An Ultimate Guide to SaaS Pricing Models & Strategies

An ideal product or service price makes a considerable difference for any SaaS company offering. Given that the SaaS model centers itself around recurring subscriptions and securing as many as possible to turn a sustainable profit for as long as needed, it just does. If you, a B2B SaaS business owner, set the bar too high or low, the results will speak for themselves sooner rather than later.

However, finding that sweet spot in a SaaS pricing model and strategy has much more to do with crunching the correct numbers. You must understand your market, your product’s value, and your customers’ willingness to pay for such a product or service. Failure to align all of these factors will have a detrimental impact on your business.

This comprehensive guide aims to help you better understand the importance of a SaaS pricing strategy, the most commonly found SaaS pricing models, and how choosing or implementing the correct pricing format can ensure the success of your SaaS business.

What are SaaS Pricing Models?

A SaaS business can use different methods to charge customers a recurring fee for its services, unlike conventional software solutions that charge customers a high, one-time fee to access their services. These pricing models, whether monthly or annually, can have various tiers based on the SaaS’s features, the number of users accessing the software, and the usage levels. The SaaS business model affords its customers a broader range of flexibility, thus making it an attractive option for companies of all sizes.

Choosing the correct SaaS pricing model and leveraging SaaS marketing services can improve your business’s outcomes by attracting the ideal customers, amplifying your revenue margins, and allowing your SaaS business to expand its reach. But since there are various pricing models, what should you consider when choosing the correct one? Well, that’s easy to answer. Ideally, you must understand your service’s value, your business’s buyer personas, their budget constraints, and how they will implement your product to ease their operations.

Also, is rapid customer acquisition your main priority, or is it maximizing revenue per user? Take your time and consider all associated factors when formulating your response, as answering questions like these will equip you with all the information you need to choose the perfect pricing model for your SaaS business.

Types of SaaS Pricing Models

Businesses implement various approaches and popular SaaS pricing models to charge customers for their services based on usage and access to software features. Also, consider clubbing either of these models with professional support from a SaaS website design agency to fully reap benefits that will push your business closer to achieving its goals. Here are the top standard SaaS pricing models you can choose when deploying your services.

Flat-Rate Pricing

The flat-rate pricing model for a SaaS business allows service providers to offer all the features of their application for a single, fixed fee. You provide a complete package or software access for a set price. This approach allows customers to manage their budgets accordingly as they know what they must pay each month or year for your service. It’s a straightforward, no-frills method of doing business for your customers and your company, as they pay the same amount each billing cycle.

When you implement a flat-rate pricing model, your customers are less hesitant to use your software. They understand that the fee for their chosen package stays the same, no matter how much they use your service. Even if you roll out different pricing tiers, with a flat rate for each tier, you simply add or remove specific features to differentiate between them.

A flat-rate approach instills trust and understanding among your clients, as there are no hidden fees or “surprises.” It’s also an excellent way to introduce your product or service to the market with the help of professional SaaS SEO services to ensure maximum impact and success. By keeping your pricing structure easy to understand, you eliminate complications, thus simplifying your operations and allowing you to focus on offering as much value as possible to your client pool.

Usage-based Pricing

Usage-based pricing is another way of saying your clients “pay as they go.” Your SaaS business will charge customers according to how much they use your service rather than a fixed fee regardless of usage. Think utility bills; it’s the same approach. This pricing model is an excellent option for companies with fluctuating usage needs as they only pay for the services or features they need or use when needed. For more context, consider how an email platform charges its users; the more emails you send, the higher your charge, or how a cloud storage provider charges clients for the data they store or reserve. The more they use, the more they pay.

The great thing about usage-based pricing is that you can scale it according to your client’s needs or requirements. If a client represents a small organization or startup, their usage will be lower during the initial stages of their operations. At the same time, established companies will have more substantial requirements, thus leading to higher bills. However, not everything with this model is sunshine and rainbows. It can be challenging for service providers to predict their potential revenues as their client’s service usage determines the money they will make.

Nonetheless, a usage-based pricing model might be an ideal choice for your SaaS company if the value of your service directly ties to how much your clients will need or use it. You should keep your usage pricing plans comprehensibly to prevent confusion or incorrect assumptions about your SaaS service.

Tiered Pricing Structure

As the name suggests, a SaaS business with a tiered pricing structure offers different service levels at varying prices. This pricing format lets clients choose an appropriate plan that matches their budget and requirements. For reference, consider how Netflix prices its services. You have three primary options: Standard with Ads, Standard, and Premium. Then, there’s the option to add members for an additional monthly fee. That’s a tiered pricing structure at work that most of you may use and anyone can understand.

