There are numerous factors that affect the revenue of your organization. The pinnacle of all revenue-growth tactics, though, is determining the optimal price for your product. There are numerous B2B SaaS pricing models available. But which one is best for you, and how can you find it?
A product’s optimal price depends on a number of criteria, but it is primarily determined by how much the product costs to manufacture. Resource costs, service costs, infrastructure costs, and maintenance costs are a few of the cost variables.
Your product pricing must account for all of these expenses and provide a substantial profit margin. Costs differ from company to company. The location of the organization and the expertise of the designers will also determine the pricing. Additionally, all business operations must be able to maintain themselves based on a company’s earnings.
In the SaaS industry, businesses often fail to determine the optimal price point in order to attract and keep the best customers. But despite the fact that SaaS pricing can appear complex at first sight, figuring it out doesn’t have to be such a daunting task.
What Is a SaaS Pricing Model?
Customers pay a recurring subscription charge for continuing use of your services/products under the SaaS business model. This mix of recurring payments and potentially complex service bundles might make it difficult for SaaS providers to identify an optimal pricing plan.
However, despite the difficulties, many SaaS organizations devote too little time to pricing. As a result, they neither upgrade their pricing to accommodate changes in the industry nor take into account the changing needs of their clients over time.
When working out prices for software, it is crucial to regard pricing models as a continuously evolving element of business. It’s also important to always combine customer value, corporate value, and long-term sustainability.
Why Is Correctly Setting Your SaaS Pricing Important?
Here’s why optimizing your SaaS price is essential:
- Improved Customer Satisfaction: Customer satisfaction can be increased by tailoring your SaaS pricing to correspond with the value you deliver to clients. In turn, this contributes to customer retention. If your SaaS pricing is disproportionate to the value you give, for instance, your clients may feel as though they are overpaying, which will result in customer churn.
- Improved Revenue Growth: Appropriate pricing guarantees that you are not underselling your products, hence contributing to revenue development.
- Competitive Advantage. Customers are constantly searching for the optimum price-to-value ratio. Setting the correct SaaS pricing and adjusting it based on market conditions will help you gain a competitive advantage. And if you do it well, you can even win over your competitors’ customers.
7 Main Pricing Models for Your SaaS Business
Despite the fact that there are other SaaS pricing strategies, these are the most prevalent. Depending on your demands, you can select one or mix them to determine the optimal pricing plan for your company.
Here is a summary and examples for each price model:
Flat-Rate Pricing
This is the simplest pricing model, as it involves charging one price for a single service with identical features. Flat-rate pricing is utilized more frequently by B2C companies selling physical products.
Flat-rate pricing works best in the SaaS industry for uncomplicated solutions that offer a single tool to B2B customers. Additionally, it is effective in specialized areas with few or no competitors.
It enables easy pricing and billing processes, limits options, and encourages pricing transparency, so it’s the simplest pricing model both for the company and the end user.
However, depending on your consumer base, a one-size-fits-all model could restrict your expansion opportunities. It’s similar to “all in” in casinos: if your clients are satisfied with your product and the value you provide, that’s fantastic. If not, they’ll be forced to search elsewhere. Choosing a tiered price structure may counteract this by providing greater flexibility and more options.
Basecamp is an example of a SaaS company that uses flat-rate subscriptions: for $99 a month, users have complete access to their platform. This deal covers all of their features in addition to unlimited projects and users.
Source: Basecamp
Usage-Based Pricing
This pricing technique, also known as the Pay-As-You-Go model, closely correlates the cost of a SaaS product with its usage: if you use the service more, your bill will increase; if you use it less, you’ll also be paying less.
This pricing method is particularly prevalent in infrastructure- and platform-related software companies (such as Amazon Web Services). Organizations are charged depending on the number of API requests, processed transactions, or gigabytes of data used.
SaaS companies are exploring innovative ways to modify their business model. For example, there are now social media tools that charge for scheduled postings and accounting software that charges per invoice.
Usage-based pricing is particularly effective for recurring billing platforms such as Chargify. By directly associating price with revenue, you can ensure that price increases occur only during periods of higher income. That way, consumers can always afford and justify the price change.
