For SMEs, every dollar counts.
Yet, when it comes to pricing their SaaS products, many CEOs simply don’t dedicate enough time to defining, testing, and optimizing their price approach. However, they certainly should make it a priority.
Overall, your pricing strategy could be the key to unlocking significant revenue growth and sustainability for your SME. Improving your pricing approach by just 1% can lead to an astounding 12% boost in revenue!
To demystify SaaS pricing, we're breaking down the pricing models that balance value for your customers and revenue for your business in a way that won't require an MBA to understand.
What is SaaS pricing?
SaaS pricing refers to methods used by businesses to charge customers for access to their cloud-based software applications. It involves determining the value of the software service and setting appropriate price points that balance profitability for the company with affordability and perceived value for the customer.
SaaS pricing models are designed to provide flexible, scalable, and value-based pricing options for customers. These models typically aim to align the cost of the service with the value it provides to customers while ensuring sustainable revenue for the SaaS provider.
With SaaS pricing models, providers shall also think of how they will bill the customers and that itself offers further customization of the pricing models. You may want to consider:
- Annual vs. monthly billing, where annual billing often comes with a discount. It provides more stable cash flow for the SaaS provider and can increase customer retention. Monthly billing offers more flexibility for customers but may result in higher churn rates.
- Volume discounts that provide discounted rates for customers who purchase larger quantities (e.g., more user licenses). This approach encourages customers to expand their usage and commit to larger deals and can be structured as tiered discounts or custom quotes for large volumes.
- Custom pricing for large organizations: Tailoring pricing and feature sets for large-scale deployments or complex organizational needs. This often involves direct sales processes and negotiations. It may include additional services like dedicated support, custom integrations, or service level agreements (SLAs).
SaaS pricing models vs. SaaS pricing strategies
While a SaaS pricing model defines the structure of how a software service is priced, a SaaS pricing strategy is the overarching approach used to determine the pricing.
Overall pricing strategies focus on the "why" and "how" behind pricing choices, whereas pricing models are the practical implementation of those strategies. The same applies to SaaS products.
In practice, SaaS companies often use a combination of pricing models and strategies to create a pricing approach that best suits their business goals.
Choosing the right pricing approach (model(s) and strategy(ies)) should ideally be aligned with the company's overall business objectives, customer acquisition and retention goals, and competitive positioning in the market.
We explain how to pick the best pricing approach for your business in another article.
SaaS pricing vs. non-SaaS pricing
The pricing models for SaaS and traditional non-SaaS products differ significantly, reflecting the fundamental differences in how these products are delivered and consumed. Here are the key differentiators:
- Focus on recurring revenue: unlike traditional software or products that often involve a one-time purchase, SaaS operates on a subscription-based framework. This means customers pay regularly – usually monthly or annually – for continued access to the software. This model provides a steady, predictable income stream for SaaS providers and allows customers to spread costs over time, rather than making a large upfront investment.
- Scalability: SaaS pricing can easily scale with usage or user count, whereas non-SaaS products might require additional purchases for expansion. Pricing can be adjusted based on factors such as the number of users, storage requirements, or feature sets. This flexibility is a stark contrast to non-SaaS products, where scaling often requires purchasing additional licenses or even entirely new versions of the software, which can be both costly and disruptive.
- Flexibility: SaaS pricing can be more easily adjusted or customized compared to traditional product pricing. SaaS providers can offer customized plans to meet specific customer needs. This agility allows them to respond quickly to market changes or competitive pressures. Traditional product pricing, once set, is often more rigid and challenging to modify without significant overhauls.
- Minimal acquisition costs: SaaS usually requires a lower initial investment compared to many non-SaaS products. Instead of a large upfront payment for software licenses and potentially hardware, SaaS customers can get started with a relatively small monthly or annual fee. This lower barrier to entry makes SaaS solutions particularly attractive to small businesses or startups with limited capital.
1. Flat-rate SaaS pricing: a single price for unlimited access to all features
With flat rate SaaS pricing, a company charges a single, fixed price for its software service, regardless of usage levels or the number of users. Simple and straightforward.
This model offers customers unlimited access to the software's features and capabilities for a consistent, predictable fee, typically billed on a monthly or annual basis.
How does the flat rate SaaS pricing model work?
