One of the most notable factors that affect a SaaS company’s revenue is the SaaS pricing model. However, many SaaS companies only spend a total of six hours working on their pricing strategy. They take only six hours to define their pricing strategy, test the model and optimize it.
The number of pricing models and strategies in the industry makes it impossible to know where to start. Hence, it is understandable that companies spend little time on them. The SaaS pricing model might seem complicated to grasp, but getting it right is not as difficult as it looks.
Understanding the pricing model
The SaaS business model revolves around customers paying a subscription fee for continuing to use a specific product or service. Of course, combining regular payments and complex service packages makes it difficult to find the right pricing model.
However, many SaaS providers make several mistakes with their pricing models. These mistakes include not updating the pricing model, failing to account for industry trends, and not considering the client’s needs changing.
Evidently, understanding the suitable pricing model means understanding these models are subject to change over time. A good pricing model combines customer value, and business value, and provides sustainability for many years.
The importance of nailing your SaaS pricing model
For example, companies choose one of two options for their pricing models.
Option 1– These companies set their prices on instinct when they start their business. These companies also forget to update their prices after setting them the first time.
Option 2– These companies set a low pricing model and don’t change it as it might scare away potential customers from their service.
The benefits of nailing the SaaS pricing model are worth the effort. The immediate benefit you gain is an advantage over your competitors. Additional benefits include growth and sustainability opportunities for the company.
How to price SaaS products in the present year
With SaaS, it is essential to strike the right balance between providing value to customers and ensuring the business receives substantial revenue. A good starting point is to balance CLV (Customer Lifetime Value) against CAC (Customer Acquisition Cost). Ideally, you want the value a customer provides to exceed the cost of attracting the customer.
Balancing CLV and CAC ensures that your business turns a profit. However, that approach is not enough to attract and retain top-tier customers for the long term. Attracting and retaining high-quality customers requires you to put a lot of time and effort into business goals and how the pricing strategy reflects them.
Top pricing models in the industry
Presently, there are several SaaS pricing models in the industry. These models help you balance out the customer needs vs. the business needs. Listed below are the most popular ones.
This model is the most straightforward pricing model in the industry. Flat-rate pricing is where you provide customers with a single product, with a single set of features, at a single price.
Typically, companies shy away from this model, but it is also an effective way to provide solutions that customers can take or leave. This model ensures that there are no exclusive features, hidden costs, add-ons, and user limits. The pricing model is easy to communicate with customers and upfront about the costs. The downside is that there is no flexibility for customers with varying needs.
Freemium model pricing
This business model revolves around giving customers free products. These products come with paid extras, packages, and add-ons. The extras add additional value to the product and entice the customers to make the purchase. This model is popular in the SaaS industry as it appears in many ‘entry-level’ options as part of a tiered pricing model.
The freedom of using a product on a trial basis with no costs and excellent features is an ideal way to onboard many customers. Additionally, it is a good idea to include several ‘premium’ options as a way of upselling the product. This approach shows the customer what the product is fully capable of.
Tiered pricing is arguably the most famous and most common pricing model SaaS companies use. This model is the opposite of the flat-rate pricing model. Here, customers can choose from multiple packages at different prices.
The benefits provided by the various tiers here will have common categories like features, users, and usage. The costlier packages provide the most comprehensive services.
SaaS companies can utilize these packages and appeal to a variety of clients. However, research indicates that the average number of tiered pricing packages has three options. These are- low, medium, and high. Many companies stick to these options rather than diversifying them and providing a variety of choices.
Per feature pricing
This specialized model is another popular choice of SaaS pricing models. This approach has different pricing tiers based on the features and functions. Higher pricing models provide customers with greater benefits and features.
The companies that opt for this pricing model must ensure that their lowest package contains several essential features. These essentials give the customer an understanding of the product and let you draw a clear line at each price point.
Another term used to describe this pricing model is Per-seat pricing or PSP. This model is also popular among SaaS companies. Additionally, research indicates that it is the most popular pricing model in the industry.
The per-user pricing model is where customers pay a monthly fee based on the number of users. The users here are those who purchase the product and benefit from using it. As the number of new users increases, the price increases parallelly.
This approach is ideal for SaaS companies looking to target small and medium businesses. Here, the pricing model can fit the business’s needs when they start. As the company grows, they hire more staff, upgrade the pricing model, and ensures revenue growth.
Active Per-user pricing
This pricing model is an alternative to the traditional per-user pricing model. This approach attempts to build upon the shortcomings of the per-user pricing model. Here, the customers only pay for the employees that actively use the product.
The active per-user pricing model is where businesses sign up for several user accounts to use a product. However, the catch here is that they only pay for the accounts that use the service. This approach ensures that large businesses do not pay upfront fees for several employees who may or may not stay with the company.
This pricing model is a creative spin on the Pay-as-you-go pricing model. Here, the price a customer pays relates to how much they use the service or product. A customer who uses the service more pays more and the opposite also holds.
The usage-based pricing model has immense popularity with the platform and infrastructure-related software businesses. Here, the business charges are based on factors such as the number of API requests, data usage, and processed transitions. Additionally, this pricing model is ideal for social media marketers that charge based on scheduled posts.
Tips to consider when developing your SaaS pricing model
Ensure that the price ends in ‘9’ to attract customers
Charm pricing is a psychological pricing strategy that utilizes the fact that people register the left number first and prefer prices ending in ‘9’. This approach is the reason why people read 4.99 as 4 rather than 5. Aside from charm pricing, you can also end prices with a ‘7’ or ‘8’ to attract customers.
Highlight the most expensive package first
Price anchoring is another psychological tactic that utilizes human’s natural bias for the first number we read. Here, you put the most expensive package first and thereby make other packages affordable by comparison.
Focus attention on your most popular package
This tip is based on the center stage effect. Here, the theory is that customers see the central option as the best value for money and the most popular one. You can emphasize this point by adding a header to the most popular package and playing into social proof.
At first, SaaS pricing can seem difficult to grasp. However, with the right approach and a plan in mind, it is possible to overcome this hurdle. The result will be finding the ideal strategy that suits your business perfectly.
Interacting with customers and analyzing your competitors is always an excellent way to gauge market interest. Also, you must strike a balance between product value and cost to provide such value.
Always remember that SaaS pricing is not a one-off activity. Always be ready to adapt and adjust your pricing strategy when required. That way, you will always have a fairly priced service model that appeals to a broad audience.