Decode The Science Behind SaaS Pricing Models

As the SaaS industry continues to evolve and become more competitive, businesses face the challenge of differentiating themselves from their competitors and standing out in the market. While growth through product differentiation and acquisition is certainly a viable strategy, monetization plays a critical role in the success of any SaaS business.

Optimizing your strategy allows you to establish a clear exchange rate for your product's value to your customers, making it easier to attract and retain customers long-term. According to the Price Intelligently report, pricing is 2x as efficient in improving retention and 4x as efficient in improving acquisition.

In this article, you will learn about the importance of having a SaaS pricing strategy, the types of SaaS pricing models used across the industry, and tips on developing the best pricing for your business. Let's dive in!

Why is a pricing strategy so important?

A SaaS pricing plan is a company's overall approach to selecting the right pricing model and setting the prices to achieve business goals. It's how you define the pricing structure, objectives, and tactics to implement pricing decisions. Several considerations of a SaaS pricing plan include target market, competition, value proposition, and revenue goals.

A well-designed SaaS pricing model holds importance because of the following reasons:

• Display Value: Pricing is more than numbers. It influences the customer's perception of your brand and the quality of your product. A balance between business and customer needs is essential to attract customers. A high price might repel customers, and a low price may indicate poor quality products lacking convincing power.
• Revenue Generation: Pricing is directly linked to revenue, and a well-designed pricing strategy can help maximize revenue for a SaaS company.
• Customer Acquisition and Retention: Pricing can be a deciding factor for potential customers when choosing a SaaS solution. A well-designed pricing strategy can attract new customers and retain existing ones. Offering a variety of plans with different features and pricing can appeal to a broader range of customers.
• Differentiation: Companies can use a SaaS pricing strategy to differentiate themselves and create a competitive advantage.
• Predictability: A SaaS pricing strategy improves predictability by helping SaaS companies forecast revenue, predict customer acquisition and churn, allocate resources effectively, and scale their operations. And companies can make informed decisions to achieve business growth and goals.

5 best SaaS pricing models for your business

Let's look at the standard models used across the SaaS industry to price their products and how they benefit companies and meet customers' needs.

1. Flat rate pricing

In the flat rate model, customers are charged a fixed fee for a specific period, typically monthly or annually. It is also known as the "fixed rate" or "subscription-based" pricing model. Irrespective of the amount of product usage, customers pay a fixed price. Customers interested in predictable pricing prefer this model as it eliminates the uncertainty associated with unexpected usage fees.

The flat rate model is suitable for SaaS businesses that offer all customers a standard set of features, with little or no differentiation between plans. Many SaaS companies with small to mid-sized businesses and individual users use this model as extracting value from enterprise customers with this pricing model is not possible.

You can provide flat-rate pricing by first deciding if you want to offer pricing based on the features or functionality. After that, you can determine what shall be included in the basic, standard, and premium tier.

Once pricing tiers are finalized, SaaS companies must determine the pricing per tier. For instance, the company might charge $10 per month for the basic tier, $25 per month for the standard tier, and $50 for the premium tier. The tier any customer chooses determines the total revenue per customer.

1.1 Pros and Cons of flat rate pricing

Flat-rate pricing is an easier-to-communicate and sell pricing model. The flat rate pricing model's simplicity and predictable recurring revenue are its advantages, as it helps plan and forecast. Customers can also easily compare price points across different SaaS companies and select the best option.

The flat rate pricing model is not suitable for all SaaS businesses, such as companies that offer highly customizable solutions or charge based on usage. Additionally, if the service costs increase significantly over time, the flat rate pricing model may become unsustainable.

Let's look at The New York Times' pricing page as an example of flat-rate pricing.

2. Per-user pricing

The next model is the per active user pricing model, in which customers are charged based on the number of users who access the software. Under this model, SaaS companies charge a fixed amount per user per month or year.

Companies must decide the pricing tiers to implement this model based on the number of users. For instance, pricing would vary for 1-5, 1-20, or more than 20 user tiers. Next, the SaaS company must decide the per-user pricing for each tier. For example, the company might charge $10 per user per month for the first tier, $9 per user for the second tier, and $8 per user for the third tier.

