The Ultimate Guide to SaaS Pricing Models

Why is it important to nail your SaaS pricing?

Here are four reasons why you should get your SaaS pricing right:

1. It helps you maintain a delicate balance with your price points. For example, if you price too high, you’ll lose out on many customers that would have subscribed to your tool. If you price too low, you’ll be unable to maintain your profit margin.

2. Monetization is four times more effective than acquisition in improving growth and two times more efficient than efforts to improve retention. Your pricing strategy and model can thus act as a growth lever.

3. You gain a competitive advantage by inculcating pricing tactics and models that suit your business the best.

4. With the right pricing point and model, you can provide value to your customers. This happens when they complete a purchase and think, “I made a great decision,” because your price justifies the value your product brings.

Which factors impact your pricing strategy?

These factors will change depending on the SaaS niche you’re in. But here are some common factors that impact the way you price your product and the models you choose to work with:

• Competitors: Who are your competitors? What benefit are they providing to the customers? What kind of pricing models and price points are most popular?
• Business goals: What are your business goals? Are you trying to establish a premium product, or do you want to achieve market dominance faster?
• Company size: Are you just starting out by creating a demand for your product or are you an established company?
• Buyer persona: What kind of customers are you targeting? Why do they need your product/service?
• Value proposition: How is your SaaS product/service unique? What features or functionalities do you provide that is different from the competitors? Can you charge a premium for it?

What are SaaS pricing strategies?

Before you decide on the pricing point for your SaaS product/service, you need to set a general pricing strategy. Each SaaS pricing strategy will depend on your overall objective. Are you looking to attract high-end customers? Or do you want to break through in a new market?

Each strategy that you choose will have its unique pros and cons. Let’s have a look at five major SaaS pricing strategies.

#1 Competitor Based Pricing

This strategy is used by many new SaaS companies that do not have enough data to set a pricing point that justifies the value of their product. 

You also don’t know all the costs you’ll incur at every stage to price your product properly.

By looking at the competitor’s price points, you can get a rough idea of what the customers are ready to pay. Depending on this data, you can opt for three ways:

• Pricing at market rate: Commonly known as price matching, this involves setting a similar price as your competitors. 
• Pricing above the market rate: If you think you’re providing more features or functionality or a better experience than your competitors, pricing it a bit higher can be the right strategy for you.

• Pricing below the market rate: This is a good strategy to follow if you want to get more customers onboard and increase your market share.

Look at how Jira and Monday.com have similar pricing points for two plans.

Monday.com’s pricing plans:

Jira’s pricing plans:

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PROS:

• It’s a simple and straightforward strategy. You can do minimal competitor research instead of spending a lot of time experimenting with different price points.
• If you’re in a highly competitive space, charging similarly to the competitor can make a difference, as even a slight price difference can change the user’s choice.
• It’s less risky as you’re adopting a pricing model already working for a similar brand in your space.

CONS:

• While it can be a good strategy to begin with, you don’t want to base your entire pricing strategy on someone else’s company that may have different problems, costs, and business fundamentals.
• You don’t know how your competitor came up with their pricing strategy, so following without complete data could mean putting yourself in a vulnerable position.
• You miss an opportunity to stand out from the crowd and separate your brand with a unique proposition.

#2 Penetration pricing strategy

Penetration pricing strategy is used by companies that want to generate demand quickly. They do this by offering their product or service at a lower price initially. 

Some ways companies do this is by:

• Offering a limited-time introductory deal
• Setting a low-price deal for the first 100 customers or so.

The major point of doing this is to make your offer attractive to the customers. When you add words like “limited-time” or “first 100 customers,” the customers are encouraged to make quick decisions that work in your favor.

It’s important to note here that the companies do aim to increase their pricing gradually through either price increases or by upselling and cross-selling packages.

Netflix did this when it entered the market back in the ’90s with rental services.

Their biggest competitor then was Blockbuster, who charged $4.99 for a single, three-day rental service. 

Netflix entered the market with a great deal: You could rent four movies at a time for $15.95 per month without a return date.

This decreased the price to $1 per DVD for regular movie watchers.

The rest became history. Netflix delivered such a change to the rental market that Blockbuster went bankrupt.

PROS:

• This strategy can help you generate immediate action. This increases your market share.
• You can create brand awareness. People like getting a good deal, and they like talking about it with people too. This can lead to word-of-mouth marketing for your brand.
• Once you onboard customers, your product can become indispensable to them, and they might stay even after price hikes.

CONS:

• Some customers might look at your lower-priced product and think it is inferior compared to the others.
• A continuous penetration pricing strategy may lead to your users thinking that your product is struggling to obtain users, and thus they may start questioning its value.
• You might have to sacrifice profitability and revenue for market share capturing.