In a flat rate pricing model, all customers pay the same amount for full access to the software. This approach simplifies the pricing structure, making it easy for customers to understand and for the company to manage. It eliminates the need for complex calculations based on usage or user numbers, and customers don't have to worry about unexpected charges or overage fees.
To calculate an appropriate flat rate price, SaaS companies typically consider the following factors:
- cost of providing the service (including development, maintenance, hosting, and support)
- desired profit margin
- average expected usage across all customers
- competitive pricing in the market
- perceived value of the software to customers
The goal is to set a price that covers costs, provides a healthy profit margin, and represents good value to the majority of customers.
When flat rate SaaS pricing model works best:
Many SaaS tools initially started with a flat rate offering, but with the evolution of the SaaS market, it became more economic to offer prices at different tiers (I’m covering those further below; feel free to scroll down to the third point).
It's worth noting that flat rate pricing may not be suitable for all SaaS products, particularly those with widely varying usage patterns or those serving a diverse range of customer sizes and needs. In such cases, tiered or usage-based pricing models might be more appropriate.
Overall, the flat rate model works well:
- when customers have predictable usage patterns and don't experience significant fluctuations in their usage of the SaaS product
- SaaS providers with relatively standardized product offerings, where the features and functionality remain consistent across different customer segments
- new SaaS releases, at an MVP stage
Flat rate SaaS pricing example:
The best example of a flat rate offering currently available is Basecamp, which offers a Pro Unlimited package of all its features at a flat rate of $299 billed annually regardless of the number of users.
They also provide a cheaper tier for individual users, also at a flat rate, that may be suitable for smaller teams.
2. Per user SaaS pricing model: charging based on the number of users
In Per user SaaS pricing, customers are charged based on the number of individual users accessing the software.
This pricing strategy is common in the SaaS industry, particularly for applications used by teams or organizations where the value of the software scales with the number of people using it.
How does the per user SaaS pricing model work?
The customer pays a set fee for each user who needs access to the software. This fee is typically charged on a recurring basis, such as monthly or annually. As the number of users increases or decreases, the total cost adjusts accordingly. This model allows for scalability, as organizations can start with a small number of users and add more as needed.
To calculate per user pricing, SaaS companies typically consider:
- the cost of providing the service per user (including development, maintenance, hosting, and support)
- desired profit margin
- market rates and competitive pricing
- the value delivered to each user
- volume discounts for larger numbers of users
Companies might also set different per user prices for different tiers of service or feature sets, which is a common combination. Note the example below.
When per user SaaS pricing model works best:
- when the usage of the SaaS product varies significantly across your customer base
- it’s often preferred by organizations that need to scale their SaaS usage up or down as their business needs change
- when you want to cater to a diverse customer base, ranging from small businesses to large enterprises
Per user SaaS pricing example:
Zoom, a videoconferencing tool offers the following per-user pricing options:
- Basic: a free tier for just one user with limited features and meeting duration.
- Pro: For 1-9 users at €12.49/month/user (billed annually) or €14.99/month/user (billed monthly); includes more features than the Basic plan
- Business: for 10-250 users at €17.49/month/user (billed annually) or €20.99/month/user (billed monthly); includes additional features beyond the Pro plan
- Business Plus: for 10-250 users, with custom pricing options; includes more features than the Business plan
- Enterprise: for more than 250 users, also at custom pricing; offers the most comprehensive feature set.
Note that the Basic plan is free and not technically a "per-user" pricing option, but it is included in the list for completeness. The pricing is in Euros and appears to be for customers calling from Portugal.
Zoom’s per user pricing model allows companies to start small and scale up as they grow. It also enables Zoom to capture more revenue from larger organizations that derive more value from the platform due to their size and complexity.
This model works well for Zoom because the value of a videoconferencing system typically increases with the number of users, as it becomes a central hub for interactions across an organization. The per user model also encourages companies to promote adoption across their teams to maximize the value they get from their investment.
3. Tiered SaaS pricing model: for a choice of features and price points
Tiered SaaS pricing is a model where a company offers multiple packages or levels of service at different price points. Each tier typically includes a specific set of features, usage limits, or service levels, with higher tiers offering more features, higher limits, or better service for a higher price.
How does the tiered SaaS pricing model work?
In a tiered pricing model, customers choose the package that best fits their needs and budget. Tiers are usually structured to cater to different customer segments, from small businesses or individual users to large enterprises. As customers' needs grow or change, they can upgrade to a higher tier or downgrade to a lower one.
