What is the best pricing model for your SaaS company?
The answer is — it depends.
Every SaaS company is unique. Which is why I can understand why it’s hard to choose the right pricing model for a SaaS company. After all, there’s a lot at stake when it comes to setting the price.
At a high level, here are the 6 most popular pricing models I break down in this article:
- Flat Rate
- Per User
- Per Feature
In my opinion, these are the SaaS payment models that are tried and true. I dug into all 6 of them and the companies that use them. And to make sure that the pricing model I chose are the best they can be, I posed a very important question:
Why does this payment model work for this SaaS company?
Let’s get into it.
1. Flat Rate Pricing for SaaS Companies
Let’s start off simple. There’s nothing like flat rate pricing to simplify things.
In this scenario, you have software that you offer as a service at the same price, regardless of the number of users or features.
The price is what it is; customers can take it or leave it.
However, just because this is the simplest pricing model doesn’t mean it’s the best. Sometimes it means oversimplifying the pricing structure and losing out on a significant portion of our customer base that would opt for a different plan.
A flat rate pricing model is similar to how companies used to sell software back in the day, with the only difference being recurring subscription as opposed to one-time license.
EXAMPLE: SMAR7 Bundle Upsell (a Shopify app)
Why does Flat Rate Pricing Work for SMAR7 Bundle Upsell?
Because it’s a very simple SaaS. It’s a plugin with limited features and functionality, and it targets a large number of eCommerce business owners. There’s really no reason to use a different pricing model when there aren’t enough features to support multiple plans.
This pricing model is present with plugins like SMAR7 Bundle Upsell for Shopify. For $47 a month (+ a free trial), users can improve their upsell tactics and earn more revenue.
Is flat rate pricing right for your SaaS company?
Typically – no.
However, if you’re starting with beta and limited functionality to get a feeling for our customers’ needs, it can be a good solution. Again, SaaS pricing models depend on our unique offer.
If there aren’t a lot of features and it makes sense to include them in one plan (for example, every eCommerce owner wants to retain as many customers as possible), it’s best to avoid overcomplicating things with multiple plans.
Flat Rate Pricing is Best For:
- Initial beta users.
- Products / services with limited features or only enough for 1 plan.
2. Pay-As-You-Go Pricing Model for SaaS Companies
The pay-as-you-go pricing model is also known as usage-based pricing.
In a nutshell, it means that your customers pay a fee per transaction.
This is one of the rarest pricing models and for a good reason. It’s very hard for the customer to monitor the cost, or SaaS companies to predict revenue. That’s why usage-based pricing is popular with payment processing SaaS services.
EXAMPLE: PayPal.com pricing model.
Why does Pay-as-You-Go Pricing Model work for PayPal?
If users want to use PayPal’s payment gateway, they can’t just pay a fixed monthly fee according to the plan they chose. Instead, they have to pay a fee per transaction:
2.9% base + $0.30
This works great for PayPal because users don’t have to commit to a fixed monthly fee. Instead, they can charge proportionally to how much they sell, and avoid unnecessary costs during a slow period.
Is Usage-Based Pricing Right for your SaaS Company?
The main question when considering pay-as-you-go pricing for SaaS is:
Are your customers willing to pay a fixed fee every month?
If your customers use your service occasionally, they may not be willing to commit to a recurring subscription. Additionally, a lot of people may be drawn in by your flexible “we don’t earn unless you earn” approach.
The main disadvantage of this pricing model is the problem of calculating expected revenue. The only thing you can do is monitor usage patterns. However, you can’t count on subscribers.
There’s always a chance customers will use our service once and, without the commitment, forget about it.
Pay-as-you-go pricing is best for:
- Transaction based products.
- Your customers aren’t willing to commit to a subscription.
3. Per-User Pricing for SaaS Companies
According to Pacific Crest’s survey, most SaaS companies use per-user pricing to charge their customers.
Per-user pricing means that customers are charged based on how many users are using your service.
