Your Comprehensive Guide To SaaS Pricing Models
Dec 16, 2021
Why Choosing The Right Pricing Model Is Important
Finding the right pricing model for your B2B SaaS company can make or break your business.
Pricing has a huge impact on the success of your business: underpricing your product may diminish its value, whereas overpricing may deter your target customers.
Yet, most businesses only dedicate 6 hours in total to designing their pricing model. Plus, they tend to keep the same pricing strategy even when they evolve from early-stage startup to growing scale-up.
We get it: pricing can seem overwhelming and stress-inducing. There are so many options to choose from for a B2B SaaS company. From freemium to tiered pricing models, to pay-per-user and flat-rate subscription… It can be confusing to figure out which pricing model is the right one for you.
Most likely, your ideal pricing model will be a mix of several options. Pricing is fundamental to your success and is unique to every business.
In fact, finding the right pricing model doesn’t only determine your profitability in the long run (finance), it also influences your positioning (marketing) and the length of your sales cycle (sales). All these components need to be taken into account when making a pricing model decision.
Now, let's discuss how to choose the right pricing model for your B2B SaaS product.
The answer comes in 2 parts:
Benchmark your company according to the market: look at your SaaS competitors' pricing. You’ve probably done that already, but it’s good to constantly monitor this.
2. Find the best pricing strategy practices for B2B SaaS business. That’s what this article is for.
At Upflow, we believe B2B SaaS businesses need inter-connected tools to scale. Learn more with our dedicated webinar!
Pricing Model for SaaS
First, let’s define what a pricing model is. For SaaS companies, a pricing model is how much you charge for the services you deliver to your users.
B2B SaaS companies either have a licensing system or a subscription model. For example, Photoshop was traditionally licensed software. However, Adobe, their proprietary firm, has since embraced subscription management with the emergence of the Adobe Creative Cloud.
With subscription management, a set price is charged to their customers for a set service, and it is auto-renewed. SaaS companies generate revenue from the subscription they charge monthly or yearly alongside the add-ons they offer to their customers.
Following a subscription model in B2B SaaS helps companies create an ongoing revenue stream, which is more or less consistent and predictable- depending on their business model and Customer Lifetime Value.
We’ll cover SaaS subscription pricing models in more detail below.
Whichever option(s) you choose, there are 3 components you should keep balanced in your pricing strategy:
These are the metrics to keep in mind whenever you think about your SaaS pricing strategy.
For example, you can offer a great price/value ratio to your customers, but at the cost of your own profitability. Or, you could maximize your profitability short term, but not be able to offer it long term, which endangers your growth and sustainability.
All 3 need to be balanced in order for you to be successful.
The 6 Types of SaaS Pricing Models
Although there are several SaaS pricing models, these are the most frequently used. Depending on your needs you may choose one or combine them to find the best pricing model for your business.
Here is an overview of each pricing model with examples:
Flat-Rate Pricing Model:
This is the most straightforward pricing model, as it means charging a single price for a single service with the same features. There are no add-ons or options to choose from, just one formula to subscribe to. Flat-rate pricing is more commonly used by businesses selling physical products in a B2C context.
In the SaaS industry, Flat-rate pricing works best with simple products that offer one solution to their B2B customers. It also works well for niche markets, where there are very few or no competitors.
It is the easiest to manage both on the users’ side (limited choice and transparency) and the Saas’ side (easy pricing and billing processes).
On the other hand, it can be quite risky and is becoming quite rare in the SaaS industry. Depending on your customer base, a one-size fits all model may limit your opportunities for growth. It’s like an “all in” in casinos: if your customers are pleased with your product and the value offered, great. If not, they have no option but to look elsewhere. Choosing a tiered pricing model may counteract this by offering more flexibility and variety.
Screenshot from Basecamp’s pricing page
Basecamp is an example of a SaaS company that uses flat-rate subscriptions: for $99/month, you get full access to their platform. This offer includes all their features, plus no limits on the number of projects or users allowed.
As the name suggests, this pricing model is pay-as-you-go: you pay for what you consume. For SaaS companies, it can be the number of API requests for example.