To calculate tiered pricing, companies typically start by identifying distinct customer segments and their needs. Then, they determine which features or service levels are most valuable to each segment. Next, calculate the cost of providing each tier of service and set prices for each tier that cover costs and provide a suitable profit margin. Ensuring there's a clear value proposition for upgrading to higher tiers is also an important part of this pricing model.
The goal is to create tiers that encourage customers to choose the highest tier they can afford, while still providing value at each level.
When tiered SaaS pricing model works best:
Similarly to the per user SaaS pricing model, tiered pricing work well:
- when the SaaS provider serves a wide range of customers with varying needs and budgets
- when you want to offer customers the flexibility to scale their usage up or down as their business needs change
- for SaaS products with a wide range of features or the ability to customize the solution often benefit from a tiered pricing model
- when you want to benefit from cross-selling or upselling
- for data-driven companies interested in modern data platforms: the tiered pricing model can provide valuable data and insights into customer preferences which can help you maximize your pricing strategies.
The tiered pricing model is commonly used in freemium or trial-based SaaS offerings, where the free plan acts as a gateway for customers to experience the product's core functionality and then upgrade to a paid plan.
Tiered SaaS pricing example:
Mailchimp, a popular email marketing and automation platform, uses a tiered pricing model. Here's a simplified version of their pricing structure:
- Essentials Plan: priced at €10.24/month for 12 months for 3 user seats, up to 50,000 contacts and monthly email send limit of 10x the contact limit (500,000 emails)
- Standard Plan: priced at €15.76/month for 12 months for 5 user seats, up to 100,000 contacts and monthly email send limit of 12x the contact limit (1,200,000 emails)
- Premium Plan: priced at €275.77/month (negotiable) for unlimited user seats and monthly email send limit of 15x the contact limit (custom)
- Free Plan: for 1 user seat, up to 500 contacts, and a monthly email send limit of 1,000 emails.
Mailchimp's tiered model works well because it allows the company to serve a diverse customer base while maximizing revenue from larger customers who derive more value from the platform. It also provides a clear upgrade path for growing businesses, helping to retain customers as their needs evolve.
4. Usage-based SaaS pricing model: for consumption packages
Usage-based SaaS pricing is a model where customers are charged based on their actual consumption of the service or specific metrics related to their use of the software. This model is particularly suitable for SaaS products where usage can vary significantly between customers and where the cost to the provider scales with usage.
How does the usage based SaaS pricing model work?
In a usage-based pricing model, customers pay for what they use, rather than a flat fee or per-user fee. The usage could be measured in various ways, such as:
- number of API calls
- amount of data processed
- number of transactions
- storage used
- compute time
- number of emails sent
- number of records stored
Customers are typically billed at regular intervals (e.g., monthly) based on their usage during that period. Some companies may offer a base rate with additional charges for usage beyond a certain threshold.
To calculate usage-based pricing, companies must first identify the key usage metric(s) that correlate with the value provided and the cost to deliver the service. Next, they have to determine the cost to provide each unit of the usage metric and add a desired profit margin to the cost.
With this pricing model, you also have to consider competitive pricing and market norms and decide on any volume discounts for higher usage levels.
The basic formula might look like this:
Price = (Cost per unit of usage + Profit per unit) * Number of units used
Companies might also implement tiered pricing where the per-unit cost decreases as usage increases.
When the usage based SaaS pricing model works best:
- when the usage of the SaaS product varies significantly across customers or over time
- for SaaS products that require significant computing resources, storage, or other infrastructure-related usage
- when you want to appeal to customers who scale their usage up or down as their business needs change, without constraining them by fixed pricing plans
- to encourage customers to experiment with new features or functionalities without the fear of being locked into a fixed pricing plan
However, it's important to note that the usage-based model may require more sophisticated metering and billing systems.
Usage based SaaS pricing example:
AWS is a prime example of a company that extensively uses usage-based pricing for its cloud services. Let's look at Amazon S3 (Simple Storage Service) as a specific example:
Amazon S3 Standard Storage pricing:
- First 50 TB / Month: $0.023 per GB
- Next 450 TB / Month: $0.022 per GB
- Over 500 TB / Month: $0.021 per GB
In addition to storage, AWS charges for data transfer, API requests, and other operations. For instance:
- PUT, COPY, POST, LIST requests: $0.005 per 1,000 requests
- GET, SELECT, and all other requests: $0.0004 per 1,000 requests
- Data transfer out to the internet: Starting at $0.09 per GB for the first 10 TB / month
This model allows AWS to align its pricing closely with the resources consumed by each customer. Small startups might pay just a few dollars a month for minimal usage, while large enterprises with heavy usage could pay thousands or millions.
