SaaS (Software as a Service) has been adopted by most companies recently, as it provides numerous advantages over traditional business models and saves a lot of time and manual labor. Since there are no physical deliveries involved in SaaS, clients have to know what they are paying for. This is why companies have to arrive at the proper pricing for their products.
Before arriving at this stage, there are some factors like knowing the status and value of your product, the target customers and the right pricing model that is best suited for your product which has to be carefully taken into account.
Choosing the right pricing method for your SaaS product
Different products have different pricing strategies. But ultimately, there are some factors that are applicable for all products across different business verticals when it comes to pricing.
1) When it comes to pricing the product, it is advisable to consult with various teams like sales, marketing and product development. Their combined expertise in their respective fields will help you in understanding and maintaining your target market and audience.
2) Once you are familiar with the target market and audience, it is important to know their review about your product. This will help you in understanding the requirements of our customers and will enable you to further develop your product based on their needs. This is the case when it comes to B2C sales.
3) Clearly understanding client’s needs when it comes to B2B sales is very essential. For instance, if your client runs a small business, it would be completely pointless to provide him/her with the products and services that are suitable for large businesses.
4) The prime factor in pricing is the ratio of LTV (Life-Time Value) and CAC (Customer Acquisition Cost). This ratio should always be greater than 1, so that you can ensure that your business is being profited and runs smoothly.
SaaS Pricing models – Advantages and Disadvantages
The Flat-rate Pricing Model for SaaS Companies
In the flat-rate model, the price of the product is previously fixed for a set of features and is the same for all clients. Despite the number of users, the client is charged a fixed about that has to be paid upfront for a year or on a subscription method.
Advantages of Flat-rate SaaS Pricing Model
- This method is simple to use.
- Since the price is fixed, the revenue estimation is very easy.
- If your business is focused on providing a single variety of products (eg: Netflix – only focuses on online streaming), implementing flat-rate pricing helps in gaining customers.
Disadvantages of Flat-rate SaaS Pricing Model
- As the flat-rate model provides products with certain features for all the customers, this method will not be suitable for clients who require tailored services according to their needs.
- The flat-rate model does not offer the necessary features to upgrade, hence this could highly affect the scalability of the business.
Tiered Pricing Model for SaaS Companies
In a tiered pricing model, different versions of the same object are provided at different prices. These versions differ in terms of features, the number of users or/and the products offered according to the business requirements, from which the users can decide the right product that matches their needs.
Advantages of Tiered SaaS Pricing Model
- The tiered pricing model has the potential to increase market share and revenue by gathering a variety of customers.
- Opportunities to promote your product through existing customers will save the cost spent on marketing.
Disadvantages of Tiered SaaS Pricing Model
- With every version of the product, it makes it difficult for customers to arrive at the right product that meets their needs.
Usage-based Pricing Model for SaaS Businesses
The usage-based pricing model is also known as pay as you go model. Here, the customer has to pay based on the usage of the product. The usage can be based on the number of emails sent, APIs used or the number of transactions. Some of the usage-based pricing products are also available on a subscription basis.
Advantages of Usage-based SaaS Pricing Model
- A majority of the clients/customers prefer usage-based pricing as they have to pay only for the services they use.
Disadvantages of Usage-based SaaS Pricing Model
- This method only charges for the services that a product offers, so the overall value of the product is not taken into consideration.
- Predicting the revenue of the product can only be estimated as it depends on the usage of the customer.
Per user-based Pricing Model for Software Companies
As the name explains, the per-user based model is charged as per the number of users using the product. The revenue of this product increases with the increase in the number of users.
Advantages of Per user-based SaaS Pricing Model
- The users will be provided with complete access over the features of the product.
- Calculating the revenue becomes easier as it can be calculated by knowing the number of users.
Disadvantages of Per user-based SaaS Pricing Model
- Sharing user credentials by end-user with others might be a concern within this model.
- Some of the features of the products are limit to the users as the company plans on reducing the amount of investment.
Freemium Pricing Model for SaaS Companies
Freemium pricing is the most commonly adopted pricing model across most companies. This model allows users to access the entire product for a limited amount of time, after which the user has to buy the product to keep accessing the entire features of the product.
Advantages of Freemium SaaS Pricing Model
- By allowing the users to have complete access to the product, although, for a limited time, this helps the users in understanding and knowing what they in return for buying the product.
- The free version of the product can be monetized to display ads that suggest users to upgrade to the premium version.
Disadvantages of Freemium SaaS Pricing Model
- Allowing the free users to access the premium features will increase the usage of resources.
- Not all free-users will necessarily upgrade to the premium version.
Per Active User Pricing Model for SaaS Companies
In the per-active user pricing model, despite the number of users who bought the product, it is charged only for the number of active users who use the product.
Advantages of Per Active User SaaS Pricing Model
- Since the inactive users need not pay for the product, there is no need to be concerned about bills even if the product is brought.
- This product can be widely adopted in enterprises as they are charged based only on the number of active users.
Disadvantages of Per Active User SaaS Pricing Model
- Customers might not use the product or they use it for the short term.
- Similar to the per user-based pricing model, the issue of shared user credentials occur in this method too.
Pricing the product right is as important as manufacturing the product. This helps in taking the product to the market and increases the sales which in turn will generate revenue that can be used in R&D and other imaginable aspects of developing the products or the business itself where investments had to be made.