Usage-based pricing benefits both customers and providers. Although it’s more complex than flat-rate pricing, its virtues merit the inconvenience.
Firstly, usage-based pricing helps customers to manage costs. As they scale, their subscription grows with them. This also helps to increase customer retention and satisfaction. However, it can become quite complex and it’s important that new customers understand exactly how your pricing works.
Usage-based models can also make MRR and ARR difficult to predict. It suits B2B SaaS companies that offer scalable services best.
Zoho Campaigns has a pricing model based on the number of contacts registered on their emailing platform.
Pay Per-user Pricing
One of the most frequently used models by B2B SaaS companies, pay-per-user pricing is based on the number of collaborators who have access to their product.
Per-per-user pricing can be divided into user-based and active-user pricing. User-based simply means you charge per user regardless of whether they actually use your service. On the other hand, active user pricing means that you only charge for users that actively use your SaaS. This is more convenient for customers as they don’t have to keep track of inactive users.
It is great for SMBs, as they get to start using your SaaS at an early stage and can grow alongside your product.
It is also a transparent, clear pricing model that leads to predictability on both sides: your customers know exactly how much they are going to pay and when they need to upgrade, and there is little change on the business’ side month after month.
However, that can lead to login-sharing, resulting in several people using a single paid account.
Salesforce uses this pricing model for their CRM, charging for every person who uses their product.
Tiered User Pricing
With tiered user pricing, customers can choose between different prices and options depending on their needs and price point. There are usually 3 pricing tiers: basic, standard, and premium. Offering anymore can lead to overwhelm and analysis paralysis.
Presenting a ‘preferred option’ can also encourage potential customers to make a decision. The information is laid out clearly, which makes upselling simple if necessary.
It’s important that your customers are aware of their needs and choose the right tier. Another downside of this pricing model is it doesn’t tailor to heavy users.
Tiered pricing is suitable for most SaaS companies and it can easily be combined with other models.
Hubspot is one of the many SaaS that offers tiered pricing: users can choose between a starter, professional, and enterprise solution. Hubspot customers must talk to the sales team before enrolling or upgrading to the 2 highest plans, but that’s not always the case.
Freemium pricing models are well-known in the B2B SaaS industry. Users can have access to your SaaS for free, but access is generally limited to basic features or a number of users.
It’s great for demonstrating value early on to your customers and to onboard them straight away onto your product. Converting them into paid customers is easier because they already know your product and its value. Since they are committed, they are more likely to remain using your product as they grow, resulting in an easier upsell.
However, as the name suggests, a freemium pricing strategy means having to deliver a service for free. It also requires a good understanding of your market and customers to know which features will make them stay and eventually pay for your SaaS.
Since there is no commitment at the freemium stage, there is also a higher churn rate.
Slack is a great example of a freemium pricing model. You can get started for free with a set number of features, and upgrade your plan as your needs and team grow.
With this pricing strategy your customers pay depending on the features they need - it is similar to the usage-based pricing, except this is based on features.
Choosing this pricing model for your B2B SaaS company means good customer retention, as your SaaS supports their growth with different features, as they need it.
You do need a good knowledge of your product and customers to know exactly which features to put in each package.
Zoom offers feature-based pricing. As long as you have a running subscription with them, you can add extra features depending on your needs.
As you know, managing subscriptions can become quite complex as a B2B SaaS company. So, in order to successfully implement a complex pricing model such as feature-based pricing we recommend using a strong subscription management software such as Chargebee.
Now that you have an overview of the pricing strategy options, you can move on to the decision phase!
How To Choose The Right Pricing Model For Your SaaS Company
Understand your Ideal Customer Persona.
To sell something to someone, you need to know who they are. That rule of business applies to B2B SaaS companies too: you won’t address a solopreneur the same way you’ll address a Purchasing Director of a corporate company.
By understanding your Ideal Customer Persona, you will be able to tailor your product - and your pricing! - to what they need. Reaching out to them with the solution they need can help to increase your revenue.
Even if you feel like you’ve done this a hundred times, it is important to always refine your target market with the most recent data available to you.
