Picking the right pricing model for your SaaS business

We present several pricing models for SaaS vendors with some pros and cons. In real life, imagination has no limit and it is common to use a combination of the below, so enjoy reading

1.     Usage-Based Pricing: customers are charged based on their actual usage of the service or product, with no subscription fee.

·      Example:

0 - 99 units: 20 cts per unit

100 - 999 units: 15 cts per unit

·      Pros: Aligns costs with actual usage, encourages customer efficiency, and can scale with customer growth.

·      Cons: Predicting revenue can be challenging, and customers may be concerned about unpredictable costs, sales compensation cannot be based on contract signature, which often results is sales team frustration.

2.     Tiered Pricing: different (fixed) pricing tiers with set usage limits, where customers pay more as they consume more resources (but price per unit decreases). Total customer spending commitment increases as price per unit decreases. Service levels usually improve as financial commitment grows.

·      Example:

Tier 1: 1000$ monthly fee, with 600 units included + premium support

Tier 2: 100$ monthly fee, with 50 units included + basic support

·      Pros: Provides predictability for customers within each tier, encourages upselling, and allows for revenue forecasting. Usually an attractive model for small business customers and consumers.

·      Cons: May lead to underutilization in lower tiers or dissatisfaction if customers outgrow their tier (which can be offset by a contract renegotiation).

3.    Freemium Model: offers a basic version of the product for free, with additional features available at a cost.

·      Example:

0 - 9 units per month free of charge

10 - 99 units per month: 20 cts per unit

·      Pros: attracts a wide user base, encourages user adoption, and allows for upselling to premium features. This is a great model when the majority of the potential customers can easily find a free alternative on the market. One can then hope to convert 10 - 20% of users into paying customers

·      Cons: Monetizing free users can be challenging, and there's a risk of cannibalizing paying customers. It is critical to offer enough but not too much, otherwise users will not upgrade.

4.    Seat-Based Licensing: charges customers based on the number of user seats or licenses.

·      Example:

For 1 - 3 users: 15$ / user / month

For 4 -10 users: 11$ / user / month

·      Pros: Predictable revenue based on the number of users, easy to understand for customers, and scales with user growth.

·      Cons: May not align with actual usage, and can be challenging for customers with fluctuating user numbers. May penalize / benefit to some customers with different usage (higher / lower number of user with low / high consumption per user)

5.    Value-Based Pricing: charge customers based on the value they derive from the product or service. A typical example is the automation of expense reports, where manual processing costs 20$ on average.

·      Example:

1 - 9 expense report per month: 8$ per report

10  100 expense reports per monh: 5$ per report

·      Pros: Aligns pricing with the perceived value to the customer, potentially increasing customer satisfaction. Provides a clear ROI to justify for the project.

·      Cons: Determining and communicating value can be subjective, and it may be challenging to quantify. Even if customer agrees on value he will usually argue of the cost saving split.

6.    Custom Pricing/Enterprise Agreements: tailored pricing agreements for larger enterprise customers based on their specific needs and usage. Such models are very unusual, every when selling into very large enterprise customers.

·      Pros: allows for flexibility in negotiations, accommodating unique customer requirements. This may be a good fit when launching a business or entering a new market segment.

·      Cons: Can be resource-intensive to manage, and standardization may be challenging. Consequences for revenue recognition and sales compensation need to be analyzed carefully each time.

The right compensation model depends on your specific business goals, target market, and competitive landscape. It's common for SaaS vendors to use a combination of these models, especially as they scale and diversify their customer base. If you want to talk about what’s right for your business, let’s get started.