What are the top 5 SaaS models?
SaaS pricing models have evolved over time. There are several different ways to charge for your software, but these 5 pricing models are still the most popular.
Flat rate pricing
Tiered pricing
Per user pricing
Per feature pricing
Usage based pricing
Flat rate pricing
What is flat rate pricing?
Flat rate pricing is exactly what it sounds like – a set price for your SaaS product that is not based on usage, features, or users. For example, you might charge a flat rate of $50 per month for all customers, regardless of how much they use the product, how many users they have, or how many features they use.
Advantages of flat rate pricing
Flat rate pricing is the simplest way to charge customers for your SaaS solution. It’s a good option if you want to charge a flat fee for their product and not worry about differing customer segments or varying usage.
Flat rate pricing is simple to communicate because it doesn’t require much explanation. This makes flat rate pricing an attractive choice if you offer a simple product with a limited feature set or if you have a target market with well-defined needs that require all the same features.
Advantages of flat rate pricing:
Simple to calculate
Simple to communicate
Equal treatment for all customers
Disadvantages of flat rate pricing
A downside of flat rate pricing is that because it targets one customer segment without regard for varying customer needs.
The long tail of smaller customers who might be willing to pay less than others for now but could grow in the future may not sign up now or at all. This means missed customer acquisition and revenue opportunities down the road.
Also, large customers may not be less attracted by this model if they have some custom needs that are not catered to by this model.
Disadvantages of flat rate pricing:
Limited target customer segments
Capped growth
Missed revenue opportunities
When is flat rate pricing a good option?
Flat rate pricing is a good option for SaaS products with a limited feature set that is that are used by a broad range of customers.
Tiered pricing
What is tiered pricing?
Tiered pricing is a pricing model where customers are given options of multiple plans that target different customer segments.
This pricing model is one of the most popular SaaS pricing models. Packages are tailored to meet needs of specific segments, which means that customers only pay for the features, functionality, or usage amounts that apply to them.
Advantages of tiered pricing
The main advantage of tiered pricing over other pricing models is its flexibility; businesses don't pay extra for things that they don't use. And if their needs grow, they can be upsold to a higher tier.
Unlike flat-rate pricing, tiered pricing allows for targeting multiple customer segments that have differing feature, user, and usage needs.
Advantages of tiered pricing:
Flexible
Target multiple customer segments
Increased revenue opportunities
Disadvantages of tiered pricing
A tiered pricing model is not for you if: you don't have customer data or know your customer needs well (like at the initial product launch), you're targeting a broad audience rather than just certain subsegments within it.
Another potential downside of the tiered pricing model is that if it’s not done correctly it can be complicated and confusing for customers. They must compare different packages in order to figure out which one is best for their needs and it may end in analysis paralysis.
Tiered pricing also requires a high degree of marketing effort since it relies on customer segmentation and targeting specific groups with different features or benefits.
Disadvantages of tiered pricing:
Deep customer data required
Complicated to communicate
Analysis paralysis
When is tiered pricing a good idea?
Tiered pricing is a good option for SaaS companies that have different customer groups with varying willingness to pay. By offering tiered pricing you can offer different levels of value to each subsegment.
Per user pricing
What is per user pricing?
Per user pricing is another popular SaaS pricing model. Per user pricing charges customers based on how many users they have.
Advantages of per user pricing
The more users a customer has, the more they pay for access. This makes per user pricing very easy to communicate. It also provides predictable monthly recurring revenue, and works well for small businesses that need fewer users but still want access to all features.
Advantages of per user pricing:
Simple to communicate
Predictable revenue
Beneficial for small businesses
Disadvantages of per user pricing
One of the main disadvantages of per user pricing is limits it places on growth. Regardless of variations in usage, all users are treated equally. This results in a lack of flexibility for users as well. Some users may have varying feature or usage needs than others. Ultimately, this can lead to money being left on the table.
Disadvantages of per user pricing
Limits growth
Assumes homogenous users
Missed revenue opportunities
Per active user pricing
Per active user pricing is a variant of the per user pricing model and commonly used by enterprises. Per active user pricing is a model in which customers are charged based on the number of active users in their account.
It saves customers from wasting money on inactive users; however, it can be complicated to implement and doesn't fit with annual pricing (which makes sense for enterprises).
When is per user pricing a good idea?
Per user pricing is a good idea when you’re looking for high level of predictability of your monthly recurring revenue (MRR) as well as when the number of users is one of the main differentiating factors between your customer segments.
