Strategic pricing is an important success factor for SaaS businesses. It may not matter if you have the best SaaS product in the market if it’s not correctly priced to attract sales and make profits. Fortunately, there are tried and tested SaaS pricing models and strategies you can rely on to succeed provided your business model is good. In this guide, we explore SaaS pricing from a business owner’s perspective.
What Is SaaS Pricing?
SaaS pricing in its most basic form refers to when software companies charge customers a subscription fee. It’s the opposite of traditional software pricing models where customers buy a license or multiple licenses for software or features. The general term for SaaS pricing is subscription-based pricing.
Every SaaS business has one or more pricing strategies aimed at attracting users and increasing revenues. Sometimes a single company can have multiple pricing models differentiated through marketing or customer segmentation. A good example is Microsoft which uses multiple pricing models for their SaaS products (freemium, tiered, subscription basis etc.)
As a new SaaS company, you need to do a lot of research and planning before picking a pricing model. The research part mainly helps with understanding your target customer, the competition, and the external environment. Luckily, there are so many tools and techniques you can use to help you choose a pricing model that guarantees results.
Here is an example:
SaaS startup X is working on a B2B solution that will help customers automate some processes. SaaS company X will need to do a lot of primary and secondary research in the product design and development phases. They can also take this time to get some insights on pricing that will help them attract early adopters. Startup X can know exactly how to price the product before launching through feedback, competitor’s pricing, primary research, etc.
There are two types of customers in the SaaS business. You can choose to build software solutions for businesses in which case you will be looking at B2B pricing models. The second customer type is the masses or individuals and here you will be looking at B2C SaaS Pricing models.
You will be guided or constrained by a set of factors based on your target market when choosing a pricing model. For example, if your primary market is businesses, then you will be considering things like the number of users, marketing costs, computing resources, etc. Next, we take a more detailed look at some of the factors to consider for both customer types and pricing models you can use for each.
How do you price a SaaS tool?
SaaS pricing is not easy for most businesses because of the many variables involved and stiff competition. However, it’s also the easiest way to make a lot of money selling a single product to millions of customers. FreshBooks, Microsoft, Slack, Basecamp, Salesforce, and Zendesk are all examples of successful SaaS products.
How to Choose the Right SaaS Pricing Strategy
What will inform your decision when choosing your SaaS pricing model? There is a lot to look at before you move ahead and sometimes, you may need to try a few options before you settle on one. As with most business decisions involving customers, be ready to experiment and learn what works.
Here are eight important things you need to consider when choosing a pricing model for your SaaS product:
What is unique about your SaaS is that customers would want to pay to use it?. Coming up with a value proposition is something you should do early in your entrepreneurial journey or product design process as part of your business model canvas. In the software business, the value proposition is usually a set of unique and useful features that solve a problem for your customer.
Company A has a SaaS product that helps customers reduce the amount of time they take to clear orders and process payments. By using this product, the customer will end up increasing their sales and ultimately increase profits. With this information in mind, company A offers the solution to the customer at a fixed recurring subscription fee. The subscription fee should take into account the customer’s increased revenues so that it’s a win-win situation for all parties.
Many B2C SaaS companies fail when it comes to defining a value proposition. It’s easy to assume that the customer will find your SaaS product useful because of the number of features it has and how much time and resources you’ve dedicated to its development. However, good software is useless if it does not deliver real value to the customer.
Using the value proposition to determine the pricing model should also involve looking at what the competition is doing. The SaaS industry is so competitive so you might find that several other businesses are offering the same solutions as yours.
What makes your solution stand out or unique? If there is not much difference between your solution and the competition, then you might consider using a pricing model that undercuts everyone else in the market.
Your Company Size and Track Record
The size of your company will have a great influence on the pricing model you choose in the B2B industry. Because pricing is part of marketing strategy, small companies or startups usually go for pricing models that help them break into a competitive market more easily. Examples include freemium, tiered pricing with free versions, or below-market pricing.
Your track record or brand visibility should also guide you on the pricing model you choose. If you are a startup or expanding to a new market, you will want to price your solution in a way that makes it easy for customers to try it. Even established brands like AWS have different pricing models for new markets.
Customers are more likely to choose an established SaaS brand or a business they already know even when their services are more expensive or have fewer features. For instance, most people would rather use Adobe Creative Cloud over inexpensive alternatives. However, companies like Canva and Blackmagic Design have managed to break into the market using attractive pricing models.