Try to be as precise as possible :
Who are they? How old are they?
What is their function? How long have they been in their company?
Which kind of company do they work at? Do they manage a team? How many?
Pay close attention to the way they work and the budget they have, plus how they tend to use it. Knowing your ICP will give you insights into what they value in a product, and what they are willing and able to pay for it.
If you’re not sure, look at the data available on your current and past customers. Notice how they have evolved over time and if there are any new patterns emerging.
2. Know Your Metrics:
Two KPIs will give you the most insight into your pricing strategy:
Your Customer Acquisition Cost (CAC): how much it costs you to acquire a new customer.
Your Customer Lifetime Value (CLV): how much money a customer will bring you while you do business together.
The higher the ratio between your CLV and your CAC, the better your profitability. As it is always cheaper to retain a customer than to acquire a new one, your CLV should be maximized.
These KPIs are the baseline of your pricing strategy: your price shouldn’t be lower than your CAC, at least not on a long-term basis.
And, optimizing your CLV and CAC brings more than one benefit. CAC and CLTV are also key financial metrics your investors will want to see.
3. Understand Your Strategy.
Pricing is so crucial because it influences your overall strategy - marketing, sales, operations… It connects everything in your SaaS company.
If your Average Revenue Per User (ARPU) is low, you will need more customers to reach your revenue goals.
This means the way you penetrate your market will be different than if you have a high ARPU, where the focus is set on customer retention - even more than usual. This model/market fit is the premise of your pricing strategy.
Your pricing also depends on the development stage you are currently at: Are you trying to get into a new market? Or are you an established player in your industry? Pricing reflects value and your position in your industry.
4.Make your Pricing Model A Company-Wide Topic.
Pricing isn’t only marketing, or finance, or sales. It is all of these at the same time. By extension, choosing your pricing model for your SaaS should involve different departments.
By collaborating on your pricing strategy, you are more likely to find a price that makes sense for your customers as well as you. A pricing structure that is sustainable, profitable, and with good value for your customers.
Three Tried-And-Tested Pricing Strategies For Saas Business:
We’ve given you an overview of the pricing options for B2B SaaS, as well as the best practices to find the right pricing strategy. Now, let’s have a look at 3 simple pricing strategies:
Cost + profit formula
A very direct approach to pricing: figure out your costs and add to them the margin percentage you want. That’s your pricing!
That’s a great starting point for your starting strategy. You might want to ponder this with other components, and adjust depending on the feedback you will get.
This approach is very simplistic, but on the plus side it's simple and a good starting point.
2. Competitor Oriented.
Knowing your industry and its average margins is key to a good pricing strategy. You can use them as a reference for your business and a starting point for your reflection.
By benchmarking your company next to competitors you can begin to see which strategies are most frequently used and what seems to work.
However, it's important that you only use this as a reference as you’ll want to differentiate yourself from competitors.
3. Value-based pricing strategy.
What is the value of your product to your customers? Put a number on it: that’s your price. Think about their ROI and find a suitable number that will make it worthwhile for them.
It doesn’t matter how much it costs you to provide this value, focus on the customer's needs and what they get in return
For this approach to work, you need to focus on successfully branding and marketing the value that you provide - it’s all about perception!
With this knowledge, you should be able to choose the right pricing model for your B2B SaaS business. Pricing isn’t something that should be decided upon and forgotten about. It’s important to review and amend your pricing strategy on a regular basis to keep up with costs, product evolution, and industry developments.
Finding the right pricing model for your B2B SaaS company is a continuous task. Your pricing strategy should be reviewed regularly to maximize your success.
Pricing is at the intersection of several departments of your SaaS company: marketing, sales, finance. We recommend involving team members from each of these departments.
There are 6 main types of pricing models for SaaS. Each has its advantages and disadvantages. Most SaaS companies use a combination of several.
When it comes to choosing the right pricing model, you need to balance price/value ratio, profitability, and sustainability. Your pricing will also be influenced by your overall strategy.
Knowing your unit economics is key to designing a relevant pricing strategy for your SaaS business. CAC, CLV, and ARPU will give you a starting point to build from.