No items found.

Our guide to every SaaS pricing model

SaaS Buying

This guide will help you understand the most common pricing models for software. Then, we discuss how to proactively work with your SaaS suppliers to align the pros and cons of pricing strategies with your company’s budget, needs, and goals.

Written by
Taylor Bruneaux
Published on
December 7, 2022
Read Time

Twitter iconFacebook iconLinkedIn icon

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

A software-as-a-service pricing model is the cost of the product, services, and technology SaaS suppliers. 

SaaS companies base their cost on many things, but it most often reflects the value the software intends to bring customers. 

A SaaS pricing strategy aims to balance the cost to provide the product and the customer’s success. Since cost and product use can vary among their customer types, it is typical for a SaaS company to offer multiple pricing models.

With ever-growing tech stacks, procurement managers simultaneously manage various SaaS pricing models and contracts.

This guide will help you understand the most common pricing models for software. Then, we discuss how to proactively work with your SaaS suppliers to align the pros and cons of pricing strategies with your company’s budget, needs, and goals. 

{{cta1}}

Cost-based SaaS pricing models

Cost-based pricing is the simplest SaaS cost structure because each product has one price point. Using a cost-based approach, the SaaS supplier has analyzed their expenses to provide and support the SaaS application and then has determined a profit margin. 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 SaaS fee. In addition, there are usually no add-ons.

Cost transparency is one of the essential price model characteristics because it reduces the chance of sticker shock. 

Simplicity and predictability are also essential, 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.

Flat-rate pricing can be a good option if your SaaS stack has a narrow scope of applications that do not need customizations. 

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
  • The higher price may outweigh the value
  • Less supplier engagement

{{cta2}}

Value-based SaaS pricing models

Companies use value-based pricing models to match the target market’s perceived value of the SaaS product. 

With this price approach, SaaS companies must understand their customers and what they perceive as value. Value-based pricing reflects the value that the SaaS product brings to customers, not the cost of bringing it to market.

The value-based approach benefits SaaS buyers because suppliers using value-based pricing will often be more in tune with their customer base and their user experience. 

This pricing model is also beneficial for the supplier because when the target audience perceives value in a product that is higher than its cost, they are often less influenced by price.

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 solution with a limited set of features. 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. Instead, the freemium pricing model includes a package with limited features to be used indefinitely at no cost. 

A free trial often offers all components for a limited period. Paid packages may 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 team members 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

SaaS buyers can understand feature-based or per-feature pricing models in ‘feature tiers.’

Each tier-up includes more features and more cost. As a result, 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 CRM 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 the upper tiers
  • Overlapping elements can cause confusion

Per-user pricing

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

Customers are only charged for end-users signing into the SaaS system in per-active-user pricing. In a per-user model, you'll determine the number of users and pay the price for whether they use the system. 

Though per-active-user pricing is popular among buyers, SaaS businesses offer it less frequently 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
  • Tricky budgeting if per-active user pricing

Tiered pricing

Tiered pricing

While tiered pricing can stand alone as its strategy, suppliers might combine it with various other SaaS pricing models. 

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

Tiered pricing example

Four 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 remember 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, potential customers may request a custom contract when their pricing page isn’t clear. 

When you reach out to your SaaS supplier, describe what changes you’d like to make to the standard contract, and be as specific as possible.

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

2. Are they providing a reasonable assessment timeline?

You should keep an eye on your renewal dates to avoid getting stuck with a contract you don't want. 

Before the renewal date arrives, determine if you wish to renew the contract. If so, check for any updates in the contractual terms or changes in pricing.

Start 90 days before 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, customers can easily break down their monthly and annual rates into line items or functionality-level costs. 

SKU-level pricing is a fractionated version of the different price points, which helps you understand your SaaS costs. 

You can ask your provider for SKU-level SaaS pricing if bundled SaaS pricing options need clarity. 

4. Do they follow an economies-of-scale strategy?

The economies-of-scale concept decreases the average cost of service (ACS) by acquiring a high volume of customers. 

When their ACS is low, SaaS service providers can offer competitive pricing on their products and 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 with a favorable software license pricing model.

How to negotiate SaaS pricing 

It may be part of your initial market research or you may wait until the procurement negotiation process. Either way, determining whether a supplier’s pricing model works for you is critical to SaaS buying. 

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

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. Then, you’ll know it's time to re-negotiate your SaaS contract.

Tips for negotiating your SaaS costs

Negotiating SaaS costs can be difficult, but it is possible with some preparation. 

First, understand what benefits your SaaS provider offers and how these benefits compare to their competitors. 

Rather than pushing your supplier to give you a low price, look at the product's value and consider the use cases you can fulfill. The negotiation process can be challenging, but you must remember: 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. On the contrary, when you come into negotiations armed with pertinent data about your software needs, you’ll position yourself well to set limits on what you’re willing to spend. 

Both sides may need to make concessions to build or maintain a healthy supplier relationship.

How Vendr can help you get the best price on SaaS

Is contemplating multiple pricing models for SaaS taking you away from more strategic work? 

Let Vendr help you manage your entire SaaS buying process, including negotiating software prices.

When you work with our team, we’ll:

  • Get data-driven negotiation and pricing insights for every supplier and focus on the most significant cost-saving opportunities.
  • Optimize for contract negotiation success with expert buyer support and a detailed market landscape evaluation.
  • Bring in the right people at the right time to shorten internal procurement processes once you’re ready to purchase.

Vendr’s expert SaaS buyers are familiar with the ins and outs of purchasing and managing your tech stack. Our industry knowledge has saved companies over $1 billion in SaaS spending. 

{{cta3}}

Similar posts

Learn more about finding, buying and managing your SaaS stack with resources from our experts.

2023: The year of the price hike?

Ryan Neu

SaaS Buying

2023: The year of the price hike?

Software budgets are growing in 2023 — but that growth may be consumed by price hikes from large software companies.

Read post
4 SaaS sales rep best practices for working with procurement

Lizzy Brophy

Procurement

SaaS Buying

4 SaaS sales rep best practices for working with procurement

SaaS sales reps achieve better outcomes when they collaborate with procurement on deals. Use these 4 best practices to improve your next negotiation.

Read post
8 factors to consider for your software management plan

Lizzy Brophy

SaaS Buying

8 factors to consider for your software management plan

Discover the eight most important factors to consider when designing a software management plan, and never miss an element again with our free template.

Read post