The aim for a small company or one getting into a new market is to make it easy for skeptical target customers to use your SaaS solution. While marketing will play a key role in this, an attractive price point is very important.
Sometimes it might even make sense to offer the solution for free so that you can showcase its value to potential customers. For example, Canva- the online graphics editor- is free for most tasks. However, people who use it and learn how it makes their life easier end up subscribing to the premium version. Market research has shown that free tiers are very important for B2C SaaS products.
Your Goals as a Business – Positioning
Your business goals may be the most important factor when pricing your SaaS. Some SaaS businesses just want to carve a niche for the product while others want to achieve market domination. You may be looking at attracting a small group of loyal customers or moving out of your traditional market. There are specific pricing models that support different business goals.
As an example, market penetration pricing strategies that involve the use of discounts, limited-time offers, below-market pricing, or free tiers are great for SaaS companies that want to expand or enter a new market. There are numerous examples of such strategies in use in the real world. For instance, most of the latecomers in the ride-hailing industry use market penetration strategies.
Positioning as a pricing factor also involves deciding where you want to be in the SaaS marketplace and the perception you want to create. Do you want to become a popular brand that attracts the masses with cheap prices or a premium brand that caters to a niche customer base? Figure this out early on and you will know how to price your SaaS. Positioning can also help you know how to design and deliver your software to attract customers.
What the Competition is Doing
Analyzing what the competition is doing can help any SaaS company choose a pricing model that guarantees some success. Even though it’s not easy to have complete information about your competition, it’s important to benchmark. It’s even more important if your SaaS has one or more similarities in terms of features and functionality with other solutions in the market.
Findings or insights you get from competitor analysis can be used as a factor in selecting a pricing model or as a benchmark for pure competitor-based pricing. Competitor-based pricing in SaaS is ideal for markets or niches where there are many alternatives. For instance, there are many project-management SaaS products out there making it easy for consumers to swap one for the other.
Many SaaS companies rely on competitor-based pricing strategies to compete or attract enough paying customers to hit revenue targets. With enough information about your competition’s pricing, you can choose to price your SaaS solutions below market rates or at matching rates with the closest competition. A riskier approach is to price above market rates which can potentially make your SaaS a premium option among a sea of cheap alternatives.
Nature of Your SaaS Solution/Product
There are many types of SaaS products that solve different problems or give services to individual consumers. Some are made to solve simple problems like editing personal photos creatively while others are made to entertain. Understanding the product you are selling as a SaaS is vital because it allows you to identify which category you fall into and how to price it.
For instance, there is a whole category of SaaS products that help end-users with personal finance and budgeting. Nearly all products in this category are offered on a standard subscription basis with prices in the same range. It would take a lot of work to get into the market with personal finance and budgeting product with a different pricing model. Know the value of your product and where it falls before you price it.
Your Target Customers – Buyer Personas
Every business has to go through the process of identifying their ideal customer early on before pricing their product. A buyer persona is a fictional person developed to represent your ideal customer. The elements in a buyer persona include demographics, environment, challenges, goals, values, and psychographics. A buyer persona determines how to price your SaaS product because it helps you understand your customer in detail.
A sure way to make profits with your SaaS is by having a clear picture of your target customer. The buyer persona(s) will tell you if your customer can pay a certain price and what you can do to make your offer more attractive to them. You can even have multiple buyer personas and have matching pricing models for each of them. The important thing is to have all the insights you need for effective personas even during the product design phase.
Target Revenue Sources
There are several approaches to monetization for software delivered through the internet. For example, some businesses choose to charge users for features while others charge based on the resources used. Ultimately, the monetization method used influences the pricing model or strategy.
A practical example is how Google monetizes most of its services using ads. Since Google can generate revenue from ads alone, it can use the freemium pricing model quite effectively raking in billions of dollars without charging end-users. It may work for Google but not for your business so you need to find out how to monetize your product before pricing them.
You also need to factor in the costs of running your SaaS before you settle on a pricing model. Be financially informed first by determining fixed costs and direct costs so that you know how much revenue you need to succeed. You may need to make some sacrifices early on to gain traction in the early stages of your SaaS business. Ultimately, your pricing model should be selected from a financially informed perspective.
5 Proven SaaS Pricing Models
With all important factors considered, you can choose from the following pricing models or use them to come up with a hybrid version that meets your needs:
- Freemium SaaS Pricing
- Subscription pricing
- Flat-rate Pricing
- Tiered Pricing
- Pay as You Go
Freemium SaaS Pricing
Freemium pricing is one of the most popular pricing models in the SaaS industry because it’s easy to implement and has been proven to work even in the traditional software industry. Freemium pricing is when a SaaS offers its product free to anyone interested. To monetize the SaaS product, they can either use supplementary paid packages or ads.
