Find out how to price your SaaS product accurately by learning about various pricing models. Get tips on how to choose the right model for your product.
If your company is struggling to capture its full revenue potential, the problem might be your pricing model or the lack of one. A well-thought-out pricing strategy can be the key difference between a business that thrives and one that just gets by.
According to a study, ‘incorrect prices lead to insufficient revenues and profits and can negatively affect the image of the organization”. This means that effective pricing does more than just set a price tag. It gives your customers value while positioning your company to outperform the competition.
Here’s how:
- Proper SaaS pricing helps you maximize customer value so your business remains profitable and sustainable.
- Thoughtful pricing models encourage customers to explore and use all features without worrying about hidden costs.
- Tiered pricing models, for example, offer opportunities to upsell, increasing your recurring revenue over time.
But with so many pricing strategies out there, finding the right one can feel overwhelming. In this article, we’ll break down the most effective SaaS pricing models and strategies, so you can make informed decisions that align with your business goals.
TL;DR: SaaS Pricing Models and Strategies
- Choose the Right Pricing Model: Your pricing model can make or break your SaaS business. Popular models include cost-based, competition-based, value-based, penetration pricing, and freemium.
- Key Factors to Consider: Market dynamics, value proposition, target audience, and company size/stage all influence your pricing strategy.
- Types of SaaS Pricing Models: Common models include usage pricing, per-user pricing, tiered pricing, flat-price pricing, and per-feature pricing.
- Tailor Pricing to Consumer Types: B2C, B2B, and enterprise customers each require different pricing approaches.
- 4 Steps to Set Pricing: Understand your product’s value, define it from the customer’s perspective, choose the right pricing metrics, and ensure scalability.
What Factors Influence the Pricing Models for SaaS
According to research by McKinsey, a sustained pricing advantage can contribute to 15 to 25 percent of a company’s overall profits. Choosing the right pricing model for your SaaS product is crucial for long-term success. Several factors come into play, and understanding them can help you make informed decisions that resonate with your target market and drive growth.
Market and Industry Dynamics
Analyzing market demand, customer preferences, and their willingness to pay is essential. For example, if your SaaS targets small businesses, you might find they are more price-sensitive, requiring a more competitive pricing approach.
Additionally, keeping an eye on your competitors’ pricing can help you position your product accordingly. If similar SaaS products are priced lower, you may need to justify a higher price through superior features or customer support.
The Value You Are Offering
What makes your SaaS stand out? Your pricing should reflect the unique value your product offers. For instance, if your software provides exclusive features that competitors lack, like advanced analytics or enhanced security, you can justify a higher price point. A strong value proposition not only attracts customers but also builds loyalty, as users feel they’re getting something they can’t find elsewhere.
Target Audience
Not all customers are the same, and their needs, budgets, and expectations will vary. By segmenting your audience, you can tailor your pricing to different groups.
For example, offering tiered subscription plans allows you to cater to both startups with limited budgets and larger enterprises willing to pay more for additional features. This approach makes you accessible to a broad audience while maximizing revenue opportunities.
Company Size and Stage
The size and stage of your company also play a role in pricing. If you are an established SaaS company, you may have the brand recognition and customer trust to command higher prices. In contrast, if you are a newer company, you might need to adopt a more aggressive pricing strategy to break into the market.
For instance, offering a freemium model can help build a customer base quickly, while a premium-only model might be better suited for established companies with a strong reputation.
How to Price a SaaS Product
Pricing for maximum revenue doesn’t have to be a guessing game. With the right approach, you can align your pricing with your business goals and market demands. Different pricing strategies suit different business models, and understanding which one fits your SaaS product is key to unlocking its full revenue potential.
Cost-Based Pricing
Cost-based pricing involves setting the price of your SaaS product by calculating all production costs and adding a fixed profit margin on top. It’s a straightforward approach where the selling price is directly tied to what it costs to create the product.
While not a SaaS company, Walmart is a well-known example of a business that often uses cost-based pricing. They calculate the cost of goods and then add a markup to ensure profitability. Some smaller SaaS companies might use a similar approach when determining the cost to develop and maintain their software before setting prices.
Pros
- By adding a fixed markup to your costs, you ensure a profit margin, even if production expenses rise.
