How To Price A SaaS Product

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Flori Needle
Flori Needle

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The right software-as-a-service (SaaS) pricing model will help you attract more customers and sell more subscriptions, increasing monthly recurring revenue.

startup founder learning how to price a saas product

However, figuring out how to accurately price a SaaS product can be difficult. In this article, we’ll take a look at several SaaS pricing strategies so you can find the one that suits your unique business needs.

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Table of Contents

Software as a Service, or SaaS, is a type of software hosted online and distributed to customers with a subscription model. Sales Hub is SaaS, and so is Google Analytics.

So much about a SaaS product’s success hinges on an intelligent pricing model. Given this, developing a well-thought-out pricing plan is extremely important.

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    Why is SaaS pricing important?

    Ultimately, an accurately priced SaaS does two things: It provides value to customers and gives companies a competitive market advantage.

    It’s a delicate balance. Pricing your product too high might make customers opt out of re-subscribing, but you also need to charge enough to keep your company afloat (and hopefully growing).

    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 think the same way. 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.

    Before you decide on the actual price tag that you’ll place on your SaaS product, you first need to choose a general pricing strategy. Then you can set SaaS fees for different subscriptions and tiers.

    Will you calculate your yearly business expenditures, then add a markup to generate a certain profit (cost-based pricing)? Or will you look at your competition and base your price according to theirs (competitor-based pricing)?

    The results of a good SaaS pricing strategy are cut and dried. However, arriving at these prices can come from various pricing strategies and models. Let’s take a look at them below.

    SaaS Pricing Strategies

    1. Cost-Based Pricing

    Cost-based pricing is a basic pricing strategy. Organizations evaluate total costs associated with providing a service, like product development and employee salaries, 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 25% profit.

    Should you implement a cost-based SaaS pricing strategy?

    Possibly. It’s a safe choice, and simple to understand and calculate. 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 derail your initial estimates, and you might lose revenue as a result.
    • Cost-based pricing doesn’t take into account competitor pricing.

    Before moving forward, learn how much revenue you could generate with this cost-based pricing calculator.

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    2. Competitor-Based 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. Your service hasn’t been on the market long enough for customers to vouch for its value, so you’ll need another way to capture market share. The software may also be so new that you still need to learn all of the costs you’ll incur from providing the service.

    In this case, using a competitor’s price points can help you determine what your prices should be. You won’t start too high and scare customers away or go too low and have customers question the value of your product.

    Streaming services often use competitor-based pricing. For instance, look at Netflix’s pricing plans:

     

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    Hulu’s pricing is quite close — only a dollar off in some instances.

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    Should you implement a competitor-based SaaS pricing strategy?

    Possibly. Competitor-based pricing is 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? Challenges that accompany this strategy include:

    • Basing prices off competitors means that you’re using their strategy, not yours.
    • Companies come out with new software because they believe theirs is the best on the market and more valuable than competitors’ offerings. If you’re using them as your benchmark, you may be selling yourself short.

    Learn how much revenue you could generate with this competitor-based pricing calculator.

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    3. Penetration Pricing

    Penetration pricing is a type of promotional pricing strategy where a company temporarily reduces its prices to generate demand quickly. It is typically marked by a designated time frame, which you may or may not disclose to customers.

    For example, you might offer the product at the introductory price of $79 for six months, then quietly raise the price. Or, you might lower your product’s fees by 50%, but only for the first 100 customers.

    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’ prices.

    Free Sales Pricing Strategy Calculator

    Determine the best pricing strategy for your business with this free calculator and template.

    • Cost-Plus Pricing
    • Skimming Strategy
    • Value-Based Pricing
    • And More!
    Learn more

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      All fields are required.

      You're all set!

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      Should you implement a penetration SaaS pricing strategy?

      Yes, but only if your SaaS product is new and untested. This pricing model can be valuable for generating immediate action. But, in the long run, you’ll need other pricing strategies.

      Here’s why:

      • A continuous penetration pricing model might make consumers think that your service is struggling to obtain users, thus prompting them to question its value.
      • The lower price can act as an anchor in a prospect’s mind, and they might be hesitant to pay the increased rate if they missed out on the initial offer.

      Using the penetration pricing model can be helpful, but should be looked to as a precursor to a stronger and more established pricing strategy.

      Learn how much revenue you could generate with this penetration pricing calculator.

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      4. Value-Based Pricing

      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 on 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 charge a premium and generate more revenue. This model also allows for price re-evaluation, should you need to modify or update your service.

