So many different pricing strategies, so little time.
That’s what you may be thinking to yourself, as you wonder how you can home in on the best SaaS pricing strategy.
Because while you have implemented a certain pricing strategy for your SaaS business, you may still have niggling doubts:
- Is your pricing strategy really the best possible option?
- Or should you be pursuing a different pricing strategy instead? Such as XYZ strategy, which has been growing in popularity for some time now?
The best pricing strategy for a SaaS business will ultimately depend on the business’s specific circumstances (spoiler alert!). However, it doesn’t hurt to keep a pulse on the latest pricing trends so you can adopt an up-and-coming pricing strategy if appropriate to do so.
With this in mind, let’s suss out some common pricing strategies for SaaS businesses—what’s in, what’s not, and why they work for different stages of SaaS business growth.
At the startup stage, your focus is on getting your business off the ground. You’ll be working on:
- building your product or service,
- establishing product-market fit, and
- importantly, finding (paying) customers.
So what would be an effective pricing strategy for a SaaS startup? Drumroll, please…
Setting out “multiple editions” of your product—in other words, differently priced product tiers or plans—is a great way for startups to test whether their target customers will bite at various price points.
And because you’re asking new customers to pay for your product, you’ll get the cash you’ll need to keep your fledgling business afloat—especially if it’s bootstrapped.
Just be careful not to go overboard and offer too many editions of your product.
“You should think that every pricing tier adds a lot of extra complexity to manage,” writes Rodrigo Martinez, Venture Partner of Point Nine Capital. “The more plans [you have], the harder it becomes to understand the different conversion and expansion rates. At this [startup] stage you don’t have the resources and understanding of the market to deal with that.”
When you’ve hit the mid-market stage of growth, you’ll have likely established a firmer product-market fit, a credible customer base, and have more resources at your disposal.
This is where you can afford to get more creative with your pricing strategies, such as playing with:
Freemium can be an excellent pricing strategy for the simple reason that people love free stuff. Launch a free plan, and you can expect your user base to skyrocket. Your job is then to nurture free users such that they (hopefully) convert to paid.
With the operative word being “hopefully,” that is.
Because despite your best efforts, some free users will never convert. They’ll happily continue using your product for free indefinitely. But at the same time, they’ll consume resources that could have gone to a paying customer.
If you’ll be going freemium, consider if you’ll be able to support a burgeoning base of free users while still giving paid customers the experience they’re paying for.
A multiple-edition pricing strategy works for SaaS startups, and it works just as beautifully for mid-market SaaS businesses too.
After all, it’s simple to understand and, if done well, can offer perfectly-tooled feature sets for customers of different sizes and pain points. For example, you can sell advanced product access to enterprise customers (and at a premium price).
But as your business transitions from startup to mid-market, the prices that got you to where you are now may no longer be:
- indicative of your product’s current value, or
- sufficient to support your future growth.
Therefore, don’t stay stagnant with your pricing. Instead, regularly review and adjust it—more on this later—to reflect ongoing product enhancements.
While the multiple editions model has been the favored SaaS pricing strategy for some time, usage-based pricing has recently been gaining more traction.
Through usage-based pricing, customers that use more of—and hence get more value from—the business’s product pay more. On the other hand, customers that use less can enjoy lower prices.
For instance, some customers of an email platform may send emails too infrequently to justify signing up for a monthly plan. In this case, they can buy email credits that are consumed as and when they send emails.
Such “pay as you go” pricing is a stellar example of value-based pricing at work. According to a 2021 State of Usage-Based Pricing report by OpenView Ventures, 45% of SaaS business respondents implemented some form of usage-based pricing in 2021, which is an increase from 34% in 2020.
Last but not least, we have the SaaS enterprise stage. Fun fact: in the not-too-distant past, you may have had difficulty finding tech enterprises that operated on the SaaS model in the first place!
Take Microsoft and Adobe, for instance. These tech giants switched away from a perpetual licensing model to a subscription fee model just a decade ago—around 2012 and 2013 respectively.
But pricing strategies are never set in stone. Even as enterprises wholeheartedly embrace subscription pricing now, the winds continue to shift.
Big businesses need to get more customers to stay big. So it’s no wonder the freemium pricing strategy has been getting more love from enterprises in recent years.
In particular, COVID-19 accelerated enterprises’ foray into freemium as they worked to meet new market needs created by the pandemic:
- PandaDoc launched a free version of its e-signature product “to help keep businesses running and people working during this uncertain time.”
- Cybersecurity solutions provider Bitdefender offered healthcare organizations free enterprise-grade security for up to 12 months.
- Meanwhile, Google made its premium video conferencing tool Meet free for everyone around the world.
And as the world adapted to living with the coronavirus, some of these temporarily free products—such as Google Meet—also became permanently free.
Enterprises typically have large and diverse customer bases. Operating on a multiple editions pricing strategy, therefore, helps make their products accessible to customers with myriad needs and budgets.
But instead of having the standard three pricing tiers, some SaaS enterprises go one step further. They may offer different sets of pricing tiers for customers with different use cases. This is especially so if the enterprise sells a suite of related products.
For example, HubSpot sells its software as separate “Hubs” for teams in marketing, sales, customer service, and more. Customers are free to purchase individual Hubs, or even mix and match Hubs to qualify for bundle pricing, as they see fit.
Interested in adopting such a strategy for your own SaaS enterprise? Then your challenge will be to present your varied editions in a way that prospective customers can easily understand, without being overwhelmed by too much information or choice.
In step with the latest trends, SaaS enterprises have also warmed to the idea of usage-based pricing. As per the OpenView Ventures usage-based pricing report mentioned earlier, approximately:
- 44% of respondents with $5 million to $20 million annual recurring revenue (ARR) and
- 47% of respondents with more than $20 million ARR
have adopted usage-based pricing.
But even enterprises aren’t immune from the potential pitfalls of usage-based pricing. Cloud computing platform Amazon Web Services (AWS) learned this the hard way: one of its customers had his AWS-hosted side project go viral on Reddit, causing his bill to shoot up to a hefty $3,000.
To mitigate the PR fallout—and possible churn—from such incidents, AWS subsequently introduced spend caps to prevent its customers’ usage and bills from exceeding customer-defined limits.
The best pricing strategy is the one that makes the most sense (and dollars!) for your business
At this point, it might seem like I’m prescribing certain pricing strategies to be the best ones for SaaS businesses at various growth stages. This couldn’t be further from the truth.
Many other factors affect whether a pricing method is right for a SaaS business. For example, if your product’s nature is such that users in an organization should each have their own account, then you could offer multiple editions of your product on a per-seat basis, à la Slack or Zendesk.
You may also find it beneficial to use a combination of pricing strategies! As an example, graphic design platform Canva offers:
- a free plan,
- multiple editions of paid access to its platform, and
- usage-based pricing for free users that want to add premium graphics to their designs.
But enough pricing strategy examples that feature other SaaS businesses—let’s come back to you.
Running pricing strategy experiments is key to determining your business’s best pricing strategy, and you’ll need the right tools to assist with the process. A modern billing system can provide the agile product catalog and comprehensive billing features that are essential for setting up and testing different pricing strategies effortlessly.
Through such regular pricing experimentation, you’ll be able to converge on the right pricing strategy for your business and capture the market share and revenue that you seek.