitive price, and you set different prices for the augmented product features.
For example, if you’re a SaaS startup with a project management app, your core product is a workflow management software.
However, there are endless options with augmented products. You can offer integrated software programs tailored to your target business needs.
Usually—but not always—the core product prices are basic, and they add up to your revenue stream through the captive (augmented) products.
3. Skimming Pricing
Skimming pricing is a strategy in which a company prices its products or services at a high level in order to maximize profits. This strategy is often used when there is a new product or service on the market, and the company wants to take advantage of the high demand.
Skimming pricing can also be used as a way to discourage competition by making it difficult for new companies to enter the market. However, if you’re working in an already saturated SaaS space, this pricing strategy isn’t the best for your business.
4. Prestige Pricing
Prestige pricing is a high-end pricing strategy in which a company charges a premium price for its products or services in order to convey a sense of quality or exclusivity.
This pricing strategy can be effective in certain situations, such as when a SaaS company comes up with an entirely new idea. By charging a higher price, the company can communicate to consumers that the product is of superior quality.
Prestige pricing can also be used as a way to differentiate a company's products from its competitors. If two SaaS products are very similar in terms of quality and features, the one with the higher price tag may be perceived as being better simply because it costs more.
Here, you may ask that what’s the difference between skimming and prestige pricing? Well, skimming isn’t permanent. It is sort of short-term, while prestige pricing maintains a high price for the entire product life cycle.
5. Free Trial Pricing
Free trial, as the name suggests, allows the customers to try the SaaS product for free. You can use the free trial strategy in a couple of ways: The first is as a way to let customers test out your product before they commit to buying it. This can be especially useful for new customers who may not be familiar with your SaaS product or how it works.
It also allows them to experience the value of your product first-hand and see if it meets their needs.
Another way to think about free-trial pricing is as a way to generate leads. By offering a free trial, you can attract new customers and get them interested in your product.
Once they've had a chance to try it out, you can then upsell them on a paid subscription.
6. Cost Plus Pricing
Cost plus pricing is a pricing method where the selling price of a product is set by adding a markup to the cost of the product. The markup is usually a percentage of the cost, but it can also be a fixed amount.
The cost-plus pricing strategy is popular in B2B settings, so a SaaS startup can use it without a second thought.
However, you need to ensure that the markup doesn’t affect the overall customer experience in the long run. It means that you cannot underdeliver by setting up too high markups on the cost unless you’re sure of maintaining a unique SaaS product for the decades to come.
7. Value-Based Pricing
Value-based pricing for SaaS involves setting your price based on the value you deliver to your customers. This means that instead of charging a flat rate, you charge based on the results you achieve for your customers.
This type of pricing can be very effective, as it ensures that you are always delivering value to your customers. It also aligns your interests with those of your customers, as you are both working towards the same goal.
The key to success with value-based pricing is to make sure that you accurately assess the value you are delivering to your customers. This means understanding their needs and what they are willing to pay for. Once you have a good understanding of this, you can then set your prices accordingly.
8. Price Anchoring
Price anchoring is a technique that can be used to influence the perceived value of a product or service. By presenting a customer with a reference price (an "anchor"), businesses can guide them towards perceiving a higher or lower value for what they are selling. In the context of software as a service (SaaS), this technique can be used to help close deals and boost revenue.
There are two main ways that price anchoring can be used in SaaS:
1. By providing customers with a list of features and benefits, along with a corresponding price for each one, businesses can encourage them to see the value in what they are selling. This is known as feature-based pricing.
2. By presenting customers with a lower-priced option (known as a "loss leader"), businesses can encourage them to see the value in what they are selling. This is known as price anchoring.
It is important to note that price anchoring should not be used to mislead or deceive customers. Doing so could damage your business's reputation and result in legal action.
9. Competitor-Based Pricing
Competitor-based pricing is a type of SaaS pricing in which the price of a product or service is set based on the pricing plans their competitors use. This type of pricing can be used to:
- Gain market share
- Improve customer loyalty
- Simply stay competitive.
In order to successfully use competitor-based pricing, it is important to have a good understanding of the competitive landscape and the prices that competitors are charging for similar products or services. Additionally, it is important to make sure that your own product or service is priced accordingly in order to attract and retain customers.
Why Is Choosing the Right Pricing Strategy Important?
While it may tempt SaaS or any business owner to price their product only based on their profit expectations, it isn’t wise to make a blind choice. Of course, a business runs for profits, but that’s not the only factor to consider while pricing a product.
