SaaS product needs a very well-defined “SaaS Pricing Strategy”. We often see a lot of different SaaS pricing models, which suit each business model’s needs. You definitely don’t want your start-up to fail especially when the reason can be so little that you can’t even pay attention to such details.Most b2b SaaS startups die in the initial phases of their running. As a service provider, you put a lot of effort into developing your product. Making it fruitful takes a lot more effort than developing it. For this purpose, the
When you build a product/service tailored to the customer’s needs, you want to make the most of it. You don’t want to break it all at the point of making money. You got it right, pricing the SaaS model. It’s the most important thing in maturing your business and helping it to grow. Most people get the wrong idea about “growing up a business”, that is, building a more user-base. There is no denial to the fact that it is crucial for the “growth” but getting the revenue out of your software product is equally important if not more.
To run a business optimally, companies need to keep it real and enhance their services. Here, we will discuss the details of the best SaaS pricing models, the strategies, their introduction, use, and necessity.
Types of SaaS Pricing models:
There are most commonly 7 types of b2b SaaS pricing models:
- FLAT-RATE PRICING
- USAGE BASED PRICING
- TIERED PRICING MODEL
- PER USER PRICING MODEL
- PER ACTIVE USER PRICING
- FEATURE-BASED PRICING
- FREEMIUM BUSINESS MODEL
Each software as a service pricing models has its own advantages, but they carry an equal share of disadvantages as well.
This SaaS pricing strategy provides the same rate of product to every customer e.g., Basecamp is an example of the current running flat-rate pricing model. While,
USAGE-BASED PRICING model only charges the customer for its potential usage of the features e.g., Mailgun, Twilio’s Pay-as-you-go SaaS plan and Messagebird.
Flat Rate and Usage-based pricing have now limited usage because they cannot produce recurring revenue. They have low value to extract money from its small and medium-sized business owners. These SaaS pricing models examples are very challenging to provide value to their product, and difficult to predict revenue and customer costs (LTV).
Most SaaS business models do not use this. Therefore, its use and importance are alleviating. After this we have,
TIERED PRICING MODEL:
This model charges its customers on different usage tiers. Tiered pricing model provides different packages to its customers based on usage of particular features. Each tier has its own set of features. So, you can price them accordingly. This SaaS pricing models example works with charging beginner customers less and providing them basic features while charging an enterprise more by providing features at their best.
SaaS companies that use this kind of pricing strategy are Chargebee, Chargify, FastSpring, Slack, Salesforce, Go-daddy, Bluehost and upwork.
Next, we have;
PER USER PRICING MODEL:
It provides access to the SaaS product based on the number of users using it. The more user you add; the more revenue you will generate. It is basically an add-on service that will attach a minimum amount to pay for each user. Different packages can be provided while upgrading. Let’s understand the add-on phenomenon. You provide a service to your customers and in return, you give them 3 options to choose the price they pay from. Many companies provide the first package-free, but charge 2 or 3 times more for the upgrade. The free package has a limited number of features while others provide enough features after upgradation.
User-based pricing is great for companies but it can be overwhelming for customers to agitate their minds regarding the use of the product. As pricing gets 3 times more of what they envisage to pay per month. Hence, it carries a risk of customer loss and can decrease the revenue generation.
SaaS companies that employ this pricing model are Pipedrive, insight, and streak. These companies use a user-based pricing model but with a customized solution, so “teams/group of people of an organization” can use them. Another SaaS pricing models example that we will discuss here is,
PER ACTIVE USER PRICING MODEL:
It is a solution to per-user-based pricing as it doesn’t charge the user for its fellow vacant seats but only charges the user for his personal use of SaaS. In other words, this SaaS pricing model charges only the users that actively use the product and not the customers that are either offline or have abandoned the usage.
For Instance, Slack is a company that uses a similar kind of model for pricing and generating pretty well revenue from it. The list of pricing models continues to grow as we land on another SaaS pricing model that is,
PER FEATURE PRICING MODEL:
This SaaS pricing strategy is simply the price a user pays for the feature(s) that he is using. During the usage, when the user becomes familiar with a particular feature there comes a point where he needs more of it. He will need a supporting feature for the best use of it. Per feature pricing is quite simple to build and easy to use as well. It gives complete understanding to the user and he becomes willing to pay for any of the enhanced feature that he is using.