This pricing model has been a key factor in AWS's success, allowing it to serve a wide range of customers from small startups to large enterprises with a single, flexible pricing structure.
5. Per feature SaaS pricing model: for customized solutions
Per feature SaaS pricing is a pricing model where customers pay based on the specific features or functionalities they use within a software application. This model allows users to customize their experience and only pay for the features they need, potentially making the service more cost-effective for some customers while allowing the provider to capture more value from users who require advanced features.
How does the per feature SaaS pricing model work?
Implementing this SaaS pricing model starts with breaking down the product into distinct modules to which you can subsequently assign a specific price. In this way, you allow customers to choose which features they want to use and pay for accordingly. The total price is calculated based on the selected features.
Here’s the formula you could use for this purpose:
Total Price = Base Price + (Feature 1 Price + Feature 2 Price + ... + Feature N Price)
Where the Base Price is the minimum cost for accessing the core functionality of the software and the Feature Price is the additional cost for each selected feature
Per feature SaaS pricing example:
Zendesk, a customer messaging platform, uses a variation of the per feature pricing model. They offer different products (features) that can be combined based on the customer's needs:
- Suite Team (€55 per agent/month), which includes a ticketing system, email, chat, voice, social messaging, and more
- Suite Growth (€89 per agent/month), which Includes all features in Suite Team and more
- Suite Professional (€115 per agent/month), which includes all features in Suite Growth
- Suite Enterprise at custom pricing, which includes all features in Suite Professional and extra features.
This model allows Zendesk to cater to a wide range of customers with different needs and budgets, from small startups to large enterprises. It also provides a clear upgrade path for customers as their requirements evolve, potentially increasing Intercom's revenue per customer over time.
6. Freemium SaaS pricing model: to entice customers to additional purchases
The freemium SaaS pricing model is a popular pricing strategy used by many businesses. It involves offering a basic version of the product or service for free, while charging for more advanced or feature-rich versions.
The goal of this model is to attract a large user base by offering them a free version of your product and then convert a portion of those users into paying customers. Note that this model is never used as a standalone practice, but rather in combination with other models that can generate revenue (e.g. it can be one of the tiers in the tiered pricing model, or offer a limited capacity in usage-based pricing).
How does the freemium SaaS pricing model work?
The SaaS provider offers a free version of their product, including only a limited set of features or functionality. The free version must still provide enough value to the user to encourage them to try the product and experience its benefits.
The business then offers one or more paid subscription plans that unlock additional advantages, like more features, increased usage limits, or enhanced functionality.
The challenge with this model is about striking the right balance between providing enough value in the free version to attract users, while still incentivizing them to upgrade to the paid plans.
When does the freemium SaaS pricing model work best?
- for SaaS products that have a large potential user base and can benefit from network effects or viral growth
- for products that have a clear path to monetization, where users can see the value of upgrading to the paid plans
- in consumer-facing SaaS products, such as file storage, productivity tools, or social media platforms
Freemium SaaS pricing model example:
Canva offers users a free plan with limited functionality limited to one year. Some providers (e.g. Dropbox) include the free version of their tool as a free trial.
7. Pay-as-you-go SaaS pricing model: billing per actual usage
With the Pay-as-you-go SaaS pricing model, customers are charged based on their actual usage of a software service, rather than paying a fixed fee regardless of consumption.
This model allows users to pay only for the resources or features they use, typically on a per-unit basis.
This model is different from Usage based pricing in that with the latter, customers are typically given different service tiers, where each price tier offers a different consumption range.
How does the pay-as-you-go SaaS pricing model work?
A SaaS business identifies consumption units relevant to their business model (e.g., API calls, storage used, number of users) and assigns it a specific price. They then have to monitor the customer's usage of the service. At the end of a billing cycle, the total usage is calculated and the customer is charged accordingly.
With this SaaS pricing model, it’s important to allow customers to view their usage in real time so that they could estimate their costs at any time – otherwise, you risk high churn rates.