Freemium pricing should not be confused with tiered pricing where there are different versions of a product with each having its price. In freemium pricing, you need to have genuine free users who can use your product to do meaningful work. The point of freemium pricing is to attract loyal customers who will upgrade to a paid version at some point because they like your product or are locked in.
Freemium SaaS pricing is great for startups and businesses competing in a saturated marketplace. It allows you to use marketing to attract new customers even when your product is competing with many other similar products that may sometimes have better features or add-ons.
Many B2C SaaS businesses currently use the freemium pricing model. Examples include Slack, Dropbox, Google, Microsoft 365, Adobe creative cloud, and many others.
The Pros of Freemium SaaS pricing
Easiest to implement-You won’t need any complex setups to implement freemium pricing. You get to skip things like payment processing and go straight to onboarding new users.
Good for market Penetration – People will always want free stuff and the freemium pricing model is the best way to attract new customers. The freemium model has been used with great success for years even before SaaS became a thing.
Easy to Market- Imagine a salesman offering free products at the local mall. Chances are that salesman will have no trouble moving stock. Freemium pricing makes it easy for SaaS businesses to market their products with any budget and in any market. All you will need is a good copy and distribution method that maximizes reach.
It attracts loyal customers– It has been proven that customers who upgrade to a paid version of any software are likely satisfied with it or depend on it. The freemium model will help you showcase your SaaS product and attract loyal customers who’ve already used it and seen its value.
Cost-effective– Since you don’t have to spend so much on implementation, freemium processing is likely to be the cheapest pricing model for you especially if you are starting. You won’t need to process payments nor are you obligated to offer after-sales support. Customers who upgrade to the paid versions will raise fewer support tickets because they already know how to use your software.
The Cons of Freemium Pricing
It can increase churn rates- The biggest risk with offering a free version of your product is the increased churn rate. People generally attach less value to free things and usually have a throwaway mentality. The churn rate is high where there are many substitutes or alternative products. However, there are strategies you can use to reduce the churn rate or reduce its negative effects.
It may delay growth – It usually takes longer to onboard a paying customer using the freemium model which can delay growth. If you are in hurry to cash in or grow your business, then you may want to consider other pricing models that guarantee early sales.
It may be unsustainable – The freemium model only works if you can transition enough customers to the paid version to break even or cover your costs. It may become unsustainable and frustrating if you are unable to do this.
Subscription is by far the most common pricing model for SaaS products. In this model, you charge customers a recurring fee for using your product. Subscription in the software business is a broad term used to describe many pricing models. Except in the freemium model, customers have to pay a recurring subscription fee to use your product.
Subscription Pricing Pros
Tried and Tested Pricing Model– Subscription pricing is not unique to the SaaS industry and has been around since paid software became a thing. It is very easy to implement as it only requires you to determine the value of your product and pick a price point.
It is Flexible- Subscription pricing is not so complicated and rigid. You can implement it in many ways and change price points when necessary. However, it’s important to maintain a healthy level of consistency to avoid losing loyal customers.
It offers predictable revenue– It’s easy to know how much you will make each financial period with subscription pricing because the recurring payments are fixed.
Good for customer retention – Most customers are comfortable using a service with predictable recurring payments because it is easy to budget for and include on their card for automated billing.
Predictable customer Acquisition costs (CAC)- It is easy to predict how much you need to spend to reach subscription targets regardless of the marketing or conversion method you use.
Subscription Pricing Disadvantages
Total Costs can be Higher– You will likely spend a little more, in the long run, to maintain a subscription model as compared to a one-off licensing model.
Resource Intensive- You need to invest in a robust and secure payment processing system to maintain a subscription-based model.
Compliance with Data Protection laws– There are additional, stringent data protection laws for vendors who collect and store financial information from their customers.
Flat-rate pricing falls under subscription pricing and is the simplest one. In flat-rate pricing, you have a single price for every customer and every customer gets the same features and resources. Flat-rate pricing is good for SaaS businesses that have a simple product that solves one problem. However, it is not very common as many businesses want to earn more money by providing additional value.
