Which of the 6 SaaS pricing models is right for you?
Your pricing model determines how your product is monetized, and so your revenue and the success of your venture.
In our eBook “Pricing a SaaS Product – A multi-pronged approach,” we explored why it’s important to select the right value metric for your pricing model. Once you arrive on your value metric(s), you will have to model your pricing around it. The value metric(s) that you pick sets the tone for your pricing model.
Golden rule: Make them an offer they can’t refuse.
In this article, we will explore the various pricing models and their pros and cons, to help you choose the best for your product.
- Flat rate Subscription pricing
If your product caters to a single customer persona, this is the best pricing model to opt for. It is also the simplest. In a flat pricing model, your customer pays a fixed amount per month/quarter/year for all the features of your product. No hidden costs, no upselling. This is widely for products in the B2C space but there are also few B2B products who have leveraged this pricing. Take video streaming platforms or news subscriptions for example. Netflix, for a long time, was charging users a flat monthly subscription fee for its services. Today, news portals like The New York Times or The Wall Street Journal are prime examples of flat pricing models.
Simplicity. If your customers value straightforward value propositions without any clutter, flat pricing models can be convincing. Revenue forecasting is also accurate and easier, with almost no complications. For example, Basecamp has been leveraging flat rate pricing beautifully to its advantage.
Sustainability is a concern. With fixed prices, you are inelastic to price wars that your competitors might start. Smaller clients might choose your competitors’ lower prices, while bigger clients might demand resources beyond the scope of your subscription plan. In both cases, you are at a loss. In fact, bigger clients might end up draining your resources without having to pay for it.
Another cause of concern is the inability to adapt with the needs and purchasing powers of your customers. What seems like an optimal price today, might end up being sub-par tomorrow. Despite its cons, flat rate pricing continues to serves early stage start-ups well enough. However, it is NOT a recommendable long-term approach.
- ‘Per-user’ pricing
In a ‘per user’ or ‘per license’ pricing model, as the name suggests, you charge your client based on the number of users using your product. Your revenue scales with adoption. In fact, you can offer your entire bundle of features, but to one user at a time. Clients generally appreciate this pricing approach since it allows them to also understand and calculate cost implications better. Enterprise solutions, like G Suite, opt for per user pricing. Another popular example of user-based pricing is the online graphic design company, Canva. Slack, the online workflow management tool is also a good example of this model, but with more tiered options.
Per user pricing is favoured by customers because it offers two valuable things – transparency and high ROI. When you offer complete access to your product, you cannot upsell in the future. Clients love that. It also makes their choices simpler. They know what they are paying for and how much they need to in case their team expands. This makes adoption easier. This is one of the pricing models which is easy to understand, making the product easy to “sell and scale”.
If there’s one difference between pricing a physical product, such as a pair of shoes, and a software product, such as yours, it’s how value is determined in both. When you sell a pair of shoes to a customer, you don’t charge for the number of miles it will help your customer walk. But for a SaaS product, this is exactly what you want to do. In other words, it’s not only about the number of users but also the volume and scale of usage. Clients can resist adding new users to reduce costs, but usage is much harder to limit. This pricing model provides the scope of abuse of the limited logins by multiple individuals within the organizations. Risk of high churn with the cases of limited adoption, less no of users, is inevitable.
- Tier-based pricing
Tier-based pricing is probably the smartest way to target a wide range of customer personas, each willing to consume your product differently. In other words, different packages or ‘tiers’ of your product for different customer segments at different prices. It’s need-based, value-based and resource optimized. Great, isn’t it? We can all learn a thing or two from Hubspot and their elaborate tiered pricing page.
For starters, when you have multiple client personas, this allows you to sell them your product according to what they want and how much they are willing to pay. When your customers outgrow their current packages, you can always take them to the next price point a.k.a. upsell. In SaaS, upselling and expanding existing revenue can cost a lot less than acquiring new revenue.
A complicated pricing page. Yes, that’s a real threat to conversion! Too many choices and you confuse the customer. Your packages also need to be on point. Customers should not feel that you are over-charging them or undercompensating them. That’s never a good feeling.
- Pay as you go / Usage based pricing
“For what it’s worth.” That’s literally what this model is about. Usage based pricing or ‘pay-as-you-go’ models allows your customers to pay only for how much they use your product. If you’re a start-up that offers cloud storage solutions, or transaction-based SaaS solutions, then this is probably the easiest pricing model for you. Customers show a strong preference for this model because it can appear more affordable and flexible. Zapier, the automation company, charges clients based on the number of tasks completed.
It is the fairest of them all. Customers pay for what they get. No hidden costs and complete transparency. You also lower the cost of upselling significantly. The more customers like your product, the more they use it; and as their usage scales, so do you.
Revenue forecasting can be hard. There’s a chance of under/overestimating clients’ usage and purchasing power. A big enterprise might be using less of your product, while a small one fills your pockets more. In that case, you’re losing out on the potential revenue the big guys could generate if your model had been per-user or tier-based. Dependency of your business growth on the customer’s growth could be an inevitable risk while using this model.
- Feature Based Pricing
This is a popular pricing strategy, and not just in SaaS. Feature-based pricing is where customers pay for the functionalities they use. If they want more product features, they must upgrade from a basic version to a premium version. Besides encouraging upgrades, this method helps streamline expectations since your customers know exactly what they are paying for. Web hosting providers like GoDaddy and marketing automation companies like ActiveCampaign follow feature based pricing models.
One big advantage is that it helps you allocate resources more efficiently. If certain features of your product are resource-heavy, include them in the premium plan. This is well-suited for the early stage startups focusing on product-led growth strategy as while they continue to experiment with the product and pricing, the incremental feature-set can drive the acquisition, adoption and expansion.
You need to really understand your buyer personas. Feature bundles that don’t make sense to the target persona won’t sell. For a customer, it’s can sometimes be difficult to understand what features are useful at what stage in their own growth. Since some features can act as a decision point for potential customers, this could pose a risk of losing out on leads if bundling is not optimized.
- Hybrid Model
The most comprehensive pricing models are usually hybrids of two or more of the approaches above. A hybrid pricing model usually helps in fetching the best price for your products. For example, video streaming platform Vimeo uses an elaborate hybrid pricing page that offers clients to choose between feature bundles, subscription type, users, usage, etc.
If you like to flex your competition out of the game, hybrid is the way forward. However, make sure to limit your options to two or three. Anything more might intimidate customers! In fact, a combination of two or more pricing models is perfect to extract the product’s full revenue potential. Like other tiered models, you have the option to upsell when your customers grow their usage. The hybrid pricing strategy helps companies appeal to a wide customer base especially when it is serving multiple industries as the scale of consumption and required feature sets vary.
The pricing page might look overly complicated. For a customer, having to choose between features, users, usage, tiers, freemium, and enterprise models can be difficult. Dedicated customer support channels to guide them through the buying process will be important. Although the hybrid model could be attractive to new economy businesses given the ability to switch between the options, their tendency to fix the supply-demand mismatch could result in misuse of the flexibility provided.
Remember, while monetization follows value delivery, pricing needs to be nailed down even before the product is. So, run price sensitivity and feature preference surveys, work on understanding your target personas, and map pricing to your operational and sales strategy. We hope this has been helpful.