When pay-as-you-go SaaS pricing model works best:
- for services with variable usage patterns
- when customers want to avoid large upfront commitments
- for businesses with seasonal demand fluctuations
- when the value of the service is directly tied to usage volume
Pay-as-you-go SaaS pricing model example:
AWS is a prime example of a service that extensively uses the pay-as-you-go model. Customers are charged based on their actual usage of computing resources, storage, and various other services. For instance, with Amazon EC2, users pay for the compute capacity they use, measured in instances per hour.
8. Credit-based SaaS pricing model as a pre-purchase option
The credit-based SaaS pricing model is a type of a usage-based pricing approach where customers are charged based on the number of credits they consume, rather than a fixed monthly or annual fee.
How does the credit-based SaaS pricing model work?
The SaaS provider assigns a specific credit value to each feature or usage metric (e.g., number of users, API calls, storage, etc.). Customers purchase a certain number of credits upfront, which they can then use to access the SaaS product's features and functionalities. As the customer uses the product, the corresponding credits are deducted from their account. Customers can typically purchase additional credits as needed, either on a recurring or on-demand basis.
When does the credit-based pricing model work best?
- when the SaaS product has highly variable or unpredictable usage patterns across customers
- for SaaS products that offer a wide range of features or functionalities, where customers may only need to use specific capabilities
- when your goal is to provide customers with more flexibility and control over their spending
- for SaaS products that cater to enterprise customers with complex usage requirements
Credit-based SaaS pricing example:
Audible – the popular audiobook platform. Audible's pricing plans start at $7.95 per month, which includes one credit that can be redeemed for a single audiobook. They also offer a higher-tier plan at $14.95 per month, which provides two credits per month.
The key aspect of Audible's credit-based pricing is that customers can redeem each credit for a full audiobook. However, the flexibility extends beyond the monthly credit allowance. Customers can purchase additional credits in packages of three at any time, allowing them to access more audiobooks as needed.
AWS also uses a credit-based pricing model for many of its cloud computing services. Customers purchase AWS credits, which they can then use to access various services, such as EC2 instances, data storage, and network bandwidth.
9. Storage-based SaaS pricing: charge for the amount of storage used
Storage-based SaaS pricing is a model where customers are charged based on the amount of data storage they use within the software application. This pricing strategy is common for cloud storage services, backup solutions, and other SaaS products where data storage is a primary feature or resource.
How does the storage based SaaS pricing model work?
First, the SaaS provider sets pricing tiers or rates based on storage capacity. Customers are then charged according to the amount of storage they use or the tier they select As customers' storage needs increase or decrease, their pricing may adjust accordingly.
When does storage based SaaS pricing model work best:
Storage based SaaS pricing model example:
Dropbox is a well-known example of a company that uses a storage-based SaaS pricing model. Here’s a breakdown of its tiers:
- Plus Plan: 2 TB of storage at €11.99/month or €119.88/year (billed annually)
- Essentials Plan: 3 TB of storage at €19.99/month
- Business Plan: starts at 9 TB for the team at €14.50/user/month
- Business Plus Plan: starts at 15 TB for the team at €21.50/user/month
Additionally, Dropbox offers a free Basic plan with 2 GB of storage, as well as an Enterprise plan that requires contacting Dropbox for custom pricing and features.
Dropbox's model demonstrates how storage-based pricing can be combined with other factors like the number of users or additional features to create a comprehensive pricing strategy. As users require more storage, they can upgrade to higher tiers, which often come with additional benefits beyond just increased storage capacity.
Pick the best pricing approach for your SaaS business
As you've seen throughout this comprehensive guide, there are several effective SaaS pricing models to consider for your business. Often, they can be used in combination to unlock the benefits that depend on your customer base, product features, and business goals.
Ultimately, the best pricing strategy is one that aligns with your overall objectives, provides value to your customers, and supports the sustainable growth of your SaaS company. You should carefully evaluate the different pricing models and how they can be applied to your unique business, you can unlock significant revenue potential and position your SaaS business for long-term success. We’ll be happy to assist you throughout the princess - just contact us through this contact form to schedule a free pricing strategy consultation.
As you move forward in refining your SaaS pricing, keep in mind that it's an ongoing process. Monitor customer feedback, track key metrics, and be prepared to adapt your approach as your business and market conditions evolve. By staying agile and responsive, you can ensure your pricing remains aligned with your value proposition and continues to drive sustainable growth for your SaaS company.