- Customers are more likely to accept price increases when they know they’re tied to higher production costs.
Cons
- This method often fails to account for indirect expenses like marketing, distribution, and labor, which can eat into your profits.
- Cost-based pricing doesn’t consider competitors’ prices or consumer demand, potentially leading to lost customers or underpricing compared to others.
Competition-Based Pricing
Competition-based pricing involves setting your SaaS product’s price by analyzing what competitors charge and adjusting your price accordingly. This strategy is particularly useful if you are a new company lacking sufficient sales data or are unsure about your product’s market value.
Airbnb uses competition-based pricing by analyzing prices for similar listings in the same area. Hosts are encouraged to set their prices based on what competitors charge for comparable accommodations, ensuring they remain competitive in the market.
Pros
- By basing your prices on what competitors charge, you leverage their market research, reducing the risk of pricing mistakes.
- This strategy is straightforward, allowing you to set a competitive price without extensive testing or research.
Cons
- While useful for new companies, this strategy isn’t sustainable long-term as it doesn’t consider your specific costs or growth goals.
- You might miss crucial details about why competitors set their prices a certain way, leading to potential vulnerabilities in your pricing strategy.
Penetration Pricing
Penetration pricing is a promotional strategy where you temporarily lower your SaaS product’s price to quickly attract new customers. Often, this approach involves a limited-time offer or special discount that helps build initial demand.
When Netflix first entered new markets, it often used penetration pricing by offering low subscription rates to attract a large user base quickly. Over time, as they established themselves, they gradually increased prices.
Pros
- Lowering prices reduces the risk for potential buyers, encouraging those who were hesitant to try your product at full price.
- Offering a significant discount can lead to a surge in sales, helping you quickly gain market share and establish a customer base.
Cons
- This strategy requires a substantial upfront investment with the hope of long-term gains, making it a risky move if you do not handle it wisely.
- Customers may start to view your promotional price as the standard rate, limiting the impact of future discounts and potentially harming your pricing power.
Value-Based Pricing
Value-based pricing sets your SaaS product’s price based on the perceived value it provides to your target audience. Unlike other strategies, it’s not about your costs or competitors’ prices but about how much your customers believe your product is worth.
Apple is a prime example of value-based pricing. They price their products based on the perceived value to customers rather than the cost of production. Apple products are often priced higher than competitors due to their brand value and customer loyalty.
Pros
- By pricing based on customer willingness to pay, you can capture the maximum value per unit, as increasing your revenue.
- This strategy requires a deep understanding of your customers, fostering stronger relationships, and driving product innovation that aligns with their needs.
Cons
- Striking the right balance between perceived value and price can be challenging, requiring continuous analysis of customer feedback and market trends.
- The perceived value of your product can change due to factors like cultural shifts or economic conditions, which are beyond your control, making this strategy potentially risky.
Freemium Pricing
Freemium pricing is a popular strategy in the SaaS world, where companies offer a free, limited version of their product to drive sign-ups and attract potential users.
Dropbox offers a free version of its cloud storage service with limited storage space. Users can then upgrade to a paid plan with more storage and additional features if they need more than what the free version provides.
Pros
- Offering a free version sets your SaaS apart from competitors who only provide paid options, making it easier to attract users who want to experiment before committing.
- Freemium models boost your product visibility through word-of-mouth marketing as satisfied users share their experiences and leave positive reviews.
Cons
- Converting free users to paying customers can be challenging, with many users content to stick with the free version of your product, potentially limiting revenue.
- Supporting a large base of free users can lead to increased support and infrastructure costs, which may strain your resources and affect service quality.
Ready to optimize your pricing strategy? With Fungies’ SaaS payment infrastructure, you can create subscription billing plans personalized to your customers’ needs, enhancing and expanding your revenue at every stage of the customer journey. Book a demo today to see how Fungies can take your SaaS business to the next level.
