Pricing Models for SaaS Software
To help you get the most out of your SaaS software, we’ll further look at the 4 main SaaS pricing models and explore the pros and cons of each.
The pricing models described below will tell you about the best ways to enter the market, increase sales and develop your business. You should also understand the psychology behind pricing and how it relates to your business to be able to choose the best model for yourself.
1. Price per user
The user payment system (Per User Pricing, also Per Seat Pricing) is one of the most popular in the SaaS industry.
The popularity of various pricing tactics in the SaaS business over the years. Yellow chart – pay per user, purple – pay after use, pink – pay per employee, green – other
This popularity is largely due to simplicity: one user pays a fixed monthly price. If another user is added, the price doubles, and so on. Clients can easily understand what is included in their monthly subscription, and SaaS startups can quickly predict their income.
A typical variant of this approach is offered by ProductPlan. The only variable for their business plans is the number of users added to the profile. The price for the service will be the same for everyone, regardless of whether you are a single user or a team of 100 people.
Simplicity. Price per user is one of the most comprehensible pricing models that allows potential customers to easily calculate monthly costs. It is great for both users and you in terms of simplifying the sales process.
Profit increases with the number of users. If you can double the number of users within the company, you will be rewarded with doubled income.
Predictable revenue generation. The model makes it easy to calculate and predict the revenue of each month.
The wider distribution of services within the customer company is limited. When charging for one user, you directly indicate the reason not to add new users to the tool. It also brings to life fraudulent schemes when one login is shared among several team members.
The model promotes outflow (Churn). By limiting distribution, you are pushing customers to opt out of your services. After all, who is more prone to outflow? A team of 100 people using your product, or a team of 10 people?
The strategy does not reflect the real value of the product. Does it matter to the client, does he have three or four users?
2. Price per active user
Active User Pricing is a variation of the previous model.
Many SaaS companies (especially those focusing on working with large organizations) prefer annual billing cycles. This means that a new customer can pay for hundreds of employees in advance – without any guarantee that these employees will actually use the software.
Pricing based on an active user eliminates this problem: customers can register as many employees as they want, provided that the bill is actually billed only for active users.
Slack is the most famous example of implementing such a policy: no matter how many users you mention, you will be billed only for those who actually used the software.
Slack packages for companies. “Free” – for those who want to try out the service for an unlimited period of time. “Standard” – $ 6.67 / month for an active user when paying for the year ($ 8 for monthly payments). “Plus” – $ 12.50 / month for an active user when paying for the year ($ 15 for monthly payments)
Customers pay only for active users.
The risks of the customer for too wide distribution of the product are reduced. If you are selling to a large organization, it is beneficial for you to promote the internal distribution of the product. When pricing for an active user, it is easier for companies to take the risk of deploying a program to use your services: if you do not need to use them, you will not have to pay.
Imperfect scheme for small and medium-sized businesses. This model is perfect for introducing a product in corporations, but when money is limited and the team size is small, such a pricing policy is not justified.
3. Payment for functionality
For the last two pricing models reviewed, users were a common variable, but it is possible to use product functions as a value indicator. In this case, price categories will be determined by the available functionality: the more functions, the more expensive the package.
So, a different set of features distinguishes Evernote’s Basic, Plus and Premium packages, additional functionality is “unlocked” with each new upgrade.
Strong incentive to upgrade. A clear and obvious motivation for an upgrade is offered for each function: you get access to additional functions.
Compensation for difficult to maintain functions. Some of your features may require a disproportionate amount of resources for maintenance. Depending on the functionality, the payment model allows you to compensate for the costs if you place them in top-level packages.
It’s hard to figure it out. How do I know which features users will need? Incorrectly designed kits can impede product implementation, as the most important functions will end up in expensive packages or, conversely, the bulk of the benefits of your product will fall into the cheapest category.
Leaves an unpleasant feeling. The consumer may be dissatisfied: he pays for the product every month and, nevertheless, misses some of its functions.
Thanks to the success stories of such well-known companies as Slack, Evernote, and Dropbox, many SaaS startups use the freemium approach, that is, they offer a free product, supplemented by paid options. This model is usually part of a differentiated pricing approach, in which paid packages are supplemented by a free option that allows users to enter the service.
This option is then limited at certain points to encourage users to upgrade, which, in turn, is based on tariffing for functionality (if you need function X, purchase a paid package), for volume (if you exceed your norm, you will need a paid package) or depending on the use case (you can use the free package for internal purposes of the company, but not for customer management).
Drift live chat tool successfully uses this model. Their “Free” package allows small organizations to establish communication with the first hundred contacts without paying anything. When the demand in the service passes the indicated mark (which, most likely, will be associated with the growth of the company and its profit), the user can update the profile to the paid version.
Drift packages: “Free” (allowing you to start working with the platform), “Standard” (for individual users), “Team” (for the sales team), “Corporate” (for large organizations)
Initial introduction to the product. One of the most difficult tasks for SaaS companies is introducing new customers into the service, and the freemium makes it much easier to get started with the product.
Viral potential. Such low barriers to use give rise to a real possibility of virality. So, Dropbox began to grow rapidly, thanks to referrals, as existing users recommended it to friends and colleagues.
Freemium negatively impacts revenue. Those who use a free subscription do not generate profit for your company. This means that paid users must bring enough money to recoup the costs of acquiring and servicing all customers, both paid and free.
Higher outflow. The more we pay for things, the more we value them. Despite the fact that SaaS products that are free to use contribute to the wide distribution of the service, they do not motivate consumers to cherish the acquisition, which leads to an increase in outflow.
A model can discount the core service. If the product solves a serious costly problem for free, users may be reluctant to meet the need to pay for your services.
Image source: Saas Software via Wright Studio/Shutterstock