A SaaS startup must have a clear idea of the market trends, the level of market saturation, how the competitors are pricing their products, and what value proposition their product offers.
Still, these are only a few factors to consider while pricing a SaaS product. If a business doesn’t take care of its pricing, it will eventually face:
- Lost revenue
- Compromised market positioning
- Dissatisfied customers
So, to get things straight, it is crucial to make the pricing choices that work. Moreover, trial and error must also be a part of the SaaS pricing strategies you adopt.
Let’s move on to see what SaaS pricing models are and how they are different from SaaS pricing strategies.
7 Commonly-Used SaaS Pricing Models Explained
Now that we have established which strategic approaches you can pick from, let’s look at the actual methods to determine the right price for your SaaS product—i.e. the pricing model.
1. Flat-Rate Pricing Model
Flat rate pricing for SaaS is a subscription-based pricing model where users pay a fixed monthly or yearly fee for access to the overall set of features of the software. This type of pricing is simple and easy to understand, making it a popular choice
However, If you're considering flat rate pricing for your SaaS company, it's important to weigh the pros and cons carefully to decide if it's the right fit for your business. Here are some of the key advantages and disadvantages to keep in mind:
- Simple and easy to understand
- Predictable and stable
- Can be helpful for budgeting purposes
- Less flexible than other models
- May not be the best option for everyone, as it doesn’t adjust the augmented products.
Flat-Rate Pricing Example
Grammarly uses flat rate pricing for different tiers of its customers.
2. Usage-Based Pricing
Usage-based pricing is a type of SaaS pricing model where charges are based on the amount of resources used by the customer. This type of pricing is often used for cloud-based services, such as storage or computing power, where customers can use as much or as little of the service as they need.
- Usage-based pricing can be more cost-effective for companies with variable or unpredictable resource needs, who may not need add-ons.
- With usage-based pricing options, businesses only pay for the resources they actually use, so there's no wasted spend.
- This type of pricing model can be more flexible than other options, making it easier to scale up or down as needed.
- Usage-based pricing can be complex, and businesses may need to invest in tools and systems to track usage accurately.
- This type of pricing may not be ideal for businesses with predictable or steady resource needs, as they may end up paying more than they would with a fixed price model.
- Usage-based pricing can also create challenges around budgeting and forecasting, as companies will need to estimate their future resource needs in order to plan appropriately.
- Ultimately, whether usage-based pricing is the right choice for your business depends on your specific needs and circumstances.
Usage-Based Pricing Example
Hubspot uses usage-based pricing for its sales software. You can pay according to the number of leads you generate per month.
3. Tiered Pricing
The tiered pricing model is a popular way to price products and services. It's a simple and effective way to encourage customers to buy more, while also providing them with a discount for doing so.
Under this model, there are a number of pricing tiers based on the quantity purchased. The more you buy, the higher the discount. This encourages customers to buy in bulk, which can save them money in the long run.
There are a few different ways to structure a tiered pricing model. The most common is to offer a fixed discount for each tier. For example, you might offer a 5% discount for purchases of 10 items or more and a 10% discount for purchases of 20 items or more.
- Tiered pricing can help increase sales by giving customers different options to choose from.
- It can also help you boost profits by allowing you to charge more for certain products or services.
- Tiered pricing can also be used to encourage customers to buy more of a product or service by offering discounts for higher quantities.
- Tiered pricing can be confusing for customers, which may lead to lower sales.
- It can also lead to resentment from customers who feel like they're being charged more than others for the same product or service.
- Finally, tiered pricing can create an artificial sense of urgency, which may backfire if customers don't perceive the urgency as genuine.
Tiered Pricing Example
You can see Freshdesk uses a tiered pricing model for different customer segments. You can see the fixed discounts as the account type changes.
4. Per-User Pricing
The per-user pricing model is a type of subscription pricing in which customers are charged a certain amount for each user that they have on their account. This type of pricing is common among software as a service (SaaS) companies and can be an effective way to scale your business while still providing value to your customers.
There are a few things to keep in mind when considering a per-user pricing model:
- First, you'll need to make sure that your costs are covered for each user that you have on your platform. This means having a clear understanding of your costs and making sure that your prices reflect those costs.
- Second, you'll need to decide how much you want to charge for each user. This will likely be based on the value that your platform provides, as well as the competitive landscape.