The total revenue from a customer is calculated by multiplying the per-user pricing (based on the tier) by the number of users. For example, if a customer has 15 users and is on the second pricing tier, the total revenue would be 15 x $9 = $135 per month. Companies provide access to the software with an administrator dashboard where the customer can add or remove users as needed.

2.1 Pros and Cons of per-user pricing

The per-user pricing model can be beneficial for both customers and companies. It offers predictability to plan and budget for future growth while providing room for scalability. Customer segmentation is also possible based on usage, allowing companies to tailor their product pricing for different segments.

Moreover, once the users get familiar with and incorporate the product into their workflow, it becomes difficult for the customer to switch all the users, so switching costs become higher. Thus, they are more likely to stay, which leads to better customer retention.

Nevertheless, companies might limit the number of users due to cost-cutting or multiple users might be logging into a single account. Thus, the user pricing model might not reflect the value of your product to customers, hindering brand growth.

Asana is an excellent example of user-based pricing.

3. Usage-based pricing

This is one of the most popular SaaS pricing models where the customers are charged based on their software usage, hence the name usage-based pricing. In this model, the price is linked to the customer's product consumption, such as the amount of data storage, the number of API calls, or the number of active users.

Implementing this model includes determining the usage metrics to charge customers. Next, set the pricing per unit of usage. For example, a company might charge $0.10 per GB of storage, $0.001 per API call, or $1 per monthly active user. To determine revenue per customer, track the customer's usage in a given period using tracking scripts or tools. Once you have customer usage, multiply it by the pricing per usage unit.

3.1 Pros and Cons of usage-based pricing model

The usage-based pricing model is cost-effective as customers pay only for what they use. Customers enjoy the flexibility to scale up or down their software usage as needed. It also creates transparency since customers know how much they are charged based on their usage.

The usage-based pricing model helps SaaS providers optimize resources, reducing costs and boosting profitability. Usage-based pricing eliminates the risk of a flat-rate pricing model overcharging frequent and undercharging heavy users.

However, the SaaS company may find it challenging to predict its revenue, making financial planning and budgeting difficult. To stay competitive, you may need to adjust pricing frequently.

Many SaaS companies use this pricing model, and Mailchimp is one example.

4. Tiered pricing plans

Another popular software pricing model is tiered-based pricing, which offers different pricing tiers for customers based on their usage needs. Each tier's price varies according to its features, such as the number of users, storage capacity, and functionality.

To develop tiered-based pricing, you must determine different prices depending on your customer's needs. You might have a basic tier with limited features at a low price, a mid-tier with more features, and a premium tier with advanced features at a high price. Once you decide on the tiers and features, set the pricing for each tier. You can then market pricing tiers to multiple customer segments with targeted messaging and marketing campaigns.

4.1 Pros and Cons of tiered pricing plans

The tiered pricing model is effective as it offers scalability and flexibility. Customers can choose the plan that meets their budget and needs with the option to upgrade and downgrade their plan as their needs evolve. SaaS companies can also predict their revenue accurately with customers locked into different pricing tiers.

However, it can be overwhelming for customers to choose the right plan with different pricing and features if their usage is inconsistent. Also, companies might need to invest more in customer support as customers usually demand more to navigate complex features.

One excellent example of a tiered pricing strategy is Usermaven which offers 3 ready-to-use tiers and a custom tier for enterprises.

Usermaven offers tiered-based pricing with three options. The starter pack is specially designed for small businesses and startups and is free forever.

The pro plan is for online businesses looking for website analytics. Depending on the needs, customers can choose the number of events (user action) they require tracking for and pay accordingly. And the premium plan is more advanced with both website and product analytics for SaaS enterprises. It lets you track up to 10 million events.

Usermaven tiered-based pricing is straightforward; customers can see what they are paying for. Moreover, a company can get a customized plan if it requires more than 10 million event tracking. A custom plan is a great solution to meet your customer's growth needs and helps customer retention.

5. Per feature pricing

The last pricing model in our list is the per-feature pricing model, where companies charge customers for individual features they need to use. Instead of paying for a bundle of features, including the ones a customer might not need, they pay only for the features they need.

A SaaS company needs to identify all the features its product offers to develop feature-based pricing. Set the price of each feature instead of clubbing them into a feature bundle. Several factors, such as development cost, customer value, and competitor analysis, can help determine the feature pricing.

