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The Pros and Cons of Common SaaS Pricing Models

A guide to the different SaaS pricing models

Holding your own in the fast-growing, highly competitive field of software-as-a-service (SaaS) takes more than a novel idea and solid engineering. To attract – and more importantly keep – customers you’ll need pricing that works for them while finding healthy revenue projections that allow you to grow.

There are two main avenues to consider to get pricing right: your pricing model and your pricing strategy. A SaaS pricing model is essentially how you package and present your services. There are various ways companies do this to show value, pique interest, and ultimately convert new subscribers.

With pricing strategy, you’re setting the right costs for your software and services. This can feel a bit like being a contestant on The Price is Right – even if you’re familiar with the product, a price tag’s bullseye can be elusive.

To save you the time in finding the best pricing method, we put together a pros and cons list of common SaaS pricing models as well as prevalent pricing strategies.

SaaS pricing models

Someone comes to your website, gobbles up a bunch of information, and is ready to make a purchasing decision. How you present your full offering – the software, services, support, licenses, SLAs and other variables – could be the determining factor behind a won or lost sale. So, do your research, think your pricing model through, and build a positive user experience to encourage the next click.

Here are SaaS pricing models that encompass the vast majority of what’s out there today:

Tier-based pricing

One of the most common SaaS pricing models is the tier-based system.

Basically, you offer “good-better-best” options with varying levels of features, services, support, and costs.

You don’t necessarily need to limit this model to three tiers, but know that anything over five can get cumbersome and confusing for customers when making selections. If you do use tiers, be sure that each option provides a solid experience – short-changing functionality can hurt your brand and may not lead to the stick, “upsell-able” users you’re looking for.

Pros:

  • Covers many buyer group needs
  • Helps capture more market share
  • Decreases the need to run promotional pricing

Cons:

  • Pricing may not factor actual market value
  • May increase churn due to the wide net you cast
  • Difficulty determining the right offerings per tier

As an example, Zoom’s tier-based pricing plan increases the value of each tier incrementally, helping potential buyers self-select the best fit while giving the SaaS provider the best chance to win over new users.

Per user

Because the SaaS business model relies on recurring payments from their subscribership, many companies simply charge based on the number of seats provisioned. Pricing here is often grouped into ranges, incentivizing higher seat counts with discounts.

Pros:

  • Encourages more users, which may lead to higher revenue
  • Simple model for users to understand
  • User-friendly access to complete toolsets, support, etc.

Cons:

  • May dilute user bases, leading to training issues or churn
  • Pricing may not reflect actual market value

Canva offers a blend of a per-user pricing structure with a tier-based system, which allows businesses to fit the tools to their needs and save a little money as their user count goes up.

Free versions

Many SaaS companies offer a free trial for a week or month. But, just as many businesses will offer a free version without a time limit to get users in the door and ingrained in their platform. The key is to create a smart, strategic free version of your SaaS product that provides enough functionality to be usable, while leaving enough to be desired to encourage upsells to a paid version.

Pros:

  • Helps build your user count and brand awareness
  • Offers opportunities for upselling to warm leads
  • User data offers information for continuous product improvement

Cons:

  • Free users will cost you for server bandwidth and support
  • Difficulty in setting boundaries for free and paid versions.
  • A free version may “cheapen” your brand a little

A great example is the free Dropbox Basic version of the cloud storage business. It offers a (much) smaller storage space and some functionality limits to get users started and invested in their platform.

Choose-your-own

Why squeeze a customer into an offering that isn’t right? Many SaaS pricing models include a “choose your own” or “custom” option on top of their chosen model so they’re not pushing any squares into round holes. If your system supports this kind of flexibility, you could wind up being the tailor-fit solution someone needs.

Pros:

  • Users get exactly what they need
  • Add-ons could lead to higher paying subscriptions

Cons:

  • Some potential complexity for account management disparate subscriptions

Pricing strategies for SaaS

There’s a little bit of a chicken-or-egg scenario going on when picking your pricing model and pricing strategy. Either way you start, when it’s time to nail your price tags, there are a few frameworks you can use:

  • Cost-plus pricing
    This strategy takes your costs – those directly associated with your product and overall business overhead – and adds a profit margin to those costs. This model ensures profitability, but it does not account for factors outside your business such as market trends, competition, or customer expectations.
  • Competitor-based pricing
    Some find competitor pricing a simple way to get started, as you essentially follow what others in your space are doing for pricing. From there you can go higher, lower, or somewhere in between based on your product, positioning, and costs.
  • Value-based pricing
    If you believe something is as valuable as someone will pay for it, go with value-based pricing. Here you’ll need to learn as much as you can from your customers and prospects to evaluate the perceived value. Whatever the price tag, make sure to back it up with data and prove your value – especially if your pricing is above the competition’s.

Key metrics for your SaaS pricing model

With so many pricing options to evaluate, it’s important to keep your goals in mind when pricing your products. Every company will have different goals and targets, but just about every SaaS provider should keep these big metrics in mind:

  • Monthly recurring revenue (MRR)
    Because SaaS is based on recurring payments rather than single transactions, you’ll need to keep track of revenue flow based on subscriber counts. This is essentially your heartbeat – keep a constant finger on the pulse to know if your pricing keeps you growing.
  • Subscriber status
    Because users equals revenue, track and project the ebb and flow of active, renewed, and deactivated subscribers. This data may help you assess if you need to do more to attract users, retain existing subscribers, or even upsell within your base.
  • Churn
    Forget how it’s spelled, churn is a four-letter word for SaaS companies. You’ll want to develop a SaaS pricing model that reduces buyer’s remorse and encourages stickiness to reduce lost revenue.

Evaluating the effects of your pricing model

With so many different pricing models to choose from, it can be tough to understand which will lead to the most growth for your business.

Using Causal, you can map out a range of different pricing structures, and project their effects on your bottom-line over time. Causal's scenario analysis feature makes it easy to understand the impact of these sorts of business assumptions on your financials.

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