#3 Cost plus pricing

Majorly used by manufacturing and retailing companies, cost plus pricing strategy involves calculating your business costs and adding a percentage to it.

This kind of pricing can serve as a starting point for SaaS companies as the method is not research-heavy and works on a single principle: to make profits, you have to earn more than you spend.

You can arrive at the number by adding customer acquisition cost, staff, development, and other costs. For example, if it costs you $50 to acquire a customer and other overheads add up to $30, you need to charge $100 to have a profit margin of 20%.

This calculation requires more depth when it comes to SaaS, as there are recurring subscription payments. For example, you have to calculate the CLTV (Customer Lifetime Value) to have a figure that gives you a profit margin over the years.

PROS:

• It is a safe pricing strategy, and you just need to have the total costs figure to come up with an accurate price estimation.
• When you add a markup percentage, you are assured that every sale will be profitable.
• It can be a useful framework for kick-starting your pricing discussions.

CONS:

• This framework doesn’t consider other market factors like competitor pricing, etc. This could mean that your price point could be totally off from the ones that are acceptable in the market.
• Your costs can’t always be predicted. For example, what if you need to hire more employees or intensify marketing? 
• This model does not consider how customers would feel about your prices. For example, if your costs are too high, you can’t be sure that your customers would be comfortable paying a high price.

#4 Value Based Pricing

Value based pricing is customer-focused and thus is one of the best pricing strategies for SaaS businesses.

It revolves around the idea that products and services should be priced based on how much value they bring to the customer and how much they think is worth your tool.

This strategy doesn’t focus on competitors’ prices or the company’s costs. Instead, you can price your services/products higher if customers understand the value and are willing to pay the premium.

For example, Adobe’s apps are much costlier than alternatives like GIMP and Affinity Photo because they know the value they are bringing to their customers.

You can even charge based on feature additions or tiers when it comes to this strategy. For example, look at how Mailchimp has different pricing tiers depending on the number of monthly emails they allow. The higher the monthly email number (value), the higher the price.

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PROS:

• You can charge more than your competitors if you provide more features or add-ons. This also helps grow your revenue and profits.
• While other costs may remain the same, you can raise your prices as you introduce new features. For example, Hootsuite started with a low price point, and recently, they have increased their pricing to account for the feature additions over the years.
• By spending time understanding your customers and how much value they get from your product, you can build mutually beneficial relationships.

CONS:

• Unlike competitor and cost-plus pricing strategy, this is a lot more complex to calculate as it requires understanding a lot of factors like how many segments you have, which segment is ready to pay how much, etc.
• While your product’s value may be high, not everyone would be ready to pay a high price which would mean you have a limited pool of customers.
• To justify a premium price, you may need to offer more than what’s available in the market. This could mean an uprise in your development costs.

What is a SaaS pricing model?

A SaaS pricing model determines how you price your products or services. For example, will you charge a flat rate for all features? Or will you charge additional features as add-on prices? Will you have different pricing tiers to cater to small companies and enterprises?

All these questions are answered when you choose a SaaS pricing model.

Each pricing model will have its pros and cons. So, let’s go through each one of them and find out which will suit your SaaS business the most.

Types of SaaS pricing models

Here are seven popular SaaS pricing models, along with real-life SaaS companies that follow each one of them:

#1 Flat rate pricing

Flat rate pricing is the simplest pricing model in SaaS businesses. It involves offering your product at a single rate, irrespective of the usage and number of features a customer uses.

This can be an effective model to provide customers with a simple choice that they can take or leave. It also does not involve any limits on users, expensive add-ons, or exclusive features. The customer is presented with the only choice between a monthly or annual plan.

Here’s a flat rate pricing example from HoneyBook, a client management software.

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 A single monthly price of $1 provides access to all the platform's features.

PROS:

• It is easy to comprehend, and you can focus your sales and marketing efforts on selling a single plan.
• As there are no complicated pricing structures, customers can easily make decisions, and you have a clear calculation of the revenue you’ll be receiving each month.
• You can build clear funnels that focus on one plan.

CONS:

• Different customers may have different feature requirements. Some may leave your core features unused, and thus these customers may feel that they’re wasting money on their subscription.
• You lose out on upselling opportunities by giving away all features in one plan
• If you’re catering to enterprises and individual customers, you may lose a fortune by selling a low-priced plan to your enterprise customers.

#2 Usage based pricing

Also known as “Pay as you go,” this pricing model involves charging the customer based on the usage of the product. The more the use, the more the charges, and vice versa.

