SaaS pricing models 101 — the ultimate guide to picking the best pricing strategy for your product
Credits, subscriptions, single payments… Choosing between the different SaaS pricing models is one of the many considerations when building your own online business. It may be a tough call – the difficulty stems mainly from the need to hit the sweet spot between the needs of your company and those of your users. Understanding the economical and psychological mechanisms behind credits, subscriptions, single payments and other available models, and properly leveraging them, can result in maximizing the commercial potential of your SaaS platform.
In this post, we take a quick look at the leading Saas pricing strategies and models, hopefully helping you to choose the right option (or a combination of a few of them) for your service.
Here are the SaaS pricing strategies we discuss below:
- Cost-based pricing
- Value-based pricing
- Usage based-pricing
- Freemium pricing
In addition, we present the following SaaS pricing models and explain when it makes most sense to use them:
- Single payment
- Per-active user pricing
SaaS Pricing Strategies
Picking the right pricing strategy for your business may seem tricky at first, but as you compare the different options and complete market research, it will be much easier to draw a conclusion. Here are some of the most common pricing strategies you can consider:
With a cost-based pricing strategy, just like with any other product, businesses have to evaluate the total cost of providing a service (which should include product development costs, employee overhead, maintenance and any other related costs) and add a relevant profit margin to generate ROI. In this pricing strategy, businesses typically offer one, flat rate pricing option. Cost-based pricing is the basic pricing strategy, however, only a few businesses tend to opt for it as it’s not free of downsides.
Amid the different available options, True - it is a straightforward model that is easy to calculate, but it doesn’t take into account that costs may change over time or that additional expenses may derail your initial estimates and, eventually, your revenue may not be enough to cover the business expenses. This pricing strategy also ignores what the competitors are charging. Thus, amid the different options available, most businesses tend to opt for one of the following pricing strategies.
Pricing products based on how much value they provide to customers is called value-based pricing. This billing strategy focuses on what the specific SaaS product can do for the target audience. Here, the assumption is that customers will be willing to pay a higher price to what competitors can offer, as long as they see true value in using it. Adobe makes great use of this pricing strategy. The company’s products are more expensive than competitor’s alternatives (e.g. ACDSee, Affinity Photo), but its customers recognize the added value and remain loyal to the company.
Made popular by services like Uber and Airbnb, usage-based models appeal to specific groups of consumers, especially those who are conditioned to only pay for the proportion of an asset they use. In this pricing strategy, bills increase proportionally to service usage and customers pay only for what they use. Amazon Web Services is an example of a service properly leveraging this model. Usage-based fees promote higher asset utilization for the seller.
Freemium pricing strategy
Freemium has become a preferred method for many SaaS businesses entering the market or initiating trials. With this strategy, businesses usually offer a basic version of their tool with paid add-ons. In a fresh approach, WhatsApp offers a customer service utility where businesses don’t pay for the service unless the company takes more than 24 hours to respond to a customer.
Major SaaS Pricing Models
Once you pick a pricing strategy that is most relevant to your business, it’s good to also look at the SaaS pricing models that can further maximize your strategy.
Single payment pricing model
Single payment is the tried-and-tested usage-based pricing model. The pay-per-use pricing model has proven effective for many online businesses, especially if the product is expensive or not likely to generate recurring purchases from customers. The single payment model is also very simple to understand and compare, and allows customers to pay a’la carte with no hidden fees and shenanigans - something that’s invaluable to many price-conscious users.
When single payment makes sense
- The single payment model makes sense for non-returning customers. It lends well for physical or highly customized products (e.g. cars).
- Single payment can also be tiered per various premium product options, which is best leveraged by the automotive industry. In most cases, purchasing the extra options involves very hefty margins – for the car’s audio, navigation and a variety of comfort options.
- Single payment is in many ways more convenient for the company. It is easier to sell and communicate to the users. It is important especially in SaaS products as pricing models can get complicated, and the abundance of choice is distracting for the users who want to be sure they’ve chosen the best option.
- This type of pricing model is quick and easy to understand for the customer as it does not hold them responsible for choosing wisely. Offering a single price for a product makes it possible from the marketing point of view to focus on and better showcase the advantages of buying, rather than getting into the complexities of options.
- In the SaaS world, single payment is not the most economical option from the user’s point of view. Although sites like Adobe Stock (Formerly Fotolia) allow users to buy a single photo as an option, but it’s rarely the user-preferred model.