      Adobe uses a value-based pricing model. Its apps are much more highly-priced than alternatives such as Affinity Photo and GIMP. But because it knows the value it provides for its customers, it prices its services accordingly.

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      Should you implement a value-based SaaS pricing strategy?

      Yes, but it’s a harder SaaS pricing strategy to adopt. Value-based pricing takes 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.

      Get it wrong and it can substantially impact your churn rate and bottom line. Along with this, different subgroups may find different value in your service, making it challenging to settle on a price.

      The upside is that spending time understanding your customers and speaking with them directly can also help you cultivate meaningful relationships with your intended audience. If they feel that you care about their experience with your service, they may factor this into their assessment of your product’s value.

      Learn how much revenue you could generate with this value-based pricing calculator.

      price-saas-product_2

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      5. Freemium Pricing

      Freemium pricing is a common SaaS pricing strategy. Here, businesses offer a free and limited version of their product to increase sign-ups.

      While the free version can be used for an extended amount of time, companies typically restrict advanced features unless the user upgrades to a paid subscription.

      HubSpot operates on a freemium pricing model for its CRM platform.

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      Should you implement a freemium SaaS pricing strategy?

      Yes — freemium pricing is easily one of the simplest and most straightforward choices in this list.

      First, it’s commonly used. The world’s biggest SaaS companies, such as Google and Spotify, use freemium pricing. That shows it’s an effective way to acquire more customers and grow your SaaS business.

      It’s also a much better alternative to a penetration pricing strategy, where you undervalue your product for a short time to win more customers. Instead, you offer a version of the product at an irresistible price — free. This gets people using your product, and when users are ready to upgrade, they turn into paid subscribers.

      However, a freemium strategy comes with downsides.

      • If you offer a solid free product, a user may stay on a free subscription forever. That’s why it’s crucial to restrict useful features without frustrating the user.
      • You might annoy users off your platform if you gate too many features behind a paid subscription. So striking the right balance is key.

      Learn how much revenue you could generate with this freemium pricing calculator.

      price-saas-product_9

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      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 1,000?

      These are all questions to consider when putting together pricing packages. Let’s go over some standard SaaS subscription models.

      Usage Pricing

      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.

      With this model, the advertised prices will always be lower than the monthly billed costs. An initially low price point can appeal 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 penny’s worth.

      One example of usage-based SaaS pricing is found in Oracle’s data integration platform.How to price a SaaS product, usage-based pricing example.

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      In Oracle’s example, you pay for the amount of data your business is processing per hour.

      Usage Pricing Pros

      • There’s a lower bar of entry. Small businesses can subscribe knowing they’ll only be charged for what they use.
      • It’s attractive to freelance-to-enterprise businesses. Very few pricing strategies can attract as wide a range of an audience as usage pricing.

      Usage Pricing Cons

      • It’s easy to back out of. With this model, keep in mind that usage doesn’t equal value. Customers may back out if they incur high costs that don’t make their business objectives any easier.

      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. It’s because your service is precious to them. It’ll thus be easy for them to churn.

      Free Sales Pricing Strategy Calculator

      Determine the best pricing strategy for your business with this free calculator and template.

      • Cost-Plus Pricing
      • Skimming Strategy
      • Value-Based Pricing
      • And More!
      Learn more

        Download Free

        All fields are required.

        You're all set!

        Click this link to access this resource at any time.

        User-Count Pricing

        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.

        Or, you might simply have a set fee for each user, allowing clients to choose the exact number they require — from one person to all the way up.

        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 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 their employees sign up with the service, but will only be charged for those who use it.

        User count pricing is popular. Here’s a user count pricing example from Sales Hub.

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        Just like HubSpot, you can use a mixture of both tiered and user count pricing to help customize costs for each one of your customers.

        User-Count Pricing Pros

        • It’s easy to calculate. If a company only has two team members using the application, it’ll only pay for those two logins.

        User-Count Pricing Cons

        • People may share logins. Users will know that more sign-ins equal higher costs, so they might share logins with employees, or between entire teams, to avoid additional fees.
        • This pricing is unattractive to growing businesses. A business that is hiring more employees might avoid doing business with you if they know they’ll be charged more per user.

        Tiered Pricing

        Tiered pricing involves offering multiple package options that vary by feature and price. Each tier can be tailored to specific buyer personas. For example, single users versus medium-sized companies.

        Not all users will need the same functionality or number of features, so this option allows them to select according to their needs.

        Tiered pricing is likely one of the most popular SaaS pricing models out there. Here’s a tiered pricing example from Sales Hub.

