Software as a Service, or SaaS, is a type of software hosted online and distributed to customers with a subscription model.
HubSpot Service Hub is SaaS, and so is Google Analytics.
Approximately 80% of businesses already use at least one SaaS application.
So much about a SaaS products’ success hinges on a smart pricing model. Given this, developing a well-thought-out pricing plan is extremely important. Customers might opt-out of re-subscribing if they feel your prices are too high, but you also need to charge enough to keep your company afloat.
However, figuring out how to accurately price a product can be difficult. In this article, we’ll take a look at several different pricing models so you can find one that suits your unique business needs.
What is SaaS Pricing?
SaaS pricing is a software pricing model where customers pay on a subscription basis for online software use. Target markets, revenue objectives, and the product or services’ marketing strategy influence prices. If pricing is the determining factor when purchasing a SaaS, then an attractive pricing model can help.
Why is SaaS pricing important?
Ultimately, an accurately priced SaaS does two things: provides value to customers and gives companies a competitive market advantage.
In terms of providing value to customers, it’s simple. When someone buys a new car, their goal is to ensure that they’re paying for something that will be worth the cost. Businesses looking to purchase SaaS software are thinking the same. They don’t want to subscribe to your service and feel like they’re not getting what they’re paying for. You want them to reflect on their decision and say that it was worth it. This is known as the cost-to-value ratio.
If you pick a pricing model that provides the best cost-to-value ratio, you’ll be viable market competition.
How To Price A SaaS Product
The results of a good pricing strategy are cut-and-dried, but arriving at these prices can come from various pricing strategies and models.
Cost-based pricing is a basic pricing strategy. Companies will evaluate costs that they’ll incur from providing a service, like product development and employee salary, and raise that number by a certain percentage point to ensure that they generate a return on their investments. For example, if it costs $100 to design your software, you may sell it for $125 to ensure that you’ll always get a 20% profit.
This strategy is popular because it’s simple. There isn’t much heavy lifting involved.
However, this strategy comes with downsides. Costs can’t always be predicted ahead of time, and there’s no way to know if your revenue will end up covering all of your expenses. Issues could arise along the way that can derail your initial estimations, and you may lose revenue. Cost-based pricing also doesn’t take into account competitor pricing.
Competitor-based pricing involves using competitors’ pricing as a benchmark. Your product or service is priced above, the same, or below the competition.
This model is a valuable strategy for companies marketing new SaaS software. Since your service hasn’t been on the market long enough for customers to give thorough reviews of its value, you’ll need another way to capture market share. The software may also be so new that you may not know all of the costs you’ll incur from providing the service.
In this case, using a competitor’s price points can paint a picture of what your prices should be, as you won’t want to start too high and scare customers away or go too low and have customers questioning the value of your product.
Competitor-based pricing is also straightforward—go to a competitor’s website, and their pricing should be easy to find. If you price your product somewhere between your competitors, you’ll likely get customers. But, at what cost?
Basing prices off of competitors means that you’re using their strategy and not yours. Companies come out with new software because they believe theirs is the best on the market and more valuable than competitors. If you’re using them as your benchmark, you may be selling yourself short.
Promotional pricing is when a company temporarily reduces its prices to generate demand quickly, and it is typically marked by a designated time frame. For example, you might lower your cost by $100, but only for the next 12 hours.
The limited time frame might make customers feel like they need to make quick decisions, which can work in your favor, especially if your price rivals competitors.
Ultimately, this pricing model can be valuable for generating immediate action. But, in the long run, you’ll need other pricing strategies. A continuous promotional pricing model might make consumers think that your service is struggling to obtain users, thus prompting them to question its value.
Using the promo-based pricing model can be valuable, but it should be looked to as an add-on your already existing strategy.
Value-based pricing is when products and services are priced based on how much value they’ll provide to their target audience and how much they’ll think it’s worth. This strategy is not focused on a company's costs or competitors' prices, but what the target audience wants from the software or product. If customers are willing to pay for your service because they understand its value, you can price your service higher than your competitors and generate more revenue. This model also allows for price re-evaluation, should you need to make changes or updates to your service.
