No pressure, but the ongoing success of your SaaS company depends on your pricing. And by pricing, I don’t just mean how much you charge, but also how you charge. You have to get both right. If you charge too much, you’ll alienate your customers and price yourself out of the market. If you don’t charge enough, you’ll run the risk of undermining your own business and sinking under the cost of running it.
However, if you don’t adopt the right pricing model, it really doesn’t matter how much you charge because your customers won’t sign up in the first place. You have to find the right model that suits your customers’ needs and helps to grow your company.
The problem is that coming up with a winning pricing strategy for your SaaS company is tough work. Fortunately, this post will help you identify the most popular SaaS pricing models in use and which one will benefit you the most. Let’s get started.
Psst.. Should you offer monthly or annual pricing for your SaaS? Here’s a look at the pros and cons.
Before we get too far into the post, let’s discuss this most important fact: There’s no such thing as a “one size fits all” SaaS pricing model. There are many different factors to consider when choosing the perfect pricing model, such as your target customer, the service you provide, your average customer lifespan, and how much you’ll charge. It’s not as simple as spying on your top competitor and piggybacking off of their price.
Here’s what you need to know first before deciding on the right pricing model for your SaaS:
Understand Your Market Position
Where does your company fit into the current marketplace? Or, in other words, what is your unique value proposition (UVP)? What sets you apart from your competition?
You’ll need to look at your competitors to see how your service differ from what they offer. That gap is your unique value. Although you probably defined your market position when you first started out, it’s worth looking again for newer companies who may now offer your same UVP.
Define Your Target Audience
Who do you service? Who is your target audience? Are you a business to business (B2B) or a business to consumer (B2C)? Do you work with both businesses and consumers?
Obviously, there is no right or wrong answer here. But understanding who will use your services will help you create an attractive pricing model. We’ll circle back around to this point a little later in this post.
Calculate Nurturing and Acquisition Costs
It’s crucial to know how much you pay to generate each lead and also how much you pay to ultimately convert the lead into a customer. These costs must be factored into both your price and the type of pricing model that you choose. If you’re working with an extended sales funnel (using lead nurturing efforts, such as email marketing, remarketing through FB), your pricing may reflect this effort. And you may also choose a pricing model that allows you to recoup those costs in one payment (i.e. an annual payment instead of a monthly payment).
Know the Lifespan of Your Average Customer
You also need to know how long your customers will stick around. Look at your current and previous customers to understand your average customer lifespan. This data can help you determine your marketing, nurturing, and acquisition costs, as mentioned above.
Understand the Benefits of Using Your Service
What benefits do your customers receive from using your service? You know your unique value proposition, but how exactly does your customer profit from it?
It’s the timeless marketing tactic of selling the good night’s sleep instead of the mattress. If you can truly understand and then articulate what the customer gains from your service, you’ll be able to justify your price and pricing model, too. Package your service in a way that reminds the customers of your immediate and relevant value to them.
Don’t Copy Your Competitors
Eyeing your competition and going a few cents less is not only petty, it can also cost you business. Instead of basing your price and pricing model on what others in your industry are doing, focus on your customers, their pain points, their friction against signing up, and the unique value that you offer.
Don’t Base Your Price on the Cost of Developing Your Service
The cost-plus model of pricing isn’t very effective for the SaaS company who wishes to develop a long-term relationship with its customer. That pricing model works best for those making a one-time purchase. With a one-time purchase, you’re recouping all of the costs that went into developing and then marketing the product. However, if you wish to offer recurring service, it’s better to charge your customers based on the recurring value that your service provides.
In other words, focus on the benefits and charge for that instead of your one time development costs. (You may actually end up charging more.)
Different SaaS Pricing Models
Let’s explore the most common and popular SaaS pricing models.
1. Charge for Premium Service Only (A.K.A. Freemium)
Freemium is one of the most popular pricing models. With this pricing model, you give away your basic service for free and then charge the customer to upgrade to a deluxe version. This model is effective because you hook the user. You give them a taste of what you offer, and they buy in because it’s free— Why not? Then, once they inevitably* come to a limit in this service, you hit them with the upgrade.
*But here’s the danger: Many times, users never upgrade. They’re content with using your free service in perpetuity. They’re also content to churn whenever they feel like it because the service was free in the first place.
Freemium may be the popular choice, but it’s not always the right choice. In order to make freemium work for you, you must ensure that you only give a taste, and not the full entree. It should be more of a starter so that the user understands, from a hands-on perspective, how your service works. Also, you need a healthy mix of customers in order to support the freemium model. Otherwise, you’ll have a bunch of users (meant in the best way possible) but no one to remunerate you for your service.
2. Charge a Flat Fee
Instead of quibbling over who pays what and when, you can charge one flat fee. Problem solved. This pricing model is simple and upfront, with no surprises.
The major drawback to using a flat fee pricing model is that it can be cost-prohibitive for small to medium businesses. Often, smaller companies are looking for a la carte or per user pricing, which allows them to customize their needs in accordance with their budget. If you’re working with smaller companies, consider the limitations of this pricing model. Unless you’re charging a crazy-cheap price, a flat fee model can alienate would-be customers.
3. Charge Per User or Per Number of Users
The “Per User” pricing model works best when your target customer is either an individual or a smaller company with a limited number of users. However, if you’re hoping to attract larger organizations with multiple users, the “Per User” model may not be the right choice. It can limit your growth because this model often leads to churn. Think about it: When a company reaches a certain number of users, they may decide to go with your competitor because they can no longer afford your service.
4. Charge Based on Usage
You can offer a tiered service where you charge based on usage. The fee fluctuates based on how the customer uses your service. Both Dropbox and Google Drive charge based on usage.
This pricing model appeals to individuals and smaller companies who may anticipate less usage. However, if you’re working with larger companies, it can be cost prohibitive because of the fluctuating nature of this pricing model.
5. Charge a la Carte
One of the best pricing models to consider, especially if you’re working with individual customers, is the a la carte or feature-based model. Here, you charge the customer for only the features that they want. This allows your customers to customize their experience with your SaaS—score! It also allows you to accept different types of customers (with different pain points and needs).
You can structure your a la carte pricing model so that you provide a base service that’s common to all and then allow customers to add features to that base.
6. Charge Your Advertisers
Last but not least… Consider covering your costs through advertisements. Ad-supported services will take the pressure off of your customers to pay.
The obvious drawback of using this model is that you’re selling your customers’ attention to the highest and/or most relevant bidder. But Facebook does it. So does Google.
If you choose to support your SaaS through ads, be considerate of your customers and focus on showing relevant content. Your goal is to provide a comfortable and valuable user experience, and not annoy them with invasive ads.
Choosing the right pricing model is never one and done. You must continue to evaluate your pricing model to make sure that it’s still the right fit for your company and for your target customer (which may change as your company continues to evolve).
Don’t forget to check out this list of the pros and cons of both monthly and annual pricing for SaaS.