It’s simple for customers and companies, and it reduces the need for hefty server and maintenance costs that can occur when SaaS customers onboard more of their team.
However, it opens up a higher possibility of users cheating and churning if the fees become too unreasonable for their budgets.
EXAMPLE: Slack pricing model
Why does per-user pricing work for Slack?
Slack offers a communication system that can be used in smaller and bigger teams alike. However, a lot of employees have to participate in it, and it’s incredibly important to upload and share information as soon as possible.
It’s very hard to cheat and share login details if the success of your company depends on all of our team using it regularly and separately.
It’s important to note that Slack also combines per-user with per-feature pricing, and then charges a more advanced plan per user. Their first plan is free but has limited functionality. Once users upgrade to a paid plan, they pay a fee per active user per month.
Is per-user pricing right for my SaaS company?
Again, this depends on our software. If team members can’t share login info (and instead rely on being able to access it independently), that’s a good way to avoid cheating and churning.
Slack is also highly useful and used all over the world. It’s practically the home of remote teams, and it’s easy to start using it a central communication hub.
If your software is as essential as Slack, per-user pricing is a good road to take. It’s best to conduct thorough research on our customers, their budgets, their needs, and the size of their teams.
Per-User Pricing is Best For:
- Frequently used or heavily relied on products.
- If your product works well with teams or companies.
4. Per-Feature Pricing for SaaS Companies
Per feature pricing is one of the most common SaaS pricing models, and it’s a good way to capture different kinds of users with different needs.
It’s commonly found in software that has broad functionality and a variety of features, not all of which can be used by all customers. And instead of sticking them all into one plan, SaaS companies which use per-feature pricing can differentiate between customer segments and offer each exactly what they need.
With the option of upgrading once they’ve scaled their business, of course.
Typically, per-feature pricing comes in three plans. The first, basic plan, offers limited functionality that gives users enough to “get them hooked.”
Depending on the number of our features and the type of our software, we can stick with just two plans. However, when it comes to software for industries such as sales, different sales teams need different things.
And to customers, it doesn’t make sense to pay for more than what they need.
EXAMPLE: Salesforce SMB Sales Pricing Model
Why does Per-Feature Pricing work for Salesforce?
Salesforce uses a combined pricing strategy (per-feature and per-user). Their basic plan has features such as accounts, tracking, email integration, and a few more.
It’s really everything small teams need to get started.
The second plan offers more advanced things like lead scoring, an even more advanced plan offers workflows and integrations which can be beneficial to bigger teams, and so on.
Each team can choose the plan with the features they need according to their sales process. It’s incredibly easy to find something for ourselves among different plans.
Is Per-Feature Pricing Right for my SaaS company?
The best way to decide on a SaaS pricing model for our company is to take a look at our customers.
Do different customer segments have the same needs? Do they need all features, or do different segments need just some features?
Regardless of our software, our clients are the priority, so a lot of A/B testing is required – especially when starting out. However, per-feature pricing is definitely not for SaaS companies that don’t have the ability to offer additional value with each upgrade.
Per-Feature Pricing is Best for:
- Your product can segment well between your customer base.
- If you’re offering a freemium plan.
5. Freemium Pricing Model for SaaS Companies
Freemium is a point of contention in the SaaS space, and for a reason: it can be very hard to separate features in a way that covers all the requirements:
- Can our company live without charging for this?
- Do we have enough features to stimulate users to upgrade to a paid plan?
- Are we being unfair to our paying customers?
- Where do we say: “Stop. That’s premium”?
However, freemium is a great way to introduce our SaaS to the world and attract more customers.
It’s like offering snacks in a grocery store as a promotional tactic; if they like it, they’ll buy it.
If freemium is packed with quality features, it can also be a strong referral generator. However, it’s hard to stop the value and say: “This was just a free trial. If you want more, you’ve got to pay.”
This puts you in a pretty tough spot, as you can either risk turning away your potential customers or completely devalue your service by offering too much.
