Key takeaways:

  • Flat-rate, freemium, feature, per-user, per-active-user, and tiered pricing are some of the most common pricing models offered today. 
  • Decision-making on the right SaaS pricing model should happen in conjunction with the SaaS supplier.

As a SaaS buyer, you’ve likely seen a number of software pricing models, or cost structures that allow buyers to pay a variable price for use of the business app or solution.

A software-as-a-service pricing model is the cost of the product, services, and technology SaaS suppliers provide. SaaS cost can be based on a number of things, but often reflects the value that the software intends to bring to its customer. The goal of a SaaS pricing model is to balance the cost to provide the product and the customer’s success and satisfaction. Since cost and product use can vary among their customer types, it is typical for a SaaS company to offer more than one pricing model.

With ever-growing tech stacks, procurement managers are responsible for managing many different SaaS pricing models and contracts simultaneously.

In a 2020 Gartner survey, 64 percent of customers said the pricing model was important in their SaaS purchasing decision. 

 

In this guide, we will help you understand what the most common SaaS pricing models are, discover the advantages and disadvantages of each, and then how to proactively work with your SaaS suppliers to align the best pricing strategies with your company’s budget, needs, and goals. 

Cost-based SaaS pricing models

Cost-based pricing is the simplest form of SaaS pricing because each product has one price point. The SaaS supplier using a cost-based approach has analyzed their expenses to provide and support the SaaS application and then has determined a profit margin on top of that. SaaS buyers seeking a cut-and-dry, straightforward approach to pricing may prefer cost-based strategies.

The most common modern cost-based SaaS pricing model is the flat-rate pricing model.

SaaS pricing model: Basecamp Business Flat-rate pricing

Flat-rate pricing

The easiest way to define flat-rate pricing is one product with one feature set at one price. You may hear it referred to as cost-plus pricing

A popular all-in-one project management SaaS supplier, Basecamp is known for its flat-rate pricing. For customers who want more than the freemium package, every feature and perk they offer is in one package with one simple monthly fee. There are usually no add-ons.

Cost transparency is one of the most important price model characteristics because it reduces the chance for sticker-shock. Simplicity and predictability are also important, as most buyers prefer a simple pricing model over a complex one. All three of these characteristics are in line with a flat-rate model.

If your SaaS stack has a pretty narrow scope of applications that do not need customizations, flat-rate pricing can be a good option. 

Advantages of flat-rate pricing

  • Simplicity and transparency for budgets
  • Low-maintenance supplier relationship
  • Simple contract management

Disadvantages of flat-rate pricing

  • Lack of package customization
  • Cost that may be higher than value
  • Less supplier engagement

Value-based SaaS pricing models

Value-based pricing models are founded on the customer's perceived value of the SaaS product. With this price approach, SaaS companies must have a solid understanding of their customers and what they perceive as value. Value-based pricing is not determined by the cost of bringing the product to market, but instead, reflects the value that it brings to customers.

The value-based approach provides benefit to SaaS buyers because suppliers using value-based pricing will often be more in-tune with their customer base. This is also beneficial for the supplier because when a customer perceives value in a product that is higher than its cost, they are often less influenced by cost.

Some of the most common value-based SaaS price models are freemium, per-user, and tiered pricing.

Freemium pricing

Freemium price models offer a free version of a SaaS application with a limited feature set. Then, to get premium features, customers must upgrade to a paid plan.

Freemium pricing should not be confused with free trial pricing or a free user pricing structure. The freemium pricing model includes a package that can be used indefinitely at no cost, with a limited set of features. A free trial often offers all features for a limited period. Paid packages may sometimes include a specified number of free users. 

Online writing assistant Grammarly uses a freemium SaaS pricing model. Subscribers can take advantage of a free subscription with limited features. Grammarly offers a premium paid subscription when end users try to use a feature not available in the free version.

SaaS pricing model: Freemium pricing

Advantages of ​​freemium pricing

  • Free option for many users
  • Simple contract management
  • Enhanced product awareness and buy-in
  • The ability to test without investing

Disadvantages of ​​freemium pricing

  • Lack of customization
  • Changes in pricing if the buyer decides to upgrade

Feature pricing

Feature-based or per-feature pricing models are usually created in feature tiers. Each tier up includes more features and more cost. Buyers seeking an “off-the-shelf” application will not pay the same price as buyers seeking a robust application full of all the bells and whistles. Feature pricing models make that possible.

Cloud-based software giant Salesforce offers a tiered feature-based pricing model, as does popular travel and expense management software provider Concur.

SaaS pricing model: Feature pricing

Advantages of feature pricing

  • Simple contract management when tier-based, if the company is using the same features for a long-term period
  • The ability to use lower tiers as a test-drive
  • The ability to only pay for the features you need

Disadvantages of feature pricing

  • Essential features may only be available in upper tiers
  • Overlapping features can cause confusion

Per-user pricing

The per-user SaaS pricing model gives buyers the flexibility to pay only for each user using the software application. 