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        Note that this only includes the Free and Starter plans. The Professional and Enterprise plans are on the next tab, making it easier for users to digest pricing information.

        If you plan to have more than three tiers, consider the design of the pricing page to improve the user experience.

        Tiered Pricing Pros

        • It’s straightforward and familiar. Tiered pricing is widespread and allows your customers to simply choose the best package for them.
        • You can personalize for different target markets. Because different packages typically target different types of businesses (e.g., small businesses versus enterprise firms), you can effectively address the needs of different customers with different packages.

        Tiered Pricing Cons

        • It may cause confusion. Too many packages (with varied options and features) might confuse customers, and they can move on to a competitor with fewer choices.

        Flat-Rate Pricing

        This pricing package is the opposite of tiered pricing. There’s one price or a flat rate (as this model’s name suggests) 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 daily.

        One example of flat-rate pricing is found on the IXACT Contact website.

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        The flat-rate method works for them because they target individual real estate agents instead of entire agencies or large real estate businesses.

        Flat Rate Pricing Pros

        • It’s the most straightforward pricing model yet. The user pays one SaaS fee and is ready to go.

        Flat Rate Pricing Cons

        • It’s not personalized. Different customers have different needs. Some will need certain features, while others will leave them unused. That can make them feel like they’re wasting their money on a subscription.
        • You face decreased profits. Because companies can share a single subscription, you miss out on potential revenue. You might also be hit with unexpected additional expenses if a firm overuses your service. Flat-rate pricing is a viable SaaS pricing strategy only if you target individuals or small businesses.

        Per-Feature Pricing

        This model is similar to tiered pricing, but customers pay per feature. For example, you may offer a base customer service system. Customers can choose to add on email automation and chatbot services for an additional fee.

        Per-feature pricing is a solution for those who want to set a flat rate, but don’t want features to go unused.

        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.

        Amazon AWS is priced on a per-feature basis. You can add the services you’ll need in the AWS pricing calculator, then figure out your yearly investment.

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        Per-Feature Pricing Pros

        • It’s easy to scale. The user can add more services and tools as they need them. They’ll feel content that they’re only spending money on features they use.
        • It’s affordable. Small businesses may only pay for a few features, while enterprise businesses may pay for hundreds.

        Per-Feature Pricing Cons

        • It can be confusing. Customers may not even know what they need. You’ll need a team of product specialists who can help them choose the right features for their business without being overtly salesy.

        Overall, while this is a valuable method, it can be difficult for the customer 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.

        Free Sales Pricing Strategy Calculator

        Determine the best pricing strategy for your business with this free calculator and template.

        • Cost-Plus Pricing
        • Skimming Strategy
        • Value-Based Pricing
        • And More!
        Learn more

          Download Free

          All fields are required.

          You're all set!

          Click this link to access this resource at any time.

          Types of SaaS Consumers

          You should also consider who your end user is when determining how to price your SaaS product. Are you targeting individuals, selling to small businesses, or serving enterprise companies?

          Knowing your audience will lead to suitable pricing choices. Here are the types of customers you need to consider and the type of pricing that serves them.

          B2C (Business-to-Consumer) Pricing

          Think about how many SaaS subscriptions you use in your personal life — for movie and music streaming, home security, cloud storage, and a host of other purposes. Netflix, Evernote, Spotify, iCloud+, Duolingo, Youtube Premium — the list goes on.

          In B2C SaaS, the general consumer is the prospect and end-customer. Pricing must be targeted toward an individual user or family, as opposed to enterprise pricing (which we’ll cover below).

          For this audience, a freemium strategy and a try-before-you-buy approach are often used to entice more users. A great example is Amazon Prime which offers a 30-day free trial.

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          Other incentives seen include special promotions and discounts for new users and students. You may also see discounts on occasions such as Black Friday and New Year’s.

          The goal is to offer an affordable plan for individuals based on their varying life circumstances.

          B2B (Business-to-Business) Pricing

          The term B2B SaaS covers a broad spectrum of customers — from SMBs to multinational corporations. This diverse range is reflected in the pricing techniques employed by different service providers.

          For instance, finding an ideal balance between affordability and value is crucial if you cater to SMBs. They typically have a smaller budget and are likely price shopping. Here, a tiered-pricing or per-feature pricing structure may work best.

          Let’s illustrate with examples. Take a look at a section of the pricing page of Quickbooks (which mainly serves SMBs) below.

          The monthly pricing and features associated with each plan are specifically outlined so businesses can make the right choice for their needs. Additionally, there’s a limited-time discount for the first three months to attract people to make the purchase.

