Finding a SaaS pricing model: understanding the SaaS growth market
Software as a service is an expanding market. Statistics show consistently positive trends on the SaaS market.
The following advantages are what convince companies the most to use SaaS services over purchasing on-premise software licenses:
- Lower investment costs, no maintenance costs
- Expenditure can be calculated precisely in advance
- Remote access from any end device
- Quick to set up
- Easy scalability
- Trial versions and trial periods are offered to facilitate decision-making
- User-friendly design and intuitive usability without the need for training
- Better SLAs (service-level agreements) in terms of performance and uptime
- Automatic and regular updates
- Quick optimizations and implementation of customer feedback
Most of these points also apply to subscribing to apps or SaaS services in the B2C segment. Customer expectations of SaaS services are high and constantly growing. If you want to market your software or app, choosing a suitable pricing model and structuring your prices accordingly are paramount to your success. Understanding and internalizing your target group’s expectations is the crucial first step toward achieving that.
Why your success depends on your SaaS pricing model
By choosing the right pricing model, not only do you gain an edge over many of your competitors in your software segment, but you can also meet the needs of your customers better. Many of the aforementioned advantages of SaaS services as seen by customers are directly or indirectly influenced by the pricing and contract model, which determines the scalability, flexibility, and predictability of expenses, among other things.
If the prices are too high, many customers will not enter into or renew a subscription. If your pricing model is not clear and transparent and it isn’t immediately obvious what the customers get for what price, you will lose customers to your competitors and potentially have to deal with complaints. If you do not offer any free or trial versions, it will be harder to win over new customers for your various individually priced packages. If your free version has too many features, hardly anyone will switch to packages that they have to pay for. What makes more sense? Setting your prices based on the number of users, data volume, duration, or a combination of all these aspects? Will you grant a discount for longer contract terms?
You should ask those and many other questions when developing your SaaS pricing model. For your SaaS application to be successful, a suitable pricing model and a carefully considered price plan are absolutely key.
Essentially, there are two main goals for ensuring that your price structuring is ideal:
- It offers customers added value.
- It gives your company an advantage over the competition.
Before launching your SaaS software solution and its pricing model, you should calculate how many sales you need to make in order to generate adequate profits. Starting out without a business plan would be fatal.
5 popular SaaS pricing models
The following five models have been used successfully to date:
#1 Usage-based pricing
Here, the price is set according to the principle: “The more you use, the more you pay.” This variant is frequently used in cases where storage capacity plays a role and an extra fee is charged when a certain limit is reached, for example 2 GB.
For vendors, this model is advantageous because they can advertise with low base prices, but the amounts that are actually charged end up being higher.
However, customers can sometimes no longer estimate the costs and threaten to switch to the competition if they receive hefty invoices that they weren’t expecting. For that reason, this pricing model is occasionally also criticized for being a bait-and-switch or swindling tactic. If you want to use it despite this, you should advertise with short contract terms to gain trust and maybe also define cost caps.
#2 User pricing
This model is primarily used in the B2B SaaS segment and involves setting the price according to the number of users who will subsequently use the software at the customer’s company. For companies, it is a transparent model, since they can clearly see in advance what costs they can expect and what they get in return. There are two possible variants within this model:
- Free scalability: Customers can choose the exact number of users they need and pay a fixed price per person (a discount is possible for high user numbers). You should make it as easy as possible for the customer to add additional user licenses if they need to.
- Hybrid variant with tiered pricing: You offer various fixed-price packages that have identical features but differ depending on the number of users. For example, package 1 is designed for single users, package 2 for up to 10 users, package 3 for up to 50 users, and so on. However, you should clearly communicate that the customer can easily and conveniently switch to a bigger package if needed!
#3 Flat rate
The flat-rate model is the opposite of tiered pricing. It works on the principle of one price, one product with all its features. With a flat rate, all customers have access to the same tools and service components. This pricing model is probably the easiest and most uncomplicated one to communicate.
Customers like the fact that they won’t be hit with additional hidden costs and don’t have to worry about any limits or restrictions to certain features. For you as a vendor though, it is difficult to find out which features or components of your SaaS application are being received well and not so well by users. Consequently, if your sales figures drop, it is not immediately apparent what you need to improve.
#4 Tiered prices
Alongside the pricing model based on the number of users, tiered pricing models are most frequently found on the B2B SaaS market. They provide a wide range of package options that differ in terms of their combination of included features as well as their price.
As a vendor, you should put together different feature-based packages that are aligned with the specific needs of your various buyer personas. Make sure not to offer more than five packages, because otherwise your services will not be clearly presented. The average number of packages offered by vendors using the tiered pricing model is between 3 and 3.5, depending on the source. That may not allow you to completely fulfill every single customer requirement, but it gives customers a better overview of the package options and you can advertise each one to the relevant target group using a specific price mark.
For example, if you want to reach single users with your smallest package and its included features, startups with up to 10 employees with your next-largest package, and medium-sized companies with up to 100 employees with your largest package offering maximum functionality, you can identify specific advertising channels for each target group and design your product marketing in a more tailored way.
#5 Price per feature
This model is generally similar to the tiered pricing model, except that customers pay per feature or service component. Users can build their individual package using the offered features and pay the total of the individual prices of all selected features at the end.
This pricing model comes with benefits for both parties: Users are given the feeling that they can optimally adapt their product to their needs and only pay for what they actually need. As a vendor, you immediately notice when individual components of your offering are hardly in demand or where you need to fine-tune your scope of services or price structuring, all while gaining new product ideas.
SaaS pricing models for B2B and B2C: how do they differ?
If you compare the pricing models of B2B and B2C SaaS services, you’ll notice three main differences:
- The freemium strategy, i.e. a free basic version with fee-based extensions, is rarely used in the B2B segment. In contrast, it is particularly prevalent in SaaS software products for the B2C market. In the B2B segment, the free trial strategy, in which a usually paid package is available to try out for a limited time, is more common instead.
- While user-based pricing is mainly found in the B2B segment, this model obviously doesn’t make any sense in the B2C segment, since there’s usually only one user. B2C paid packages with differing scopes of functionality are a suitable complement to the freemium strategy. This is where the lock-in effect comes in, which encourages users to upgrade from the free, feature-limited version to a paid version with greater functionality.
- In the B2C segment, short contract terms that can be terminated at shorter notice are popular, while in B2B, longer contract terms, such as annual subscriptions or even multi-year subscriptions, at a discounted price can also be effective.
Gear your SaaS pricing model to target group segments
What the target group focuses of both the B2B and B2C sectors have in common is that more than one paid option should be offered. In practice, two to four different paid options have proven to be successful. This number is ideal because:
- It is small enough to clearly present and explain the options.
- It ensures the psychological effect that the customer has a choice.
- You can tailor your offering to different segments of your target group.
Although your packages will most probably be aimed at a clearly defined target group, you should try choose a pricing model that appeals to different customer segments within that target group and precisely equip each paid package with features and capacities to suit the individual segment and then price the package accordingly.
Example: If you have developed a booking system for the hospitality sector, your target group may have the same needs that you can meet with your SaaS software solution. However, the target group will encompass different customer segments, ranging from large hotels to innkeepers and vacation home owners. The demands placed on the software’s functionality and the willingness to pay will therefore vary enormously across the different customer segments. Your pricing model should offer a perfectly matched solution for each of these customer segments, both with regard to the price and functional scope.