If you want a tiered pricing structure or model to work for your SaaS business, you must ensure that each chosen tier is worth the asking price and appeals to customers who may need these services. You must also make each tier logically alluring to a certain degree so customers can choose between your options. This approach is also an excellent opportunity for your company to upsell your higher-tiered services. It creates a boomerang situation, where your customer returns for more services or features your business can offer.

There’s a catch to this pricing structure, though (there’s always a catch, you say): don’t offer more than three or four tiers. Historically, business owners have found that giving clients too many options will probably cause confusion and potentially prevent them from signing up for a service. Aim to create a tiered pricing model that your clients will love, and your business stands to profit from the most.

Freemium Pricing Model

For SaaS businesses, a freemium pricing model is an excellent approach to getting potential customers to notice your product or service. It works by giving away a basic version of your service for free. If customers want to access your product’s other more “premium” features, increased capacity, or additional functionalities, they must pay for it. SaaS companies leverage this approach to build a more expansive user base.

While it’s an excellent way for customers to pay for a subscription plan, there’s a kicker to this pricing approach that many potential customers could take advantage of: “Why buy the cow when you can get the milk for free?” Getting customers to pay for an upgrade of free service can sometimes be challenging. Nonetheless, it’s particularly beneficial for service providers that offer products with a clear value proposition.

When using this pricing model, your main goal is to give customers a practical and beneficial experience they want or need to use more often. This approach will lure them in and substantiate their decision to pay for a premium version of your service that offers advanced features or add-ons. Your SaaS company should ensure it has a bullet-proof plan to generate revenues from your service’s free users over time.

Per-User Pricing

A per-user pricing structure is when your SaaS company charges customers based on the number of people who use your service or product within a single account. Each active user per month or billing cycle pays a set fee for your service. It’s an excellent pricing model that scales the service cost with the number of people using it within an organization. It’s a common approach for software like collaboration tools or CRMs that teams use.

While this pricing model is a practical way to get teams on board, it might not benefit all work groups. For instance, if the per-user cost of your service is $13, and you have 45 individuals within a team who might need your service, the total service cost for that team would be $585 at the end of a billing cycle. That might make them more hesitant to subscribe to your product or service. A better workaround would be to offer meaningful discounts for larger teams to ensure they get a better sense of value for their buck.

You should aim to price your service to suit your target customers’ budget. If you price it too high, you lose potential customers; if it is too low, you shoot your profit margins in the foot. With research and customer feedback, you should find a spot that perfectly balances out the scales of your per-user pricing structure to ensure your best shot at success with this model.

What are SaaS Pricing Strategies?

A SaaS pricing strategy is a company’s approach to determining how much to charge customers for their products or services. It involves different pricing models, such as flat-rate, freemium, tiered, per-user, and usage-based pricing. These strategies primarily aim to garner and retain customers while maximizing revenue potential for a SaaS provider based on customer usage patterns or their specific needs.

SaaS companies must identify different customer types and tailor pricing strategies to suit their needs while clearly distinguishing between their service’s various levels or tiers to cater to a broader range of customers that might need a service for differing purposes.

Your SaaS company must consider various factors like the market temperature, how customers will react to their service, and how long it determines its product to offer value, given the market’s landscape. By applying the correct pricing strategy formulation to its operation model with the help of a SaaS specialist partner like Wytlabs, a SaaS company will subsequently increase or better its potential to forge ahead successfully and make a lasting impact.

Common SaaS Pricing Strategies

SaaS businesses can leverage various pricing strategy approaches, such as different pricing models, to achieve revenue and client acquisition goals. Let’s look at SaaS businesses’ most common pricing strategies and outcomes.

Penetration Pricing

A penetration pricing strategy involves a SaaS business setting a low price for its service or product when entering a market to garner a substantial customer base and market share. It’s akin to getting your company’s foot in the market’s door. A business prices its product or service below that of its competitors and then increases its fees once it has secured a loyal customer base and market dominance.

While the initial price offering is an excellent way to draw new customers in, the potential for your company to lose them to competitors once you increase your service’s fees is a minor gamble that all SaaS businesses that apply this pricing strategy. For the best outcome, you should set a definitive plan about increasing service price points over time and leveraging assistance from SaaS link-building services for further reach while letting your customers understand your product’s value upfront.

Captive Pricing

In a captive pricing strategy, your SaaS company will offer its core product or service at a low price to capture customers but then charge premium prices for additional services, features, or add-ons. This approach works well when a SaaS product has different segments, like a standard-version CRM with a basic free service, but if your customers want access to the advanced integrations or features, they have to pay more. The key to successfully implementing and running a captive pricing strategy is offering a core product that is extremely useful to your customers. They should want to pay for additional features and add-ons of their own volition.

Do not bombard your potential customers with too many extra features or a complicated core product or service. Present a straightforward user experience and interface that keeps your clients engaged when using your service while solving their bottlenecks or problems before you can serve them with a topped-up version comprising additional features to ensure that they integrate your product loyally with their daily workloads.