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          On the other hand, products serving larger organizations may benefit from user-count pricing or usage-based pricing. This way, you can charge a higher price if your customer uses your services more frequently.

          For example, let’s say you’re selling a learning management system to train employees. Let’s look at the pricing options offered by LMS platform Talent LMS.

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          A company looking to train one department can opt for a basic or plus plan. Meanwhile, a company looking to train its whole workforce can choose a premium plan. TalentLMS can sell to both types of prospects.

          Enterprise Pricing

          Enterprise customers are like whales in the sea of business. For example, a single enterprise account could generate revenue equivalent to twenty regular customers. And along with the right solution that delivers value, the right price is key to netting them.

          SaaS providers who serve enterprise clients fall into two camps: those that share prices upfront on their pricing page (or at least a starting price or estimate) and those that don’t (usually inviting prospects to schedule a sales call or demo for a quotation).

          Both approaches are viable options, depending on individual circumstances.

          Marketing Hub’s enterprise shares prices upfront.

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          Meanwhile, Sprout Social’s enterprise plan offers a custom-built plan and requests prospects to get in touch for pricing details.

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          Deal size exerts an influence over whether SaaS firms display their pricing online. Data gleaned from 2,200+ SaaS firms by OpenView showed that 84% of companies with an average annual deal size under $1K publish their pricing compared to 33% of firms with average deal sizes between $5-25K.

          Along with strategic pricing, it’s also important to invest in customer success to ensure your enterprise clients are gaining a continuous benefit from your product and will renew their subscriptions.

          Free Sales Pricing Strategy Calculator

          Determine the best pricing strategy for your business with this free calculator and template.

          • Cost-Plus Pricing
          • Skimming Strategy
          • Value-Based Pricing
          • And More!
          Learn more

            Download Free

            All fields are required.

            You're all set!

            Click this link to access this resource at any time.

            SaaS Pricing Model Template

            Regardless of the SaaS pricing strategy you choose, you’ll likely create either a single package or multiple packages, which will be laid out on a pricing page for customers to peruse.

            If you’re only offering a single package, your published SaaS fees can look as follows:

            Product Name

            (e.g. Sales Hub)

            $/month or $/users/month

            (e.g. $45/month)

            Value Proposition Statement

            (e.g. “A full suite of sales CRM tools for your whole team to shorten deal cycles and increase close rates.”)

            Most Important Feature

            (e.g. Contact, deal & task management)

            Secondary Feature

            (e.g. Email tracking / notifications)

            Tertiary Feature

            (e.g. Email templates & scheduling)

            [Call-to-Action Button]

            If you’re implementing a pricing model with multiple subscriptions, it could look as follows:

                 

            Target Customer 1

            (e.g. Personal)

            Target Customer 2

            (e.g. Professional)

            Target Customer 3

            (e.g. Enterprise)

            $/month or $/users/month

            (e.g. $9/month)

            $/month or $/users/month

            (e.g. $19/user/month)

            $/month or $/users/month or Custom

            (e.g. Custom)

            Value Proposition Statement

            (e.g. “A basic set of tools to improve your productivity.”)

            Value Proposition Statement

            (e.g. “Advanced project management tools for small teams.”)

            Value Proposition Statement

            (e.g. “Everything your enterprise-level team needs to increase productivity at a mass scale.”)

             

            Package Upsell Statement

            (e.g. Everything included in Personal, plus…)

            Package Upsell Statement

            (e.g. Everything included in Personal and Professional, plus…)

            Most Important Feature

            (e.g. 1 Kanban board and up to 100 tasks)

            Most Important Feature

            (e.g. Up to 20 collaborative timelines and dashboards)

            Most Important Feature

            (e.g. Unlimited boards, timelines, tasks, projects, and dashboards with 1 year of history)

            Secondary Feature

            (e.g. In-app notifications)

            Secondary Feature

            (e.g. In-app messaging and comments)

            Secondary Feature

            (e.g. Advanced performance reports for teams and individual contributors)

            Tertiary Feature

            (e.g. 1 automated workflow)

            Tertiary Feature

            (e.g. Up to 3 automated workflows)

            Tertiary Feature

            (e.g. Unlimited custom objects and workflows)

            [Call-to-Action Button]

            [Call-to-Action Button]

            [Call-to-Action Button]

            Nailing Your SaaS 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 factors, there’s a greater likelihood 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. Put ample time and proper analysis into creating your pricing plans. Then, remember to keep on refining them.

            Editor's note: This post was originally published in September 2020 and has been updated for comprehensiveness.

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