Pricing is one of the biggest determinants of your potential revenue…
And yet for most SaaS companies, pricing is more of an after-thought.
Can you guess approximately how long the average SaaS company thinks about its pricing model?
You’d think, it’s something companies put a lot of time and effort into, right? Something you experiment with, try several models, and ultimately, pick what works best.
Not really. The average SaaS company spends a grand total of 6 hours on its entire pricing strategy.
6 hours as in, 6 hours in total. Not 6 hours in a week, or a month, or a year.
Most companies sit down, brainstorm a bit, define their pricing, and use that exact model for years to come.
But what if your SaaS pricing model is sub-optimal, and you could be earning up to 40% more revenue, just by optimizing your pricing strategy?
If you’re looking to experiment with your pricing model, and find the one that works best for your business, you’re in the right place.
In this guide, we aim to teach you everything you need to know about SaaS pricing models, so you can get the best revenue out of your business (and at the same time, create the most value for your users).
The pricing strategies we’re going to cover include:
- Flat-Rate Pricing
- Per-User Pricing
- Feature-Based Pricing
- Pay As You Go
- Tiered Pricing Strategy
- Free (With Ads)
- Usage-Based Pricing
So, ready to become an overnight SaaS pricing expert?
8 Best SaaS Pricing Models
#1. Flat-Rate Pricing
This one’s the most straightforward SaaS pricing model out there.
You charge a single price for all of your users to get access to your software.
The most popular example for flat-rate pricing models is Basecamp: their software costs a flat rate of $99 per month.
So, whether you’re an enterprise with thousands of employees or a tightly-knit team of 5, Basecamp offers the same pricing model.
Flat-Rate Pricing Pros
- It’s the easiest pricing model to explain to your users. Pay X, get Y, done deal.
- The flat-rate pricing is perfect for a product with a simple, single use-case.
- Or, as with the example with Basecamp, you can use the pricing model to stand out from your competition, who have more complex pricing models
Flat-Rate Pricing Cons
- It’s difficult to get max potential revenue from a diverse customer base. E.g. you generally want to charge more for an enterprise (much higher budget) than an SMB (limited budget), but with a flat-rate pricing model, you can’t.
#2. Per-User Pricing
The per-user SaaS pricing model is the most common among team-based tools.
Think, project management software, CRMs, workflow software,and pretty much anything aimed at collaboration within the organization.
This pricing model allows you to get the most potential revenue from each customer. In other words, you charge a lot less for SMBs with a few team members, and you charge a much higher price for enterprises with 500+ employees.
For example, Asana, a PM software, uses this pricing model…
Usually, the per-user pricing is used together with the feature-based pricing. In other words, you allow the user to pick a tier based on the features they want, and then charge them per user.
Per-User Pricing Pros
- You scale as your customers do. You get new revenue when new users sign up for your platform, and at the same time, when your existing users grow their business.
- Just like the flat-line pricing, the per-user model is also very easy to understand for your customers
Per-User Pricing Cons
- Potential customers with a lot of users (large or enterprise companies) are more likely to be deterred from the pricing, as it can get extremely expensive with a per-user model
#3. Per Active User Pricing
For large organizations, getting started with a SaaS solution that employs a Per-User pricing model, can be both extremely risky and expensive.
These companies have to roll out software department-by-department and make sure that the adoption happens everywhere. So, it’s not that reasonable to ask them to get all their users on at the same time and charge them per-user.
So, to mitigate this issue, you can use the Per Active User pricing model instead. What this means is, that they can onboard as many employees as you want, but they’ll only be charged for active users.
The most popular example of this SaaS pricing model is Slack:
Per Active User Pros
- It’s going to be a lot easier to convert enterprise clients since they won’t have to spend a ton of money up-front (before knowing if the software works for them or not).
Per Active User Cons
- You’ll need to create a function on your SaaS that determines which users are active and which ones aren’t, which can require additional dev resources.
#4. Feature-Based Pricing
Feature-based pricing, as the name suggests, means charging your users based on tiers split by features.
A lot of popular SaaS tools use this tactic, including Slack:
Feature-Based Pricing Pros
- This pricing model allows you to get more value based on the user type. E.g. the casual users get to pay the bare minimum, while a power user pays a premium for advanced features and functionalities.
- It also makes it easier to sell to cold audiences. You can first sell a user on the basic account, and once they start using the software regularly, it’s easier to upsell them to a better plan.
- If some features take more resources to deliver, this model allows you to charge a premium for them.
Feature-Based Pricing Cons
- The feature-based pricing is really hard to get right. Without experimenting, you can’t really know which features your users are willing to pay more for.