The success of this SaaS pricing strategy depends on the quality of the feature(s) that you are providing, the seamless experience user is facing, and also on the value that you provide to your customer.
Here comes its limiting factor, the need of developing more features, this comes with the increase in the cost of developing as the user upgrades. So, understandably this pricing model is not for every SaaS business.
Example include “Unbound” which provide features to users according to the price they pay. Similarly, there are numerous ERP-based products that charge their customers per feature. Lastly, we have,
FREEMIUM BASED PRICING MODELS:
The freemium pricing model provides users a free trial or free access to their limited set of features. This is a great way to enter the market without any hindrance. Customers provide a great amount of attention to such deals, which builds a customer base. Although it a great plan to gain a huge user-base but it attracts the wrong customers who are not into your product. They only came due to the free service and will refuse to pay for the upgrades.
Each pricing model has its own pros and cons. You need to understand your product, service, and the need of potential customers. These b2b SaaS pricing models provide basic guidelines to set the best model for SaaS pricing model in your business. One can choose a single or can apply more than one models in their business.
To gain the best from your business, you need to set the best SaaS pricing models concerning what customer needs and which best suit your services.
SaaS Pricing Strategies
At this point of our write-up, strategies for pricing models is yet another important topic to be elaborated. Before you apply these enlisted strategies below, you must know the goal that you want to achieve. Whether it be to attract valuable customers that are loyal to the product or to expand your business at a minimum possible effort and time.
Gurus in the tech industry provide various SaaS pricing strategies to best set your pricing model. Few of them get successful and come into play. The most valuable of them are:
- PENETRATION PRICING STRATEGY
- CAPTIVE PRICING STRATEGY
- SKIMMING PRICING STRATEGY
- PRESTIGE PRICING STRATEGY
- COST PLUS PRICING STRATEGY
- VALUE-BASED PRICING STRATEGY
1) PENETRATION PRICING
It is the strategy companies use to enter the market with a product having a low price as compared to its rivals. It is the tactic that marketers use to create a sense of monopoly in the market. This is also used to carry away the customers from opponents. Penetration pricing is a SaaS pricing strategy that is more inclined towards beating your competitors in the market and making your own place. It has various names as it is also called predator hunting, and land and expands strategy. Various companies like Slack and New Relic have used this strategy to make their places in the industry.
These companies lower their product selling price to an incredibly low level in order to get more eye-balls within their business ecosystem. Everyone likes to enjoy the best services in cheaper costs. Same is the case here as well. However, there is an indication that these prices can raise afterward, so when a raise happens customers don’t get shocked and stick to the product. This strategy has long-term benefits as they built rapport and gain the trust of their users.
Penetration pricing also makes a company huge in the market shares. This creates a sense of monopoly and standardization in the market. Hence, the company is a standard and earns more as compared to old and traditional policies of competitor companies. Microsoft being the prime example of it. As it created a standard of developing products and made rivals side-line while showcasing a promising product.
2) CAPTIVE PRICING
This SaaS pricing strategy works in an indistinguishable manner. As it does not charge users for the main product a company is selling. But charges heavily for the components of it. It provides the company a predicted value of revenue. This is a subtle way of achieving both objectives, one is customer satisfaction and the other being revenue generation/expansion.
In this market, captive pricing is explained by providing a most common example of a printer for understanding. As you know the printers come at an incredibly lower price. The printer is the main product but isn’t charged enough for its price. Hence, the profit generation is done by ink cartridges that are way too expensive than their use.
Another example is Adobe Photoshop, which sells its software free of cost but generates money by their side products like Adobe Stock Images, Paid Mockups, Premium infographics, and a lot more.
Adobe Creative cloud products also use such strategies, as they provide free software to the users but decrease the compatibility for future use. Hence, less effective use pushes customers to buy their latest software.