- Third, you'll need to have a system in place to track users and ensure that they are only being charged for the users that they actually have on their account. This can be done through a variety of methods, including manual tracking or using a third-party tool.
- The monthly fee is fixed, so there are no additional charges involved at any level
- The addition of each user leads to revenue growth
- The model isn’t suitable for scaling within organizations, and the churn rate can get very high.
- People may take advantage of a single license and not buy more for their organization
Per-User Pricing Example
Canva is a design tool that uses the per-user pricing model.
5. Per Active User Pricing
This type of pricing model comes under the umbrella of user-based pricing. The per active user pricing model is an augmentation of the per-user pricing model. Not the best pricing model, but it has some solid upsides to it for scaling among a large number of team members. Typically, this pricing model is prevalent in SaaS businesses, and it only bills for users who have actively used the SaaS option for a certain time (for example, a month).
If the customer hasn’t used the service even after buying a membership, they don’t need to pay each month.
- The customers pay according to the usage only
- It is easy to scale within organizations
- More complicated than most of the other pricing models
- Not suitable for annual billing plans
Per Active User Pricing Example
Slack uses a freemium version as a basic plan, but once a certain limit of messages reaches, the pricing model shifts to per-user.
6. Per Feature Pricing
As the name suggests, per feature pricing model is a type of pricing strategy where businesses charge their customers based on the features they use. This type of pricing can be seen in various subscription-based services, such as software-as-a-service (SaaS) products, where customers are typically charged a monthly or yearly fee for using the product.
The per feature pricing model can be beneficial for both businesses and customers alike. For businesses, this type of pricing can help to simplify their billing process, as well as providing a more predictable stream of revenue. Per feature pricing can also be flexible, allowing businesses to adjust their prices according to the value that customers place on certain features.
Meanwhile, customers may prefer a per feature pricing model as it allows them to pay for only the features that they need or use the most. This can be helpful for those who are on a budget, or who do not need to use all of the features offered by a product.
- With a per feature pricing model, you can offer your customers a greater degree of flexibility and customization. This can be especially helpful if you have a complex product or service with many different features.
- Easier to understand: Per feature pricing models can be easier for customers to understand than other pricing models. This is because they are typically presented in a more straightforward way, with each feature clearly listed and priced individually.
- Greater transparency: Per feature pricing models tend to be more transparent than other pricing models. This means that customers are more likely to know exactly what they are paying for, and why.
- A per-feature pricing model can require more work on your part, as you will need to keep track of all new features, the existing ones, and their prices.
- With a per-feature pricing model, your revenue may be less predictable than with other pricing models. This is because customers may only purchase certain features and not others.
- If customers only purchase certain features, they may miss out on the full value of your product or service. As a result, they may be less likely to recommend it to others.
Per Feature Pricing Example
Salesforce uses the per feature pricing model.
The freemium pricing model is a popular way to monetize your app or service. With freemium, you offer a basic free version of your app or service and then charge for premium features or upgrades.
This pricing model can be very effective in increasing conversion rates, tapping a new market, and make the free users become paying customers.
- You can attract new customers easily and better approach potential customers.
- It’s a great way to get people hooked on your product or service
- It can help you boost your revenue over time.
- Some customers may feel cheated if they don’t feel like they’re getting value for their money.
- It can be tough to strike the right balance between giving away too much and not enough.
- There’s always the risk that people will take advantage of your free offer and then never upgrade to a paid version.
Zapier provides a ‘forever free’ version to its customers.
How Do I Choose the Right Pricing Model for My SaaS Business?
There are a few key factors to consider when determining which pricing model is right for your SaaS business model. Let’s look at some of the most important things to keep in mind:
1. The type of product or service you're offering
Are you selling a simple, self-contained service? If so, a tiered pricing model might be the best way to go. On the other hand, if your product or service is complex and/or requires ongoing support, a user-based price model could be a better option.
2. The nature of your customer base/ buyer persona
Do you have a large number of small businesses as customers? If so, they may be more likely to prefer feature-based pricing model according to their needs. On the other hand, if you have fewer customers, but each one is a large enterprise, an per active user pricing model would be a better fit to cut the running business costs of your customers.
Now, it's up to you.
The pricing of your SaaS product is a critical part of your overall business strategy. You need to find the right price that will cover your costs while also making it attractive to customers. By understanding the different strategies and models for pricing, you can make an informed decision about how to price your own SaaS product.
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Related Read: A Nice Price: The Intricacies Of Product Pricing Strategy