The usage can be charged on various factors like the number of emails being sent, the storage they use, the social media posts that get scheduled, the number of invoices being generated, etc.

With this model, an initial low price can draw users in, and they can try out the product without paying a hefty fee. Even smaller businesses know they won’t have to pay as much as enterprise companies, and thus they feel satisfied with the deal they are getting.

Here’s how Chargebee, a subscription billing platform, uses this model.

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Its plans are based on the revenue its customers generate. The more revenue, the higher the pricing plan.

PROS:

• This model is perceived as fair by the customers because the prices are directly proportional to the usage, and there are no hidden costs.
• The model appeals to all business sizes. As a result, you can target both small-sized companies and enterprises and increase your market share.
• Revenue recognition and recurring billing are straightforward and easy to manage.

CONS:

• As the model does not consider the organization size, you might miss out on revenue by charging enterprise customers less because they use the product less. 
• You might see customer churn more. For example, if startups have to use more of your service, they might incur a high cost, and if they find a cheaper alternative, they will switch easily.
• Your MRR (Monthly Recurring Revenue) and ARR (Annual Recurring Revenue) may fluctuate a lot depending on the usage of your customers.

#3 Tiered pricing strategy

The tiered pricing model is used by most popular SaaS companies like Slack and HubSpot. Over here, different pricing plans are created depending on the features, usage, number of users, etc.

These pricing tiers can range from 2-5, but generally, SaaS companies stick to three tiers aimed at low, medium, and high price points.

The basic premise of this model is that not all customers would require the same feature or the same number of features. These pricing tiers thus allow them to choose the plan according to their need.

It’s important to note here that you should not create more than 4-5 pricing tiers as too many options can overwhelm the user, and they might go elsewhere.

Here’s how Slack follows the tiered pricing model that helps them cater to different customer segments and organization sizes.

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PROS:

• It gives your customers the freedom to choose a plan that suits their requirements. Also, it does not make them feel that they have to pay more despite them not using many features.
• You can personalize the pricing packages for different customer segments, thus making it more actionable and easy to decide upon.
• You have a ready database of clients that you can upsell and interact with for further SaaS growth and development.

CONS:

• You need to find the perfect balance as too many tiers can confuse the users, and too few and poorly constructed tiers don’t help you reap the advantages of this model.
• It would take a lot of research and time to figure out which features should be clubbed together and how you should price each tier.
• While it is tempting to appeal to every customer segment, you might lose your focus on your most valuable customers.

#4 Per user pricing

Per user pricing is another popular model that many companies use. In this model, businesses charge based on the number of individuals using the product. The more users from a company, the more scale in revenue.

This model makes it easy for SaaS companies to know what their revenue will look like each month. 

The only caveat here is that you need to price your per-user rate so that it’s affordable to companies that need to onboard many users but still profitable for your SaaS business.

Most project management companies follow this model. Here’s how Asana does that.

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PROS:

• It is one of the simplest pricing models for prospective customers as they can easily calculate how much they will pay depending on the users they need to onboard. They also don’t need to understand overly complicated bills and deal with shady upsells for features.
• You can easily predict the revenue you’ll be generating each month.
• Your revenue scales with adoption. If you can 2X the number of users in a company, you’ll be able to generate 2X the revenue.

CONS:

• More logins mean higher costs which is why many companies will try to find a way out, so you’ll need to be aware of login abuse — multiple individuals using the same account.
• It might lead to customer churn when an organization can’t deal with the increasing costs of onboarding new users. This can especially be the case for large businesses.
• This can limit adoption as organizations will try to minimize the number of users they need to add.

#5 Per active user pricing

Have you noticed SaaS companies promoting their annual plan more? It’s very common today. But what if an organization subscribes to 100 users in the beginning and then they realize that ten users are inactive? Would they want to keep paying extra for these users? No, right?

That’s where the per active user pricing comes into the picture.

In this pricing model, you charge your subscribers depending on how active they are. Teams can enroll any number of users, but they will be charged only based on how many users use the tool. 

This typically means charging for users who have logged in to the tool in the last 30 days.

Slack is one company that follows this model.

PROS:

• Customers only pay for the active users, and thus it is beneficial for them.
• If you’re selling your tool to enterprise companies, you want them to increase the adoption. Per active user pricing model helps them onboard as many users as possible (even all the people in the organization). If it doesn’t work, they don’t pay.

CONS:

• While this pricing model works great for enterprise companies, it does not offer any incentive for small businesses whose team sizes and budgets are tight.
• Many organizations will try to find loopholes where they can use a single account for many employees.’
• It can be more complicated to define an “active” user than to follow the earlier pricing strategy per user.

