You can spend days—weeks, even—reading about SaaS pricing models. There's much hot debate surrounding the subject and no clear-cut answer as to which pricing strategy works best.
So, I turned to the big guns of SaaS to hear what they have to say on the matter! Below, you'll find a collection of insightful value nuggets, with a sprinkling of SaaS pricing strategy pearls of wisdom. They should help you understand some of the major SaaS pricing models and evaluate how the different pricing models could benefit your business.
Let's begin with some SaaS savvy from Cameron Deatsch.
"When you’re optimizing for volume, always aim for a simple and low-touch approach."
Deatsch is Chief Revenue Officer at Atlassian, an Aussie SaaS giant that generates over $2.1 billion of annual revenue. In his experience, giving customers unlimited flexibility to choose how much they want to pay—and which services or features they want to add—often ends in total chaos. "Pricing strategies tend to have their own version of entropy," he says.
It can work if your business model relies on fewer customers making large transactions for complex, customized products. In that case, you can afford the time and staff to build customized pricing packages and handle individual negotiations.
But if you're using a self-service purchasing model, you're relying on high user volume to create momentum and drive growth. In that case, Cameron recommends adopting a more simple strategy. Optimizing for volume is key to building a flywheel.
You can do this by using a feature-based pricing model paired with a tiered pricing strategy. This provides a balance of simplicity with customers' freedom of choice.
Now, from freedom to war...
"The only winning move in a price war is not to play."
This statement comes from Madhavan Ramanujam, a partner pricing at pricing consultancy Simon Kucher and the author of Monetizing Innovation. What he's getting at here is price integrity.
Price integrity means saying "no" to price changes in the months after a product launch. That can be tough, especially if the market didn't well receive your product. It's tempting to drop your price to try and drum up subscription volumes. But it could have the exact opposite effect.
Lowering your price post-launch can actually harm your brand by devaluing your product in the eyes of consumers. It could seem like you're unable to deliver the quality you initially promised.
What should you do, then? Well, if you're going by Ramanujam's advice: stick it out! Your team has worked hard to develop this product, understand its value, and devise a suitable SaaS pricing strategy. So before you change anything, take time to understand other possible areas of friction in the buyer journey.
For example, look at your pricing page. Could the way you're presenting the offer be an issue? How often is pricing the reason for a lost deal, anyway? Are your marketing efforts effectively reaching your target audience? Gathering more data helps you adjust non-pricing strategies first, so you can increase sales without sacrificing profit and customer lifetime value (LTV).
That's not to say you shouldn't change your pricing strategy—you should revisit it multiple times a year—but it's about the right timing, and always about testing.
One man who knows all about testing is Bill Staples.
"Your SaaS pricing model should be mutually beneficial and reinforce your value position."
When Staples took on the role of chief product Officer at New Relic, he radically transformed the business pricing model from flat rate pricing to per-user pricing. But not before running extensive pricing tests with small customer cohorts first.
Staples also notes that a consumption-based model only works when you choose the right metrics. That's because customers want a price that predictable. Usage-based SaaS pricing can be hard to forecast, leading to budgeting frustrations.
For New Relic, the per-user pricing model made sense because of the link between engineer headcount and a business' need for a full stack of observational tools (its SaaS product).
Consumption-based pricing has become increasingly relevant recently. With usage pricing or active user pricing, businesses whose activities halted during the global pandemic saw it reflected in their bills. Others that paid a fixed monthly price found themselves unable to make mid-contract changes to subscription prices. As their revenues plummeted, costs remained the same, and it became obvious the flat rate pricing model wasn't working in SaaS anymore. Businesses need value-based pricing that's also flexible.
Forms of flexible SaaS pricing include per feature pricing and pricing tiers, which we'll explore now.
"It is crucial to the success of any SaaS business that you have a way for customers to spend more money with you."
In other words, "Always have an upsell," according to Andy Baldacci. Baldacci is a former Marketing Director of Hubstaff, a multi-product SaaS business that generates over $1.09 million in monthly recurring revenue (MRR).
Discovering how much customers are willing to pay is an integral part of a value-based pricing model. However, the answer is not necessarily a fixed dollar amount, but rather a scale.
Some customers might need a small-scale solution, for which they expect to pay a lower price. Other (and probably larger) SaaS businesses may be prepared to pay a great deal more, given the chance to solve their problems faster and more comprehensively. And the once-small customer might grow into an enterprise business during their lifetime with you, needing to scale its use accordingly.
This shouldn't be an attempt to milk customers for all they're worth. It's about finding a pricing strategy that accommodates customers' changing needs. For example, you could use a tiered pricing model or offer add-ons with a per-feature pricing model.
This benefits your business by increasing monthly recurring revenue (MRR) without the need for new customers. Plus, a higher LTV supports growth because you can spend more on customer acquisition costs.
On the other end of the spectrum, let's look at a pricing model that, despite encouraging hundreds of new users, may not increase MRR at all...
"Freemium models can be dicey for SaaS companies."
It's common to see SaaS businesses using a freemium pricing model, especially startups. Freemium pricing helps to attract a user base, test viability, garner market share, and collect valuable data.
However, Neil Patel warns against the dangers of a freemium business model. And this guy really knows his stuff. He co-founded KISSmetrics, Crazy Egg, and Hello Bar—three of the most well-recognized and essential SaaS marketing tools out there.
The main concerns of using this pricing strategy are:
- the kind of users drawn to a free SaaS product will probably never convert to paying customers,
- the users who do want higher-value features and can't access them through the free tier may disregard your product,
- getting return on investment (ROI) requires massive volume (100 to 1,000 times that of a paid user base), and
- freemiums cost money! You still need to build and maintain the free product.
For these reasons, freemium is rarely the key to a successful pricing strategy. Other SaaS pricing strategies like per-user pricing, usage-based pricing, penetration pricing, or value-based pricing tend to be more conducive to business growth.
So, the experts have spoken! Here's a quick summary of the main points.
- Your pricing model should be optimized for high volume if you want to build a flywheel.
- Spend sufficient time preparing your pricing model pre-launch, stick with it directly post-launch, and then test extensively once you have the customer base and capabilities.
- When opting for a consumption-based pricing model, choose your metrics carefully.
- Don't over-complicate, but provide customers with enough options that you don't leave money on the table. Consider tiered pricing or paying per feature.
- Be wary of freemium as a SaaS pricing model.
If one thing is clear, it's that there's no one-size-fits-all when it comes to SaaS pricing. For the best chance of success, you must always keep one ear to the ground, constantly review, run pricing experiments as necessary, and be ready to adapt.