Here’s a quick recap:
| Pricing Strategy | Overview | Pros | Cons |
| Cost-Based Pricing | Prices based on production costs plus a margin. | Ensures profit margin; Justifies price increases. | Ignores indirect costs; Doesn’t consider market demand. |
| Competition-Based Pricing | Prices set based on competitors’ rates. | Low risk; Simple to implement. | Not sustainable; Misses nuances of competitor pricing. |
| Penetration Pricing | Temporarily lowers prices to attract customers. | Quickly builds market share. | High upfront risk; Customers may expect low prices long-term. |
| Value-Based Pricing | Prices based on perceived customer value. | Maximizes revenue; Deepens customer relationships. | Requires constant adjustment; Value perception can fluctuate. |
| Freemium Pricing | Offers a free version to drive sign-ups. | Attracts users; Boosts visibility. | Low conversion to paid plans; High support costs. |
5 Common Types of SaaS Pricing Models
Here’s a look at five common SaaS pricing models, each with its own benefits and drawbacks.
Usage Pricing
In usage pricing, the cost is based on how much the customer uses the software, such as data storage or processing power. This model works best for products where usage varies, like cloud storage services.
Amazon Web Services (AWS) charges customers based on their usage of various cloud services, such as computing power, storage, and data transfer. Customers pay for what they use, which makes it highly flexible and scalable.
Pros
- Customers can start small and increase their usage as they see value, making it ideal if you are a startup or small business.
- This model allows users to pay only for what they use, making it more appealing to your cost-conscious customers.
Cons
- Customers might hesitate to use your product extensively due to concerns about unpredictable costs.
- Without an annual contract, customers can switch providers easily, increasing the risk of churn.
Per-User Pricing
Per-user pricing charges a set fee for each user who accesses your product. It’s a straightforward model often used for systems and tools where multiple users need access.
Slack charges businesses a set price per user per month, making it easy for companies to predict costs based on the number of users they have on the platform.
Pros
- With a fixed price per user, both you and your customers can anticipate costs and income without surprises.
- Each new user added to the software directly increases your revenue.
Cons
- High costs per user might discourage widespread adoption within an organization, limiting overall usage.
- If your product isn’t widely adopted across an organization, churn rates can increase due to low buy-in.
Tiered Pricing
Tiered pricing offers multiple packages at different price points, each with a distinct set of features tailored to different customer needs, from individuals to medium-sized companies.
Mailchimp offers different pricing tiers based on the number of contacts and features required. Customers can choose a plan that suits their needs, from a basic free plan to more advanced paid plans with additional features.
Pros
- Your customers can choose the package that best fits their needs, simplifying the buying process.
- As customers grow, they can easily upgrade to higher tiers with you, driving additional revenue.
Cons
- The variety of options can overwhelm customers, potentially leading to confusion and difficulty in making a decision.
- Some customers may need features from higher tiers but don’t require the added users, leading to potential dissatisfaction.
Flat-Price Pricing
Flat-price pricing offers a single product with a fixed set of features at one price point, usually with options for monthly or annual payments.
Basecamp charges a flat fee for unlimited users and projects, with a single pricing tier that provides all features at one price point, regardless of the size of the business.
Pros
- The fixed price makes it easy for customers to understand the models and for your team to market and sell.
- With fewer details to manage, invoicing becomes straightforward for you, reducing billing issues and improving cash flow.
Cons
- With only one pricing tier, there’s little room to upsell or offer upgrades, limiting revenue growth for your company.
- Customers might feel undervalued if they don’t use all the features they’re paying for, leading to potential dissatisfaction.
Per-Feature Pricing
Per-feature pricing charges customers based on the specific features they want, with higher packages offering more features.
Salesforce offers different pricing based on the features included in each package. More expensive packages come with more advanced features, and customers pay more as they require more functionality from the platform.
Pros
- Customers only pay for the features they use, making it an attractive option for those with specific needs.
- As customers’ needs evolve, they’re likely to purchase additional features from you, increasing your revenue.
Cons
- It can be challenging for you to balance offering essential features at lower tiers while keeping higher-value features attractive at higher prices.
- The complexity of choosing the right features might overwhelm some customers, leading to potential dissatisfaction.