Per feature pricing
What is per feature pricing?
Per feature pricing is a model that charges customers based on the individual features or components of a software product that they use.
Advantages of per feature pricing
It allows businesses to choose and pay only for the features they need. It provides a strong incentive for customers to upgrade to the next level, to access more features. It's suitable for different customer segments who have varying functionality needs.
Advantages of per feature pricing:
Customizable
Targets multiple customer segments
Incentivizes upgrades
Disadvantages of per feature pricing
Per feature pricing requires deep knowledge of your customer segments and what their varying feature needs are so it might not work well if your organization doesn't have this insight yet.
It is also more complicated to communicate if your customers are not familiar with all your functionality and therefore might result in analysis paralysis where they don’t convert because they’re not sure what to choose.
This model also assumes that feature needs grow with size of customer. Smaller customers with lower budgets may not be able to afford top features.
Disadvantages of per feature pricing
Requires deep customer needs assessment
More complicated to communicate
Costly for smaller customers
When is per feature pricing a good idea?
Per feature pricing is a good idea when your customers have varying feature needs and look for customizable solutions. It works best when you have a deep understanding of these needs and ability to map them to the different customer segments.
Usage based pricing
What is usage based pricing?
Usage based pricing charges customers based on the software usage that they consume. If they use more, the price goes up. If they use less, the price goes down.
Advantages of usage based pricing
Usage based pricing allows customers to pay only for the usage they consume. It is seen as inherently fair as it is up to the customer to control their amount of usage. It allows smaller users easier access.
Advantages of usage based pricing:
Appears fair and transparent
Customizable
Accessible to a wide range of customers
Disadvantages of usage based pricing
While this model is most customizable, it lacks the revenue predictability that other models offer. A customer has control over their usage and therefore your growth is directly tied to their growth. It can also be complex to track usage accurately.
Disadvantages of usage based pricing:
Hard to predict revenue
Relies directly on customer growth
Complex to track
When is usage based pricing a good idea?
Usage based pricing is a good idea when there is a wide range of usage patterns among your customers. It works well when you’re trying to attract smaller startups that may have more complex needs.
Choosing the right pricing model
The most important step in pricing your SaaS offer is understanding your customers.
What is their problem?
How painful is it?
How do you solve it?
What is their willingness to pay for your solution?
These are all questions that should be answered before going down any path towards pricing. Once you've done this homework and identified a clear target market for your product, you'll want to conduct some research into what other companies in that space are charging for similar offerings. What your customers see in the market is a point of reference if they’re comparing.
What pricing models do your competitors use?
How is your offer different from competition?
Once you have an idea of what other businesses charge for similar products or services then you can start evaluating which model might work best for your business. Your model needs to support your business goals. Some pricing models are better for revenue growth, others are better for profitability, and still others are best for customer acquisition.
What goals do you have for your business?
How will you evaluate the success of a pricing model?
Which pricing model supports your goals best?
Once you’ve answered these questions, you’ll be able to see why a per user pricing model may not be right for you if most of your customers are single users. You might notice that a per feature model is not right because all your customers need access to most features.
The right pricing model for you may actually be a mix of two or more models.
Want to know more about choosing the right model? The Practical Guide to SaaS pricing takes you through the models in more detail and helps you choose the one that’s right for you.
Changing your pricing model
If your existing pricing model is no longer serving your business and your customers, it may be time for a change. Pricing is a continuous journey, not a one stop decision.
Within SaaS there are constantly new competitor moves, new features being releases, and novel customer problems to solve. Your model needs to evolve alongside these changes.
While at prelaunch you thought your customers cared about certain feature, that may not be the case a few months down the road.
Once you have more customer data, you can use it to inform how to pivot your pricing model. Are you offering up too much usage within one tier and not enough in another? What pricing feedback have your heard from your customers?
Aim to review your pricing every six months. It may be time to change your pricing model if:
Your competition has changed, maybe new entrants are present, or your differentiation is not as clear as before.
Your experience consistent customer pushback, do they all want access to more features, are new customers different than current ones?
Your product has evolved, you’ve added more features, your product is better this year than it was last, do you customers understand the full value?
Takeaway
The most important thing to remember is that there is no “best” SaaS pricing model. The best model for your business depends on your goals, the customer you are targeting, and the product itself.
Always price with your customer, competition, and business goals in mind.
If you’re looking for help with optimizing your pricing, reach out.