There’s also the risk of increased churn. There’s no commitment – they can just leave whenever they feel like it. And since they’ve been using your resources, you’re losing profits. In fact, you can even cross the threshold where you’re operating just out of hope while covering server and tech costs for people who may not even upgrade.
Freemium is a risk for SaaS companies, but there’s still a way to develop it right and generate enough revenue to keep the referral flywheel spinning.
EXAMPLE: MailChimp’s Pricing Model
Why does freemium work for MailChimp?
In an Inc.com article published in late 2017, Ben Chestnut (Co-Founder of MailChimp) shares what the freemium model did for their business.
“MailChimp’s tipping point came in 2009, when Chestnut made a somewhat counterintuitive decision: “Let’s just make the whole thing free.” If your customers are small businesses, make it easy and cheap for them to try you out, his thinking went. That means they’ll be happy once they have to pay for your services, because it means their business is growing.
The freemium plan was the first time MailChimp directly tied its fortunes to those of its small-business customers. And in terms of sheer volume, it was a swift success. “We had about a few hundred thousand users on the system, and within a year it was a million,” Chestnut recalls. “Within another year, it was two million. And it just kept growing from there.” Freemium–and focus–had worked.”
MailChimp’s freemium plan is a great gateway to a paid upgrade. It relies on users building their email list while they gain access to the majority of MailChimp’s features for free.
However, there’s a catch: users can have up to 2,000 subscribers.
This is pretty good for personal use, and by the time you’ve hit 2,000 subscribers you’re more than likely invested in what you’re doing. And since they can try it for free and get a feeling for what MailChimp can do, it’s much easier to convince them to upgrade.
After all, email marketing is so useful that it’s not hard to get on board with something that is essentially critical when running an online business.
Does freemium pricing model work for my SaaS?
If you understand your customers so much that you can accurately put a stop to features without making it seem like a trick – yes.
Freemium is like an extended free trial. However, the trial has to end somewhere. If the upgrade comes naturally and leaves our users wanting more, it can be a great way to increase our company’s revenue.
Freemium Pricing is Best For:
- Your product can segment well between your customer base.
- If you’re offering a freemium plan.
6. Tiered SaaS Pricing Model
I’m saving the best for last. After all, the tiered pricing model is what SaaS companies are most famous for.
This pricing model shows the importance of understanding your clients like no other SaaS pricing model.
With distinct tiered pricing plans, you can provide features that distinct buyer personas need. There are no feature limits – just feature adjustments, while making sure you’re not devaluing your service.
However, if there are too many plans, things can get confusing fast. And if users reach the most expensive plan and still have a need for more, there’s no way to earn more revenue.
EXAMPLE: HubSpot Pricing Model:
Why does tiered pricing work for HubSpot?
HubSpot knows their customers, so they have three distinct plans for three distinct marketing software buyer personas: Basic (for those new to marketing), Pro (for professional marketers), and Enterprise (for marketing teams).
Their main limitation is the number of contacts, and it’s easy to upgrade up to a higher plan if necessary. However, by using these plans, they are able to predict their revenue based on their customer research.
Should my SaaS company use tiered pricing model?
If you cover a wide range of needs for different kinds of customers, definitely. It’s a great way to standardize for revenue prediction, optimize for customer feature satisfaction, and incentivize for churn reduction.
Freemium Pricing is Best For:
- An established product that’s been successful in expanding their solution to different markets.
- You’re confident in your product and have proven historical stability with your revenue.
Not all SaaS companies are alike and there are so many factors to consider when choosing a pricing model. It all depends on your product, what will resonate best with your customers, your resources, etc.
A freemium offering sounds great for acquiring customers but can you make a promise to your customers it will always be free? Is your product built to sustain those free users?
My opinion is the start backwards. Ask your beta customers what they’ll pay and why. Your business is unique and you have to do what will be best for your business and your customers. Think about the end state where your customers are using your product. Learn what will create the most value to keep your customers sticky.
From there, it will be a clear choice. You’ll know for certain you chose what’s best to be successful in the long-run.