SaaS (Software as a Service) has proven to be a very elastic, scalable and progressive industry. According to Gartner Group, worldwide SaaS revenue was $22 billion in 2015, which has increased from 2012 by 52% and according to Formtek, by 2018, about 28% of enterprise applications will be SaaS based generating about $51 billion in revenue.
With such numbers, the SaaS industry has no signs of slowing down, and it has already become a very attractive space for startups. However, getting into SaaS with creative ideas is one thing, but being successful with it is a beast of its own. There are hundreds of articles focused on the development of successful SaaS companies, but the focus of our article today will be on the SaaS pricing models.
Before getting into the successful SaaS pricing models, some background needs to be covered. According to Lincoln Murphy, pricing models are not about the pricing page you use. In order to be successful, companies need to give serious consideration to market position, service level and customer satisfaction. Here are some important factors you need to consider:
Where will you position yourself in the market?
Do you serve businesses (B2B), direct customers (B2C) or both?
How many customers do you desire/will be able to serve?
What are the main benefits your customers will get?
How long is your customer lifespan?
Thinking about these questions will give you the chance to clearly understand the value of your SaaS, which will make it easier for you to think about pricing tiers and bundles. Now, here we present the most successful SaaS pricing models:
1. Per User Pricing
This is a popular SaaS pricing model, where you have users pay different amounts based on the number of individuals using the software. However, according to Patrick Campbell from Price Intelligently, this common pricing model may hurt some SaaS companies, especially if you are working with client companies where there may be multiple individual users. The reason is that when you implement per user pricing, you are cutting down on the number of people within a company who will use and love your software. Moreover, such a pricing model limits the potential number of users, which is not good for the health of your SaaS company’s profits. Sometimes, this pricing model can work for SaaS companies, but in many cases you need to implement a value-based approach.
2. Tiered User Pricing
The mechanism of this strategy is somewhat related to per user pricing. In the case of tiered user pricing, the number of permitted users increases in bands rather than single digits. For example, a SaaS product may cost one price for up to 5 users, another price for up to 10 users and so on. Besides the main disadvantages mentioned in the per user pricing model, tiered user pricing also has several potential drawbacks. For example, this model does not represent value for clients like solopreneurs, who may only need base features but not additional features. If you are offering tiers, make sure to think about the number of options you offer and the method in which you display them, as this can affect your revenue.
3. Flat Rate Pricing/Subscription
A flat rate pricing model is when a company charges a single fixed fee for the software, regardless of the number of users. Some SaaS companies charge a flat rate for all of their upgraded services with no further differentiation. For example, Buffer, a useful social media tool, uses the flat rate pricing model for their Awesome Plan.
4. “Pay as You Go”
In the “Pay as You Go” SaaS pricing model, the customers are charged based on their usage of the service. A prime example of this pricing model is Amazon Cloud Server. The advantage of this model is that, for example, small companies (or companies with fluctuating service usage) won’t need to pay huge amounts of money if they are using only several features of the software. However, the disadvantage for clients is that it is impossible for them to know for sure what their resource usage will be, which makes it difficult for them to calculate their costs in advance.
5. Feature Based Pricing
Another popular SaaS pricing model is differentiating prices in tiers based on the services and upgrades available to customers. For example, if your client is running an invoicing company, then he/she will probably be focused either on the number of customers they can manage, or the number of invoices they can send. In such cases, the feature based pricing model is a very wise choice.
6. Per Storage Pricing
Cloud storage SaaS companies often use tiered pricing models based on the amount of storage customers need to use. For example, Google allows its users to use 15GB of storage across their accounts, and if a user wants extra storage, then he/she needs to pay a fee. Dropbox, as well, lets you have a certain amount of storage for free, after which users desiring increased storage pay for it. This is a clever pricing model, as it allows people to become familiar with the software/service, which may encourage them to upgrade when they hit the storage limit.
7. “Roll Your Own”
Another great SaaS pricing model that can also appeal to customers is the “Roll Your Own” model, where customers have the opportunity to customize their service package. This is a strategy used by Hiveage, an online invoicing software. In their model, customers have the chance to pick the add-ons that they really need. There is a fee for this pro service, but then you get your own bundle. According to Hiveage, this pricing model works very well for small companies.
The freemium SaaS pricing approach is similar to the per storage pricing model. In this model, the company is providing great functionalities for free and also offers a range of upgrades. For instance, you can get a lot out of LinkedIn with its free version, but there are some upgrade packages that are tailored to the specific needs of job seekers, recruiters, business owners, etc.
This can be an awesome pricing model for your SaaS company if your add-on services are super valuable to your target market. However, there is always the danger that most of your customers won’t need your upgrades. In this case, you may end up with a lot of free users who are using much of your support resources without the revenue to stay afloat.
9. Free, Ad Supported
In the free, ad supported pricing model, you make your core software free, but you earn revenue from allowing advertisers to run ads within your software. In this case, you do not charge for your software, except for when customers choose to pay you for an ad-free version.
So, what are you doing wrong?
These were the primarily used SaaS pricing models. However, don’t think that just because you use one of them you can’t use the others, as there are many companies who mix and match pricing models depending on their audience.
Now, when we know which are the most useful pricing models, we can move on with presenting what you may be doing wrong with your pricing strategy. Here are the most common pricing mistakes that SaaS companies make:
Basing price on costs
Traditionally, when selling one-time software, sales people were focusing on covering large upfront and marginal costs, and then adding a profit margin which is also known as “cost-plus” pricing. However, times have changed and the way SaaS companies need to approach pricing strategies is different from one-off software sales. Instead of basing prices on the raw costs of developing the service, you should base your pricing on the ongoing value that customers get from your software.
Basing prices on competitors
Similarly, your competitors may be a great source of insight on where to start your prices, but, again, your SaaS price should be based on the value it offers to customers. No two products are exactly the same, and you may miss out on revenue if you offer the same price, but you have additional features on your software. Or, if your software is more streamlined than the competition, then of course you should offer lower pricing than their SaaS.
Having only one price option
The amount of money that people are willing to spend varies a lot from one client to another. You can get more customers and thereby more revenue if you offer different plans, with different bundles of features for different target audiences.
For example, SalesForce uses a pricing strategy based on the number of features in the package each customer chooses. In this way, it allows customers to sign up initially at a lower tier and encourages them to upgrade over time.
Having too many price options
On the flipside of the previous misstep, though customers like options to choose from, too many options can also be counter-productive. When you have too many plans with different features, it can complicate the overall checkout process, which can make potential customers feel overwhelmed. It is a good idea to have around three or four different plans, which is the status quo for most SaaS companies that charge for their services.
Learn from the experience of others
So, there you have it: the most successful SaaS pricing models and the main mistakes you might be making. If you have other unique pricing strategies, or pricing mistakes you have learned from, please share them with us in the comments below.