5.1 Pros and Cons of per feature pricing model

Per-feature is value-based pricing; since customers pay for their needs, they perceive more value in the product. For customers, additional pros of per-feature pricing include customization and flexibility in choosing features. SaaS companies can compensate for some of the features that require excess resources to deliver and also have the opportunity to upsell.

Despite all the pros, per-feature pricing is complex, creating customer dissatisfaction and the potential for higher costs. Customers feel resentful as they might have to pay for features every month that might have been available at the compensated price in a bundle. Also, difficulty predicting revenue for SaaS providers. They will need a better understanding of customer persona to combine features in relevant plans that meet customers' needs.

How to choose the best pricing model for your SaaS business?

Pricing can be tricky with different models to choose from. And it is possible to set pricing that does not reflect your product's value and business goals. Therefore, having a strategy is essential to back up your decisions. You can use this checklist as a guide to SaaS pricing models:

1. Determine your target market's needs and buying behavior to develop detailed customer personas. It can be a useful resource while answering questions related to pricing models.
2. Analyze your competition to identify its strengths and weaknesses. You can fill any identified gaps and differentiate your offerings.
3. Revenue goals inform which pricing model is best to meet your pricing targets. They can be crucial to balancing generating revenue and customer acquisition.
4. Your pricing should reflect your value proposition. Having a clearly defined value proposition helps you communicate value to the customers, allowing you to justify prices and reduce price sensitivity among customers.
5. Test different pricing models or try different pricing within the same model to analyze the impact on key metrics, such as customer acquisition, retention, and revenue. Additionally, continuously refine your pricing model based on customer feedback and market trends.

How to perfect the SaaS pricing strategy?

A perfect SaaS pricing strategy results from continuous evaluation and adjustment based on customer feedback, market trends, and data analysis.

You can conduct customer surveys, interviews, and focus groups to collect insights on how much your target audience is willing to pay and what features are the most popular among what segments. The better you understand your customers, the more your pricing will resonate with them.

Leverage data analytics tools such as Usermaven to track customer usage, revenue generated, and most used product features to determine opportunities for improvement and growth. Moreover, be transparent about your pricing and any changes over time. Offer flexible pricing options, such as monthly or annual billing and tiered pricing plans, to meet the needs of different customer segments.

FAQs about SaaS pricing models

What are the most successful SaaS pricing models?

The success of a SaaS pricing model depends on several factors, such as the target market, product complexity, and competitive landscape. Therefore, there is no one-size-fits-all answer to this question. However, some common pricing models used by successful SaaS companies are:

1. Freemium Pricing
2. Usage-Based Pricing
3. Monthly or Annual Subscription
4. Tiered Pricing
5. Per-User Pricing

In short, the most successful SaaS pricing models align with the target market's needs, offer value for money, and are flexible enough to accommodate different usage patterns.

How to track & analyze your Pricing model?

To ensure your SaaS pricing model is effective in achieving your business goal, here are some steps you can take to track and analyze your SaaS pricing model:

1. Define KPIs to measure and track the effectiveness of your pricing models, such as revenue, customer acquisition cost (CAC), customer lifetime value (CLTV), churn rate, and conversion rates.
2. Use data analytics tools like Usermaven to collect user behavior data.
3. Analyze the performance of your pricing model and identify any trends and patterns in your customer data to find areas of improvement.
4. Based on the insights gained from the data analytics, use A/B testing to experiment with different pricing models or strategies.
5. Keep an eye on the competition to stay competitive and identify opportunities to differentiate your pricing strategy.
6. Iterate and optimize your pricing model with continuous experimentation to refine it and ensure it achieves your business goals.

What is the 10x rule in SaaS pricing?

The 10x rule is a SaaS pricing strategy that charges customers ten times the cost of providing the services. It is based on the idea of creating significant value for customers that far outweighs the cost of the service. By charging ten times the service cost, SaaS companies aim to provide a highly differentiated, high-value product for which customers are willing to pay a premium.

In the context of SaaS pricing, the service's cost includes the direct costs of hosting and delivering the software and the costs of customer acquisition, customer support, and ongoing development and maintenance.

Therefore, charging 10x means your customers receive 10x value from your product. It means if you are selling something for $20, you are providing a value of at least $200 to your customers. However, the 10x rule may not be appropriate for all SaaS companies or products.