You can use flat-rate pricing when you are starting to attract early adopters and beta testers. Most SaaS providers offer an attractive flat rate for an upcoming product for a limited time. Users who are interested enough to pre-order get to enjoy the flat rate for a period or for a lifetime. This is a good way to reward early customers who will likely encounter a few bugs with your software early on.
Tiered pricing also falls under the subscription pricing category. In tiered pricing, you divide your price points using packages (tiers) based on features, components, or allocated resources. Customers interested in the basic features, fewer components, and may have limited resource requirements get the cheapest deal.
An example of a way to structure a tiered pricing model is by using silver, gold, and platinum packages. Silver packages get the basic features, essential components, and limited resources. The gold tier gets more features, improved components, and just enough resources for normal workloads. The platinum tier gets all the fancy features plus addons, all components, and maximum resource allocation
Tiered Pricing Pros
More options for the customer– Tiered pricing is currently accepted as the best pricing model for SaaS businesses because it offers options to the customer. Giving customers multiple options is a proven approach to increasing conversions and reducing churn rates.
Easy to Upsell – It allows you to earn more by providing more value to the customer and the customer gets what they want. You’ll be motivated to work on more useful features so that you can have more customers choosing the highest possible tier or upgrading.
Flexibility – Its flexibility also means customers can upgrade or downgrade at any time to match changing needs and budgets. Flexibility, therefore, helps with customer retention.
Tiered Pricing Cons
Can be confusing to customers– Tiered pricing introduces complexities that may put off some customers who would rather have a simple plan. They might choose to use a more expensive product with a simpler pricing structure.
It’s good for simple SaaS products –Tiered pricing only makes sense if your SaaS solution has tons of features and other elements that can be divided into packages. You don’t need to have multiple price points if you are selling a niche SaaS solution.
Prone to Resource abuse– Sometimes users who sign up for the most expensive tier may end up misusing their unlimited resource allocation to run demanding tasks at the expense of others.
More Expensive to Market- You’ll need to come up with complex marketing plans to attract customers of different types and budgets. Each tier may need its marketing budget because it is different from the next in terms of value, price, and target customer.
Pay as You Go SaaS Pricing
Pay-as-you-go pricing (PAYG) also referred to as usage-based pricing is a pricing model where users are charged based on how much they consume or how they use the product. It’s a popular pricing model for SaaS products where resource usage patterns are important. You need to be able to measure usage to implement pay-as-you-go pricing.
This payment model can be implemented in two ways depending on the SaaS product. You can implement a credit-based pay-as-you-go pricing model where users purchase credits or points in advance. The credits allow them to use your SaaS product or resources until they run out. You can also use consumption-based PAYG pricing where users are charged based on how they use the product or the resources they consume over a given period.
Pay-as-you-go pricing is one of the most popular pricing models in the SaaS industry. Big SaaS companies such as Amazon Aws, Google, Mailchimp, and Microsoft use it. For instance, Aws users are charged based on the resources they consume over a given period.
The advantages of using pay-as-you-go for B2C SaaS products are how easy it is to implement, better conversions, and transparency. However, PAYG makes it hard to retain customers as they can sign on and off at any time. It’s also impossible to predict revenue when using PAYG because you can’t tell how much resources customers will consume. There are ways to get around this.
How Do You Price a B2b SaaS Product?
B2b SaaS pricing is slightly different from B2C SaaS pricing. However, most of the pricing models used in B2C pricing are also used in B2B pricing albeit with different implementations. B2B SaaS pricing aims to offer value to business clients while turning a profit from your SaaS.
The two main B2B pricing models or strategies include:
Cost-plus pricing takes into account your customer acquisition costs, cost of goods sold, and margins. The sum of these three elements will give you a price point for your SaaS product. The principle of cost-plus pricing is to ensure the SaaS business makes a profit from every business client using its product. Cost-plus pricing can be implemented in various ways depending on the product and target market.
Value-Based SaaS Pricing
The principle behind value-based pricing is to deliver lifetime value to your customers while making a profit from your SaaS. The customer is the focal point in value-based pricing. Practically, value-based pricing is implemented using other pricing models such as tiered pricing, subscription pricing, and pay-as-go. The customer gets to pay for what they are using and gets desired value from their purchase.
How to Increase Your Saas Prices?
Increasing SaaS prices is a risky process for most businesses because it can impact sales and send the loyal customer away. The best way to increase profits from your SaaS is to invest in marketing or customer acquisition. Upsell your SaaS, improve messaging, use metrics to understand potential customers, and optimize your sales funnels for a better conversion rate. Hire a developer to start building your dream SaaS today!