3) SKIMMING PRICING
The skimming price strategy is explained by the word “skimming”. Skim is the process to remove floating high-fat contents from the upper surface of the milk. It shows that in the marketing industry, skimming can be taken as generating enough money from the customers as the product is freshly launched and then gradually lowering the price as the product spreads widely. Skimming is done when your product provides great value for money and is innovative. It also is a widely accepted strategy among loyal customers and luxury buying-oriented minds. Taking the example of Apple products, which is a company well known for its expensive phones, watches, laptops, PCs, Watches, and much more.
Apple sets its product price very high at the launch. But this SaaS pricing strategy can only work if a company provides good quality products and a seamless experience with every upgrade.
Later on, when the prices get low over the course of time, each class of society will opt to purchase it, be it even an older version of the product. Hence, this strategy covers a wide range of customers without losing a huge amount of revenue.
4) PRESTIGE PRICING
Prestige pricing is just another way of pricing customers heavily. It also resembles a lot of skimming pricing strategies. The main purpose to adopt prestige pricing is to maintain the power of the company in the market. To hold a decent amount of market shares, it is done along with the provision of quality products.
Prestige pricing is a luxurious way of getting elite users’ attention. For example, Apple. As apple products are relatively high priced but they don’t lower the price even after passing of time. Also, even when the company wants to lower the price, the users get a sense of loss of quality. As the company knows that people who value their product will buy it even the price is ridiculously high. There is a disadvantage to this pricing strategy, as it targets only a selected class of the community and spread unevenness in society
Companies opting for this strategy value their short number of customers. Pricing your product highly brings a sense of responsibility and trueness. Users expect to get every feature at its full version. Therefore, to validate the strategy companies should provide high-quality products.
5) COST PLUS PRICING
Cost-plus pricing is honest pricing keeping the margin of profit for the product. It is a process of pricing the product based on the developmental, marketing, and selling costs. The company keeps the margin of profit according to the situation and expectations. This also depends on the fact that how much value does it provides the customer and selling frequency.
For example, a company sets a price of said amount (let say 5$). This includes all the developmental, marketing, and selling costs. So, following this strategy, company adds 2$ of profit for itself.
This strategy can be slightly company-oriented as it does not value the customer mindset and what they want. Therefore, during the thought process, one should set its priorities straight.
6) VALUE-BASED PRICING
Value-based pricing SaaS is the pricing strategy in which the consumer’s point of view is kept in mind. The SaaS pricing strategy comes from the aura that the product can make. It depends on the people’s mindset and expectations.
Value-based pricing SaaS is done according to the mindset of the consumer, as it runs on the feedback from the user.
This kind of pricing is most commonly done in the fashion, pharmaceutical, and cosmetics industries. SaaS business models can opt for this strategy for their product.
SaaS pricing strategies may differ slightly but can be modified according to the best fit. Moreover, building a product that provides value, enhances the user experience, provides ease can uplift a company’s image and skyrocket the price if it has gone viral.
Companies should make more effort to increase their product value so buyers can excitedly pay high prices for the same. To build a product or to upgrade it, the company does an extensive research and development process. In other words, it provides several opportunities to expand the company’s revenue.
Many companies are adopting the 10X rule which really helps in building a service that has more quality. 10X RULES says that the product value should be 10 times the price it is selling. This can be a clear way to set up the prices for your valuable product.
However, there are a lot more strategies to be discussed but the aforementioned ones are the most important and have widespread use in the market. SaaS is the largest developing business model in this latest technology-oriented era of the internet. There are limitless applications of SaaS and almost all the digital platforms are using this. It can help grow your business on faster terms as compared to an offline physical business with comparatively less effort. The value that SaaS provides is undoubtedly huge but, having clear objectives is the condition.
Therefore, companies need to develop some clear strategies and policies for setting a SaaS pricing model. Optimizing the pricing model with your product is much necessary. Above mentioned models and strategies must have been very helpful for your SaaS product.
Connect to Status 200
To uplift the user experience and business feasibility, SaaS products are the need of the era. We at Status200 are giving high-quality SaaS application development services by using the latest technology stack and agile methodology. We provide not only professional guidance about the best SaaS pricing models but also development assistance as well. Our team is looking forward to helping you implement SaaS applications with software as a service pricing model. Moreover, we also offer a free consultation for your business website or app development queries.