- Single payment makes sense especially for physical products whose value does not scale down when bought in larger volumes.
Credit-based pricing model
Credits originated as the preferred payment model for microstock photography websites as a way to encourage users to buy more photos. The company that first introduced credits as a payment option was iStockphoto. The pricing model proved effective and got quickly replicated by many other similar stock photo services like 123RF, Adobe Stock or Dreamstime, and persists today in numerous other services.
The concept of credits is simple at the core: clients wanting to buy photos must first buy a credit pack, and then use the purchased credit towards their later purchases.
Credit pack economy is governed by a simple rule: the larger the credit pack you buy, the lower the price per credit you get.
When credits makes sense
- The psychological effect of credits is significant from the users’ point of view – because the payment for future purchases is deferred, users are more likely to be more extravagant when spending them. The direct connection between the payment in a known currency (e.g. in dollars) and the spending (in credits) is lost over time, and the discomfort associated with paying is less.
- Credits are the model of choice for many popular stock photo websites today. And even though some services may not replicate the model in its original form and offer variations, the mechanism is the same under the hood. For example, although Shutterstock doesn’t sell credit packs and their images are priced in dollars instead, the charge per photo still vary depending on the selected plan.
- Annual plans offer the best bang for the buck, but come at the cost of a long-term commitment. Whether users are ready to invest vastly depends on how many future purchases they are willing to make.
Subscription-based pricing model
Most sites, in their attempts to generate a steady cash flow, offer a recurring subscription-based pricing model as the most economical option. The advantage here is that subscriptions, by default, come with automatic renewals, and users, whether due to laziness or the additional hassle – may not remember or want to cancel in time.
With prices per a single product much cheaper than in the case of single purchases and credits, this pushes customers into purchasing recurring payments, but only makes sense if big amounts are purchased monthly.
Although the pricing of subscriptions is usually the most attractive of all the models, the trade-off for the user is the longer commitment – not necessarily something acceptable to the users.
When subscriptions make sense
- Pricing strategy based on subscriptions allow young businesses to generate a more predictable cash flow and allow them to better plan for the future growth. As users agree to make longer commitments, the company can focus on the customer retention activities.
- Due to the additional hassle associated with cancelling a service, customers are likely to stick with a service for longer, even if they are considering other options.
- SaaS platforms also lose customers, but there are many options to lure them back – discounts or a couple of months for free.
- Automatic billing functionality means users don’t have to worry about remembering to pay an invoice and your business benefits from a consistent revenue stream.
- Subscriptions can be designed to cater to all types of potential customers. They can be tiered according to functionality, usage levels, or reward long-term commissions with better bang for the buck ratio.
- Because the service is paid for in advance for many and low cost of acquisition. Such providers demand much higher multiples when they divest.
Per active user pricing model
Per active user pricing is a popular option in the SaaS pricing model (especially enterprise), where clients are charged different amounts depending on the number of users using the software. This model may hurt some SaaS companies by affecting the key metrics like daily active users.
Per user pricing model should be used with caution: when implementing it, you may be cutting down on the number of people actively using the software, and thus cripple recurring revenue.
When properly implemented, this pricing model can work for SaaS company, but most SaaS platforms implement more value-based approaches.
When per active user pricing makes sense
- To make per user pricing model work, the number of users doesn’t have to be the only factor differentiating the plans. For instance, you could offer a tiered pricing model consisting of 3 tiers: free plan limited to a couple of users, another plan for >4 and a Pro plan for 10+ users.
SaaS pricing strategies
While customers appreciate having different options, they are unlikely to benefit from abundance of choice when it comes to SaaS pricing models. Offering too many plans and a complicated checkout process can deter customers and leave them overwhelmed. The sweet spot is offering from three to four different plans with clearly defined differences and benefits for the user.
When it comes to selecting the best SaaS pricing strategy, having clear buyer personas and a deep understanding of how your target customers use your software is critical for success. Understanding how your SaaS helps solve your customer’s pain points will help your digital business make important decisions about how to price your software or service.
If you’re still on the fence between choosing between usage-based or subscription-based SaaS pricing models, the good news is that you don’t really have to be confined to either. Many SaaS companies offer a combination of various pricing models like pay-per-use and subscription. Converting pay-per-user customers into regular subscribers typically pays off – it’s a way to maximize the revenue.