Key takeaways:

  • Suppliers offer SaaS pricing strategies that cater to different business models and buyer personas. 
  • Many SaaS suppliers offer more than one pricing model and sometimes a combination of several. 
  • 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.

Software-as-a-service (SaaS) suppliers use pricing strategies based on a series of metrics and their business model. Their primary goal is to balance profitability and their customer’s and potential customers' success and satisfaction. As a result, it is typical for a SaaS company to offer more than one pricing model.

As businesses continue to shift technologically, Gartner reports that by 2025, 80% of IT spending will be subscription and/or consumption-based. So, what does this mean for SaaS buyers? It means that with an ever-growing tech stack, you may be responsible for managing many different SaaS pricing models simultaneously. In fact, you most likely already are.

In a 2020 Gartner Customer Preference Survey, 90% of customers said the pricing model was important in their SaaS purchasing decision. The trick to mastering SaaS pricing models is first to understand what the most common models are, discover the advantages and disadvantages of each, and then proactively work with your SaaS suppliers to align the best pricing strategies with your company’s goals. 

If you’re not sure where to start, look no further. We’ve covered all of that for you here.

Cost-based SaaS pricing models

Cost-based pricing is based primarily on, well … cost. This 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.

Flat-rate pricing

SaaS pricing model: Basecamp Business 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. 

Popular all-in-one project management SaaS supplier, Basecamp, is known for its strong ties to flat-rate pricing. For customers that 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. 

Gartner reports that 23% of customers said cost transparency was the most important price model characteristic, 18% said simplicity was the most important, and another 17% ranked predictability as most important. All three of these characteristics are in line with a flat-rate model.

If your SaaS stack isn’t massive but has a pretty narrow scope of applications that do not need customizations, flat-rate pricing can be a good option. However, even in that scenario, it doesn’t mean that there aren’t other equally as good or better options.

Advantages of flat-rate pricing:

  • Simple and transparent pricing
  • Great for budgeting
  • Low maintenance supplier relationship
  • Simple for contract management

Disadvantages of flat-rate pricing:

  • Lack of package customization
  • Cost may be higher than value
  • Supplier may be less involved with customer values
  • Less supplier engagement may result in more shelfware 

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 dig deep to have a solid understanding of their customers and what they perceive as value.

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.

In the same Gartner study, 43% of customers ranked flexibility and value alignment as the most important price model characteristics for SaaS.

Let’s talk about some of the most common value-based SaaS price models.

Freemium pricing

SaaS pricing model: Freemium pricing

For those taught that nothing is free, the SaaS industry threw us a major curveball with the freemium pricing model. This approach involves offering 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. A freemium 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. 

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

Advantages of ​​freemium pricing:

  • Free
  • Simple for contract management
  • Enhances product awareness and buy in
  • Testing without investing

Disadvantages of ​​freemium pricing:

  • Lack of customization
  • Supplier may be less involved with customer values

Feature pricing

SaaS pricing model: Feature pricing

One thing is certain when it comes to SaaS applications: There is no shortage of features available. From the most basic functionality to advanced features stakeholder teams never even dreamt of, SaaS suppliers often have something for every end-user need.

Feature-based or per-feature pricing models are usually created in feature tiers, each tier up including more features and more cost. This can be a great way to reach almost any customer. Customers seeking an “off-the-shelf” application should not pay the same price as customers seeking a robust application full of all the bells and whistles. This type of pricing model makes that possible.

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

Advantages of feature pricing:

  • Simple for contract management when tier-based
  • Use lower tiers as a test-drive
  • Pricing is relatively simple
  • 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 and per-active-user pricing

Per-user and per-active-user pricing

The per-user SaaS pricing model gives customers the flexibility to pay only for each user using the software application. Per-user and per-active-user pricing are common pay-as-you-go pricing models. The difference is that you are only charged for end users signing into the SaaS system in a per-active-user pricing model. In contrast, 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, it will be offered more infrequently by small businesses and startups because it can be difficult to predict revenue. 

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

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

  • Great for limited users
  • Simplicity and transparency of costs
  • Avoid paying for inactive users if per-active user model

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

  • Not always great for enterprise applications
  • End users may try to share logins
  • Difficult to budget if per-active user pricing
  • End users may try to share logins
  • Paying for inactive users if per-user pricing

Tiered pricing

Tiered pricing

We saved pricing tiers for last because while it can stand alone as its own pricing strategy, suppliers might combine it with various other SaaS pricing models. SaaS suppliers that offer tiered pricing bundle feature sets into packages with different price points focusing on catering to different buyer personas. Packages with more features or more users come with a higher price tag. Most SaaS suppliers offer some variation of a tiered pricing model. 

Well-known cloud-based CRM provider HubSpot uses a tiered strategy to offer starter, professional, and enterprise tiers with distinctly different pricing levels and features.

Discovering the right SaaS pricing strategy for your company's needs

People working together

Whether it's part of your initial market research or you wait until the procurement negotiation process, determining the right pricing model is a critical piece of software buying. But when there are so many pricing plans available, decision-making can be a challenge. 

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 is optimal from a low-price perspective but will result in higher-maintenance contract management. On the other hand, if using a SaaS buying platform is an option, it can be a great way to optimize cost savings and contract management while also enhancing the lifetime value of the software to your business. 

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 five things: a contract that fits the needs of your specific business, 90 days to assess renewals, SKU-level pricing, economies of scale, and clear pricing upfront.

As the SaaS buyer, once you’ve decided on pricing models, it’s just as essential to reassess your company’s needs upon renewal, whether it’s a one-year or multi-year agreement. You may discover that things have changed and the original model selected is no longer advantageous. It is OK to go back to your SaaS supplier at that time and discuss other options.  

Is juggling multiple SaaS pricing models taking you away from more strategic SaaS management tasks? Let Vendr help reshift your focus to tasks that will drive the most value to your company.

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