While the subscription pricing model is hardly a new concept, the struggle for SaaS companies is always to find the right one. When it comes to Saas, the pricing should be a fine balance between what the customer wants and the profit that the business needs to survive and thrive.
Software as a Service, in the past decade, has proven its affinity for scalability and elasticity, two reasons why startups are finding it more alluring than ever. However, with a major chunk of the target audience looking forward to only the freemium version, how do you go about deciding the subscription pricing model that can capture the market that you aim at?
But, before we head to learn what the most popular and effective SaaS pricing models are, it is important to know why a subscription-based pricing model needs to be different from product-based pricing models.
Why SaaS Pricing is Different from Other Product-Based Models?
For Saas subscription, your customers will pay at regular intervals for continued service, which is not so in the case of products. There always needs to be a fine balance in creating the right amount of value for the customer and the right amount of profit for your business per month in order to retain the client and sustain the business respectively.
How to Do it Differently?
Before pricing your SaaS product:
- It is important to pay attention to your position in the market, the level of service that you are offering and the level of present and expected customer satisfaction.
- You also need to see what kind of customers you want to capture and how many of them would you want to turn into paying subscribers for your business to turn profitable.
- Sketch out what benefits your customers will reap at different levels of your SaaS product.
- Determine who your customers are, businesses or end users or both, and what their lifespan will be.
Making tiers and bundles of users and thus prices becomes easier this way. And in all fairness, these need to be revisited from time to time to keep the pricing fair.
So, let’s move to some popular SaaS subscription pricing models that are used world over by the best of brands.
This is the most popular pricing model when it comes to customers. Such a model offers great functionalities for free. The upgrades are over and above the freemium version and those need to be paid for.
If your add-on SaaS offer is very valuable to the market, the freemium model is a great option. But, in that case you will run the risk of most users being satisfied with the freemium version and not being in need of upgrades.
So, you need to devise the freemium version, keeping the mind the value that the upgrades need to offer. LinkedIn a classic example.
Pay per user pricing model is one of the most popular models. It charges the customer by the number of individuals using the software. And that makes it ideal for businesses with a large infrastructure since that kind of pricing makes it very expensive for small companies.
When a client business buys SaaS on this model, odds are that they will be making a fewer number of individuals use the software for cost-cutting. So for a SaaS business, it means lessening the number of potential users.
So, if your target audience is not enterprises with large budgets, you may need to work on a value-based approach, which means that the number of users should not be the only difference in paid plans.
Tiered User Model
Very akin to the per-user model, herein the number of users goes up in bands and not in single user digits. So, a client does not need to pay the same price for each incremental user, but for an upper range. For example, there would be one price for 1-5 users, another for 6-10, and another for 11 and above.
Here, exactly opposite to the per-user model, the solopreneurs are at a loss since one only pays for bands and not a lower price for a single user, who probably needs just basic features. So, in the tiered approach, you may need to think of individual users as well if they make a good market for your SaaS.
Flat Rate Model
As the name suggests, within this model the provider charges a fixed charge for the software plan. It’s like one fixed plan for freelancers/solopreneurs, the second for a small local network team, and the third for a global team.
While this model solves the problems that per user and tiered user model pose, it also poses a drawback, that is the inability to retain customers. There is only a fixed payment and not extra features and upgrades are offered. So, once the user has what they want, you need to acquire new users.
But on the other facet of the coin, you can set this fixed price according to the approximate Customer Lifetime Value so that you don’t overspend on the resources.
One classic example is Basecamp. In their only plan for $99 a month, they give you unlimited users, 500 GB storage, and all features.
This model differentiates prices in tiers according to not users but services and upgrades. The customer can simply pay according to the features they’d like to use.
Like in Quickbooks, the basic plan will let the user track their sales, expenses, and profits, apart from creating as well as sending an unlimited number of invoices. It also lets you track as well as manage sales tax.
But if you chose the plan a rung above, you will get additional features like payment and management of bills even in multiple currencies, and more.
And then, there is a third version with even more features.
It makes for a great model because an awful lot of users choose SaaS based on features.
This pricing model charges the customer based on usage. A classic example is Amazon Cloud.
Small companies or those individuals that witness fluctuating usage of the software, need not shell a large amount even if they are buying several features offered.
The only disadvantage is when the user can’t predict the extent of usage. That makes it difficult for them to predict cost and make the right kind of investment in such a plan.
Per Storage Model
Herein, a customer is charged based on the size of the storage they need. Most cloud SaaS companies opt for this model. Google is one example. Google allows 15 GB of storage to every Google account user. Anything above and beyond needs to be paid for. Similar is the case with Dropbox which gives 2GB for free.
The ingenious thing about this model is that it offers users to get acquainted with the software for free. And more often than not, they will need extra storage when they hit that free upper limit.
This one is a genius idea if you will. Customers have the power to customize the service package for their specific use. There will be a base price and one can choose your add-on features over and above, ensuring that they are never paying for something they don’t need. It works wonderfully well for startups and small businesses.
Free with Ads Model
Let’s say that in this case, you are earning not from the user but from the advertiser. You give a free version to the users but you allow advertisers to publish their ads within your software. In this case, this ad-supported version is free for the user. But if they need an ad-free version, then they need to pay.
Spotify is the biggest example for free with ads model.
Pay Per Active User
This is a model that is catching up fast as SaaS businesses take a cue from Slack. The customer is charged only for the active number of users of the software. It is very helpful for businesses where resources keep on adding or leaving.
One can buy the plan for a particular number of users, but if some accounts remain unused, one can get a refund for those accounts.
What Strategy to Follow for Pricing?
So, no matter which pricing model you choose, you need to strategize well for it. Here are some points you need to include in your strategy no matter what.
- It is important to study the audience before finalizing on the pricing model. While freemium works in most cases, you will need to see what your customers need. So, study them and find the pain point.
- Also find the cause of the pain point. That usually lies in your competitor’s pricing model. By doing that, you will be able to learn from your competitors’ mistakes.
- Use this data to craft out a solution, a pricing model that appeals to your customers and helps you make steady profit.
- Just because you made a mistake, you don’t need to stick with it. If the existing model doesn’t work, revisit it and make fixes.
- Remember that price should reflect value. That’s the best balance a SaaS company can strike.
- Follow the KISS (keep it simple, stupid) principle. Do not make complicated pricing plans and structures.