In per-active-user pricing, customers are only charged for end-users signing into the SaaS system. In a per-user model, you'll determine the number of users and pay the price for them whether they use the system or not. 

Though per-active-user pricing is popular among buyers, it is offered less frequently by SaaS solution providers because cost changes month over month. 

Business communication platform provider Slack offers a per-active-user model combined with other models.

Per-user and per-active-user pricing

Advantages of per-user and per-active-user pricing

  • Cost savings for companies with limited users
  • Simple and transparent costs

Disadvantages of per-user and per-active-user pricing

  • End-users share logins to save costs
  • Difficult budgeting if per-active user pricing

Tiered pricing

Tiered pricing

While tiered pricing can stand alone as its own strategy, suppliers might combine it with various other SaaS pricing models. SaaS suppliers cater to different buyer personas by offering bundled feature sets. Packages with more features or more active users come with a higher price tag. Most SaaS suppliers offer some variation of a tiered pricing model. 

HubSpot uses a tiered strategy to offer starter, professional, and enterprise tiers with distinctly different pricing levels and features.

Tiered pricing example

4 questions to ask sales reps about the SaaS pricing model 

While we’ve shared some of the typical pricing structures you can expect, it’s important to keep in mind that they’re not always as transparent as they seem. One way to work through this is to ask potential suppliers for four things: 

1. Can they provide a contract that fits the needs of your specific business?

Although most SaaS suppliers have standard SaaS contracts, customers may also request a custom contract when their pricing page isn’t clear. When you reach out to your SaaS supplier, describe what changes need to be made to the standard contract, and be as specific as possible.

Your SaaS supplier will then review your request and let you know if it can be accommodated. If yes, they will provide you with a revised contract that has the right pricing strategy for you to review and sign.

2. Is the timeline of 90 days to assess renewals reasonable?

You should keep an eye on your renewal dates in order to avoid getting stuck with a contract you don't want. Before the renewal date arrives, determine whether you want to renew the contract. If so, check for any updates in the contractual terms or changes in pricing. Start 90 days prior to the renewal date — this way there will be some leeway if you need time for negotiation.

3. Do they provide SKU-level pricing? 

If your supplier’s user pricing model is consistent, their monthly and annual rates can be easily broken down into line items or functionality-level costs. SKU-level pricing is a fractionated version of the different price points, which helps you understand exactly what you are paying for. If bundled SaaS pricing options lack clarity, you can ask your SaaS provider for SKU-level pricing. 

4. Do they follow an economies of scale strategy?

The economies of scale concept is all about driving the average cost of service (ACS) down by acquiring a high volume of customers. When their ACS is low, SaaS service providers can not only offer competitive pricing on their products, but also great discounts on bulk SaaS license purchases. 

Because the economies of scale model places a lot of emphasis on price effectiveness, you’re highly likely to secure a win-win deal. 

How to negotiate SaaS pricing 

Whether it's part of your initial market research or you wait until the procurement negotiation process, determining whether a supplier’s pricing model works for you is a critical piece of SaaS buying. 

To simplify, identify your company's goals and how those align with the different pricing models available. For example, you may decide that a particular SaaS pricing model may save costs, but won’t give you all the features that you need. 

Once you’ve made a SaaS purchase, it’s essential to reassess your company’s needs upon renewal. You may discover that things have changed and the price that you’re paying is no longer advantageous. It is OK to go back to your SaaS supplier at that time and discuss other options. 

Tips for negotiating your SaaS costs

Negotiating SaaS costs can be difficult, but it is possible with some preparation. You should know what benefits are offered by a SaaS provider and how they compare to their competitor. Rather than pushing your supplier to give you a low price, look at the value of the product and think about the use cases you can fulfill with it.

The negotiation process can be tough, but you need to remember that it's not personal. While it is essential to take part in the discussion, active listening can go a long way in helping you find the middle ground in a negotiation.

There may be tension with procurement negotiation, but that doesn’t mean you have to settle for less or make a hurried decision. When you come into negotiations armed with pertinent data about your software needs, you’ll be in a better position to set limits on what you’re willing to spend. Both sides may need to make concessions in order to build or maintain a healthy supplier relationship.

How Vendr can help you get the best price on SaaS

Is contemplating multiple SaaS pricing models taking you away from more strategic work? Vendr’s expert SaaS buyers are familiar with the ins and outs of purchasing SaaS and managing your tech stack. Their industry knowledge has saved companies over $1 billion in SaaS spend. Learn more about how Vendr can help you find, buy, and manage the best software for your company.

Next post Back to all posts