Skimming Pricing

SaaS companies that use a skimming pricing strategy capitalize on the enthusiasm of early product adopters who are willing to pay a premium fee for their services. As time progresses, these companies gradually lower their fee costs to attract more customers as competition increases. Your company must maximize profits by targeting the most price-insensitive market segment with the “early access” plan and making more affordable plans available, sometimes with fewer features.

A great example of this pricing strategy is when Apple launches its latest iPhone at a higher cost price and then reduces the cost of the product as and when more people want to purchase it. A skimming pricing strategy isn’t for all SaaS companies; if you have an innovative service and can spread awareness about your product with the help of professionals who specialize in offering SaaS content marketing services, paired with a concrete plan for how and when you will lower your service’s price, opt for this approach.

Prestige Pricing

In the SaaS sector, a prestige pricing strategy implies setting a high or premium price for a company’s service to convey a sense of exclusivity, luxury, and quality. It makes customers feel your service or product is worth the extra expense. This approach targets customers who regard a higher price as a sign of additional value and associate your service as a means to increase their brand image, thus positioning your product as a luxury offering.

For instance, this method works well with established corporations or businesses that would opt for an “enterprise or premium” plan at a notably higher price with additional features and exclusive integrations than a standard service version. However, if you apply a prestige pricing strategy, you must be able to back it up with a premium-level service that justifies the extra spend.

Free Trial Pricing

A free trial pricing strategy lets customers try your full service for a limited period to completely experience your SaaS company’s offerings before committing to a paid subscription. In other words, you give them a “try before you buy” demo with a limited timeframe before prompting them to subscribe to continue enjoying your service’s features and benefits.

While what you give your potential customers access might have certain limitations, it helps them understand your product’s value and how much more they could use to make their workloads easier. Ensure your trial period is long enough for your potential customers to use and fully experience your product. When applied correctly, this approach lowers customer hesitation when subscribing and increases your service’s exposure to a broader client pool that might soon become paying customers.

Cost Plus Pricing

A SaaS cost-plus pricing strategy means your company sets a price for offering your software service by calculating the total production costs, including customer acquisition costs, development, maintenance, and a desired markup to achieve a profit. Essentially, with this pricing strategy, you guarantee a profit for your offered product without fully considering perceived customer value or market competition levels. For instance, if your service costs $120 to make and maintain, and you want a 20% profit on your offered service, your SaaS product will cost $144. This strategy works for businesses looking for profitability and efficiency.

However, this approach has a downside since you don’t account for the perceived value it brings to a customer. If they find your product more valuable than you price it, it could result in a potential loss in higher profit margins. Nonetheless, it’s a safe and reliable way to set prices, but combining this approach with other strategies to make the most profit works best.

Value-Based Pricing

Value-based pricing occurs when your SaaS company sets the price strategy of your service according to the perceived value it delivers to your customers. With this approach, you don’t consider production costs or competitor pricing; instead, you charge customers a fee they believe your service is worth and its benefits. This pricing strategy helps you set prices that align with your product’s value and is an excellent way to grow your SaaS business.

For example, consider Slack’s pricing model, which has different tiers: a standard/basic version for individual users and an “enterprise grid” plan that is priced considerably higher but comes with a plethora of features and perks that make it more appealing to larger companies that may need these higher value benefits. It takes cost-plus pricing to another level by considering development costs and the perks or outcomes customers can benefit from using your product.

Competitor-Based Pricing

As the name of this pricing strategy suggests, your SaaS company sets its product or service price based on the similar products your competitors charge for theirs. This strategy helps you align your fees with the competition instead of pricing your product solely based on production costs or perceived value. It’s a practical approach in markets where customers are price-conscious or price-sensitive.

For instance, if a new SaaS company offering a project management tool enters the market, it might price its service per established players like Asana or Trello or at a slightly lower fee based on its perceived value compared to its competitors. This pricing strategy is a safe bet to make a meaningful impact, but it might not always make your company the most money or profit.

Conclusion

If you want to ensure the success and profitability of your SaaS company, you must decide on the correct or most optimal pricing model and strategy. It’s not about simply setting a specific fee and waiting for the cards to fall into place; it takes understanding your customers’ needs, determining your product’s value, and correctly gauging the market in which you wish to position your company. Always match your service’s fees with what your customers seek and your business’s goals or targets.

If you need assistance determining the correct approach your company should take to ensure optimal outcomes, consult a SaaS specialist like Wytlabs for the best suggestions and techniques to take your business from strength to strength. Once you achieve the perfect service pricing and continue improving your company’s offerings, financial success is a destination you’re on your way to that will arrive sooner than expected.