Value-based pricing does take a considerable amount of time and commitment — it requires understanding who your customers are, what they want, and how much they’re willing to pay. Despite this, different subgroups may find different value in your service, making it challenging to settle on a price.
In addition, spending time understanding your customers and speaking with them directly can also help you cultivate relationships with your intended audience. If they feel that you care about their experience with your service, they may factor their experience into their assessment of your product's value.
Once you know how you’ll price your SaaS, you’ll need to determine how you bill users. Will you charge a flat-rate for all features? Will you have options for smaller businesses with 25 employees and enterprise companies with 100? These are all questions to consider when putting together pricing packages. Let’s go over some standard SaaS subscription models.
A usage-based package is a the-more-you-use-the-more-you-pay concept, like cellphone data. You may have a monthly 2GB plan, and you’ll get charged more if you go over.
This model’s value is that its advertised prices will always be lower than monthly billed costs. An initially low price point can be attractive to users, enticing them to select your service. Smaller businesses know that they won’t pay the same price as enterprise companies, so they’ll feel like they’re getting their pennies worth.
With this model, it’s essential to keep in mind that usage doesn’t equal value. While an enterprise business may pay a higher bill, that’s only because they’re a larger company with more significant day-to-day needs, not because your service is precious to them. Customers may back out if they incur high costs that don’t make their business objectives any easier.
This model involves charging customers based on the number of seats, or users, they have on their account. Many SaaS companies use this model.
Customers are charged a base rate per month for each user account. For example, you might charge $6 for personal accounts, $25 for ten users, and $45 for 100 users, regardless of how much they use your service in any given month.
This package makes it easy for companies and their users to know what their bills will look like each month. However, customers may shy away from this pricing if they’re looking to grow. If they know hiring more employees means higher software costs, they might elect a service that allows them to grow, regardless of price.
Some companies attempt to avoid this issue by also instilling a per-active-user price. This means that companies can have all of their employees sign up with the service, but will only be charged for those who use it.
However, this package can have its downfall. Users will know that more sign-ins equals higher costs, so they might share log-ins with employees, or between entire teams, to avoid additional monthly fees for separate accounts.
Tiered pricing involves offering multiple package options that vary by feature and price. Each tier can be customized for specific buyer personas, for example, single users vs. medium-sized companies. Not all users will need the same features or the same amount of features, so this option allows them to select according to their needs.
For this model, the number of packages can vary, but the average is 3.5. Too many options might confuse customers, and they can move on to a competitor with fewer choices.
This pricing package is the opposite of tiered pricing. There’s one price that includes the product and all its features— all customers have access to the same tools.
It’s easy to attract users with this model because they won’t incur any additional monthly costs. However, using this pricing model may mean that some of your software’s unique features may go unused. Some users may never touch certain features, while others will use them every day.
This model is similar to tiered-pricing, but customers pay per feature, like email automation, chatbot service, or ad management. It’s a solution for those who want to set a flat rate, but don’t want features to go unused. If customers don’t interact with all aspects of your service, it becomes harder to get enough data points to understand its value and troubleshoot when necessary.
Pricing packages differ by the number of features that come with each model, so higher-priced packages come with the most features. Typically, more expensive packages include all features from the lower-tiered packages as well.
While this is a valuable method, it can be difficult for the company to discern which features should be grouped within each tier. Additionally, the customer may want to use a higher-priced tier feature, but their budget requirements may force them to move to another service to get the same feature at a lower cost.
Nailing Your Pricing Strategy
Pricing a SaaS product or service is based on two key elements: charging for value and targeting the right audience. If you do proper research on these three factors, your customers will reward you by purchasing your service.
It’s essential to keep in mind that prices can always be changed over time as you grow or roll out new software additions.
Ultimately, all SaaS companies will choose a pricing strategy and billing model that fits their individual needs. If you’re putting time into your plan, customers will appreciate your prices and subscribe to your service.
Originally published Oct 6, 2020 7:30:00 AM, updated June 16 2021