#6 Per feature pricing

Like tiered pricing, this model prices your product based on the different features and functionality the customer wishes to have. The more features the customers want, the higher the pricing plan.

Typically, the more expensive packages also consist of the features in the lower-tiered plans.

According to this pricing model, the customers scale along with your product. For example, if they grow and require more extensive features, they upgrade to the next level.

For this model, you’ll have to ensure that all essential features are there in the basic plan, and you’ll have to figure out where to draw the line for each price point.

Canva follows this pricing model. Below you can see how their pricing plans have different features.

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PROS:

• This model provides clear upselling opportunities as the customers can easily see the features they will be able to unlock when they move to a higher-priced plan.
• If you have some features that require a lot of time or resources, by putting them in the higher-priced plan, you can compensate for these features.
• You can easily target SMBs and enterprises both with this model.

CONS:

• It can be challenging to decide which features are essential and which deserve to be in the premium plans. This becomes even more difficult if you deal with multiple customer segments with different feature requirements.
• It can leave some customers disgruntled because they might feel that even though they are paying a monthly fee, they cannot utilize everything your tool has to offer.
• Customers may find these plans confusing, and instead of choosing one, they might put off their purchasing decision.

#7 Freemium business model

The freemium business model involves offering a free product which is often supplemented by add-ons, paid extras, and higher packages. 

It is most often used as an “entry-level” option as part of a tiered pricing model. The basic premise behind this model is that it helps in the easy onboarding of the users, and you can get them hooked to your product before you try upselling to them.

This model is often restricted in terms of the number of features (milestone and other high project management features are not available) that the user can get access to, the number of users (restricted to 10 users in the project team) they can onboard, or the capacity that they can use (can create only 7 projects).

Take a look at how Asana provides a free plan but it doesn’t involve high-level features such as timeline, custom fields, workflow builder, etc.

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PROS:

• Nobody wants to risk their money on a tool that might not work for them. When you offer a free plan, you’ll see more product adoption, and you might see a lower CAC than other models.
• Dropbox leveraged this model to get user referrals by letting customers pass on their product to colleagues and friends. You can do the same by getting your free plan popular and encouraging user referrals.
• With your free plan, you can experiment with new features before deploying them for every plan.

CONS:

• You’d be missing out on revenue that you could have otherwise generated with a basic plan.
• Your paying customers may feel resentful as they might think, “Why should I pay if I am getting XYZ features for free?”
• When we pay for something, we are encouraged to utilize it properly. With your free plan, customers may take things lightly, and instead of turning into paying customers, you might see a lot of churn.

How to choose the right pricing model for your business?

Selecting the right pricing model for your business can impact all the relevant metrics in a great way. While you will need to do some research to find the one that suits your business the most, here are some things that will help guide your decision:

- Research your buyer personas and find the customer segments that require your product the most. This will help you position your product effectively with the right price points.

- Differentiate your pricing tiers after you get an idea of the features a startup will want and how that differs from what an enterprise wants.

- Create surveys for your existing customers and get data on the most popular features of your tool, how much they value your tool, etc. This data is actionable and relevant as you get it straight from the horse’s mouth.

- Set your pricing after taking the suggestions and recommendations from all the customer-facing teams, like marketing, sales, customer support, etc. You’ll even want to involve your finance team, as they will help you set a profitable price point.

- Consider your LTV to CAC ratio before setting the pricing.

How to implement the right pricing model for your business?

The way you implement a per-user pricing model will be different than the way you implement a tiered pricing model. 

For example, you’ll have to take into consideration the number of users different-sized companies will onboard and how you’ll manage to make a profit from an enterprise company as opposed to an SMB. Whereas, for a tiered pricing model, you’ll mostly be taking into consideration the different features an enterprise will make use of as compared to a startup.

If you’re already following a pricing model, you might have to take small steps instead of changing your entire pricing structure.

Keeping all these things in mind, you can start implementing the relevant pricing model for your business.

Final Thoughts

Figuring out your SaaS pricing strategy and model may take some time and research, but it’s too important to be neglected. After all, with the right pricing plans, you can increase your product adoption and have customers th

You can speak to your customers and see the strategies your competitors are using to establish how much users are willing to pay and find that balance between covering your costs and providing value to your customers.

Always remember that SaaS pricing is not a one-off task. You’ll need to keep optimizing your strategy, price points, and models to suit the environment, new additions to your tool, and other scenarios.

Read more about SaaS:

How to build a SaaS sales funnel?

SEO for SaaS: The ultimate guide for 2023

The most critical stages of the SaaS sales process