Source: Chargify
Pricing Penetration
Typically, new companies will want to utilize the market penetration pricing approach. It entails setting prices that are lower than those of competitors. This method can help establish a foothold in a new, competitive market. However, low prices can result in losses, so this is not a viable long-term plan.
Netflix is a great example of a company that successfully employed the penetration pricing strategy. The brand entered a market in which DVD renting was prevalent. In 1999, they began offering a monthly subscription for $15.95, where users would get four DVD rentals with no return-by dates. That is almost $4 per DVD, unlimited, whereas Blockbuster charged $4.99 for a three-day rental of a single DVD.
Beginning with penetration pricing, Netflix was able to create a substantial customer base.
Source: ProductHabits
Value-Based Pricing
The value-based pricing model is the optimal pricing strategy for SaaS enterprises. This strategy takes into account customers’ perceptions of the product or service’s worth. Value-based pricing can help you package your products to meet the needs of your customers, even if your competitors are charging more.
For instance, Crazy Egg splits their pricing based on the features included at each tier. This tiered pricing strategy enables different client segments to obtain value from Crazyegg’s solutions based on their demands and budgets. At the same time, it allows Crazyegg to upsell customers to a more expensive plan. It’s a win-win situation.
Source: Crazy Egg
It is also possible to alter and experiment with pricing to appeal to different sectors of your customer base, provided you have a thorough understanding of consumer behavior.
Freemium Business Model
Due to high-profile success stories such as Slack, Evernote, and Dropbox, many SaaS companies offer freemium pricing: a free-to-use product along with extra subscription packages.
Typically, the freemium business model is implemented as part of a tiered pricing strategy: paid packages are complemented by a free, entry-level tier.
This tier is then restricted at various points to encourage users to upgrade at a certain level of usage, typically using the following restrictions:
- Feature-based restrictions: if you want feature X, you need a paid package.
- Capacity-based restrictions: if you exceed your allowance, you’ll need a paid package.
- Use-case-based restrictions: you can use the free package internally, but not for managing customers.
Trello is a great example of the freemium pricing model.
To help you stay organized, you can use Trello forever without cost. You can create an unlimited number of tabs and boards for this purpose.
However, if you want to combine your Trello account with other applications, you have to pay an additional fee.
This system is a wonderful illustration of freeware, as most users can get all they want for no cost. Professionals, though, will certainly require an upgrade.
Source: Trello
Per-Feature Pricing
Per-feature pricing differentiates between pricing levels based on the capability provided in each, with the more expensive packages including a greater number of features.
For a good example, take a look at Evernote. The key distinction between Evernote’s Basic, Plus, and Premium versions is the variety of available functions, with new capabilities “unlocked” with each upgrade.
Source: Evernote
Tiered Pricing
With the tiered pricing model, customers can select from a variety of rates and options based on their demands and budget. Typically, there are three price tiers: basic, standard, and premium. Offering more can result in oversaturation and choice paralysis.
Highlighting a “preferred option” might help motivate prospective buyers to make a purchase. The information is presented concisely, making upselling straightforward.
It’s essential that your clients understand their demands and choose the appropriate tier. Keep in mind that one disadvantage of this pricing model is that it does not accommodate heavy users.
Most SaaS businesses can benefit from tiered pricing, and it can be simply integrated with other models.
HubSpot is one of the numerous SaaS brands with tiered pricing, allowing users to select between a starter, professional, and enterprise solution. Prior to enrolling in or upgrading to the two highest HubSpot plans, consumers are typically required to speak with a sales representative.
Source: Hubspot
In Closing
As you evaluate the available options and conduct market research, you’re likely to discover that the optimal price approach for your organization is not as challenging as it once appeared.
The key is to find that balance between the value you’re delivering and what it costs you to provide it, which can be determined by Speaking with your consumers and researching your competitors will help you out in that regard.
Remember that SaaS pricing is not a one-time activity. If you are willing to adapt and alter your pricing as needed, you will be on your way to providing a service that is profitable yet reasonably priced for your target market.
Author bio:
Trevor Hatfield’s career began as a freelance learning applications developer and designer. After finding success in software he moved into SaaS consulting, and started the SaaS growth agency, Inturact. Over the last 10+ years Inturact has helped many SaaS companies find scalability and get acquired. Inturact is now also an investment vehicle for Inturact Capital – a private equity fund that acquires, grows and exits SaaS companies.