Here’s a quick recap:
| Pricing Model | Overview | Pros | Cons |
| Usage Pricing | Costs based on customer usage, such as data or storage. | Scalable for startups; Customers pay only for what they use. | Unpredictable costs may deter extensive use; High churn risk. |
| Per-User Pricing | Charges a fixed fee per user accessing the product. | Predictable revenue; Scales with user growth. | High per-user costs may limit adoption; Risk of increased churn. |
| Tiered Pricing | Multiple packages at different price points with varying features. | Simplifies buying process; Encourages upgrades as customers grow. | Too many options can confuse customers; Some may feel dissatisfied with available tiers. |
| Flat-Price Pricing | One product, one price, with fixed features. | Easy to understand and market; Streamlined billing. | Limited upselling opportunities; Customers may feel undervalued. |
| Per-Feature Pricing | Charges based on the specific features customers select. | Customizable; Encourages additional feature purchases. | Balancing feature tiers is challenging; Complexity may overwhelm customers. |
SaaS Pricing Strategies Based on Consumer Types
Understanding your audience is crucial to setting the right pricing strategy for your SaaS product. Different consumer types require different approaches.
Here’s a breakdown of how to tailor your pricing based on who you’re selling to:
B2C (Business-to-Consumer) Pricing
B2C SaaS products are designed for individual users or families, similar to services like Spotify, or iCloud+. The pricing here needs to be straightforward and affordable, often with a focus on subscriptions that users can easily manage.
For instance, Spotify uses a freemium model, offering a basic version of its music streaming service for free, with ads, while encouraging users to upgrade to a premium, ad-free version with additional features. This approach makes the service accessible to a wide audience while driving revenue through premium subscriptions.
B2B (Business-to-Business) Pricing
B2B SaaS pricing covers a wide range of customers, from small and medium-sized businesses (SMBs) to large multinational corporations. The key here is flexibility. SMBs typically have tighter budgets and may be more price-sensitive, so pricing structures like tiered or per-feature models work well to balance affordability with value.
Slack, a popular communication tool used by businesses of all sizes, offers tiered pricing with different levels of features. SMBs can choose a lower-tier plan that fits their budget, while larger businesses can opt for higher tiers with more advanced features and support.
Enterprise Pricing
Enterprise customers are the heavyweights in the SaaS world, often bringing in revenue equivalent to dozens of smaller clients. Pricing for enterprises needs to be highly customized, reflecting the significant value these clients expect. Some SaaS providers list starting prices or estimates on their websites, while others prefer to discuss pricing during a personalized sales call or demo.
For instance, Salesforce, a leading CRM platform, typically uses enterprise pricing. While they offer some pricing information on their website, large enterprises usually negotiate custom pricing based on their specific needs and the scale of their operations.
Choosing the Right Pricing Model for SaaS
Selecting the right pricing model for your SaaS business is a crucial decision that can greatly influence your success.
Here’s a 4 step process on how to approach it:
Step #1: Understand Your Product and Value Proposition
Start by thoroughly evaluating your product or service. Your pricing model should align with the value you offer so that your customers feel they’re getting their money’s worth. Ask yourself:
- What unique value does my product bring to the table?
- How does it stand out from competitors?
Your pricing should reflect this value, making it clear to customers why your product is worth the investment.
For example, if your SaaS offers advanced analytics that competitors lack, consider a value-based pricing model that highlights this unique feature.
Step #2: Define Value from the Customer’s Perspective
It’s essential to understand what your customers truly value about your product. While you might think it’s functionality, customers might value how quickly your solution addresses their pain points more. By identifying their primary concerns, you can tailor your pricing to highlight how your product solves their problems, giving you a competitive edge.
Let’s say your SaaS helps businesses streamline their operations. Accordingly, emphasize how much time and money they’ll save by using your product, justifying a premium price.
Step #3: Choose the Right Metrics
The metrics you choose for pricing should be directly tied to how your customers use your product. For instance, if your SaaS provides storage solutions, a per-storage pricing model might be the most appropriate.
Or if your SaaS is a project management tool, you might charge per user or per project, depending on how your customers typically engage with your software. The key is to select metrics that resonate with how your customers perceive the value of your product.
Step #4: Consider Scalability
As your business grows, your pricing model should be able to scale with it. Evaluate whether your chosen model can accommodate an expanding customer base without causing operational difficulties or harming profitability. Think long-term—how will this model support your business as it grows?
For instance, if you expect rapid growth, a tiered pricing model might be ideal, allowing you to easily upsell customers as their needs evolve.
With Fungies, you can create subscription products tailored to your business needs quickly and efficiently. Whether you need monthly, yearly, or usage-based billing plans, Fungies offers ready-made templates to get you launched in no time. Book a demo today to learn more.