#5. Pay As You Go Pricing
The Pay As You Go model is a SaaS pricing strategy where your price is directly correlated to your software’s usage.
The more a customer uses your SaaS, the more you charge.
Usually, this SaaS pricing strategy is used by infrastructure SaaS products, such as CDN providers like BunnyCDN. CDN providers usually charge based on the GB of data served in a month.
Pay As You Go Pros
- Your price scales alongside product use. The more your customers use your SaaS, the more revenue you generate.
- You get a very low barrier to entry. Your users can start off with a very small fee (for a small service), and eventually increase it when they need to.
- If it takes more resources for you to provide more services, then this model accounts for the users using more of your services.
Pay As You Go Cons
- It’s harder to predict your revenue since you can’t know for sure how much a certain user is going to spend per month.
- It’s also harder to predict expenses as a user. After all, your users can’t know for certain how often they’ll be using your SaaS.
- The software can get extremely expensive for the power users, so they’d be inclined to look for a competitor with an alternative pricing model (fixed monthly or yearly fee).
Today, most SaaS companies offer some sort of freemium access to their tool.
This is not that surprising - freemium allows users to start using your product with 0 up-front investment, and if they end up liking it, they’re bound to upgrade.
Notion, a note-taking & project management software, uses this model:
You can get your team on board for free and start using the tool.
Once you do, unless you’re extremely displeased with the product, you will eventually upgrade when you hit the freemium limit (which is usually max # of users).
- Significantly easier to acquire users, since you’re not asking for an up-front investment.
- Better marketing opportunities. Anyone can try your app for free and become a fan. Meaning, even if they don’t need to buy your SaaS now, they’ll come back when they do.
- If you don’t have a very good incentive for upgrading to a premium part of your service, freemium might end up killing your revenue.
- Freemium users take up server resources without generating any revenue.
#7. Tiered Pricing Strategy
Another popular SaaS pricing model is the Tiered Pricing Strategy.
What this means is, you offer different features sold in specific packages. This model is specifically useful if you’re selling software that has different use-cases.
To give you a real-life example, HubSpot offers these pricing modes for their Marketing Hub:
Tiered Pricing Pros
- You get to sell different packages to different customer personas
- You get to maximize revenue for each type of client
Tiered Pricing Cons
- You’ll need to clearly define the persona for each use-case, otherwise your customers might get confused on which package they need
#8. Free (With Ads)
This is basically the freemium model but monetized with ads.
It’s useful if your SaaS is very consumer-centric, and you have a TON of free users that you want to monetize.
The best example of this model is Spotify's freemium model: your users get to use Spotify for free, but they’ll be interrupted with ads between songs.
Free (With Ad) Pros
- If you want to have a freemium model, but don’t have the option to subtract features, you can add ads to incentivize your users to upgrade
- If you have a TON of freemium users, this allows you to monetize them so they’re not a net loss for your business
Free (With Ad) Cons
- Ads can really hurt your customers’ user experience, and in turn, your brand
- You’ll need to have a separate department that handles ad selling to advertisers
#9. Time-Based Pricing
This one’s most commonly used in tandem with most of the SaaS pricing models we’ve mentioned thus far.
Basically, the model means charging customers less if they pay for a longer subscription.
Resume builder SaaS companies tend to use this to motivate users to get a longer subscription than just 1 month:
And at the same time, B2B SaaS tools like SEMrush also offer a hefty discount if you buy a 1-year plan instead of paying month-over-month.
This makes it a lot more likely that the user will stick around with the SaaS for the long-haul (and if they’ve been using it for a year, they probably won’t up and switch any time soon).
Time-Based Pricing Pros
- Lowers churn, ensuring that your users stick around longer
- Makes it easier to forecast revenue
Time-Based Pricing Cons
- Virtually none
Work With a SaaS Marketing Agency
Once you’ve got your pricing strategy down, you need to focus on your SaaS marketing & user-acquisition.
And unless you’re a seasoned SaaS marketer with 10+ years of experience behind your back, this won’t be an easy task.
At Apollo Digital, a SaaS marketing agency, we’ve helped over a dozen SaaS companies set up and execute their marketing strategy. And today, we want to help you too!
Want to work with us? Get in touch now!
Not convinced? Check out our SEO case study on how we grew a BPM SaaS client from 0 to 200,000 monthly organic traffic.
Or, check out some of our other top SaaS marketing resources:
- B2B SaaS Marketing Strategies
- Expert’s Guide To Enterprise SaaS SEO [For 2020]
- Expert's Guide To SaaS Content Marketing [W/ Case Studies]
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