Pricing pages have become increasingly complex. While it is true that one size doesn’t fit all, it is important to understand which pricing model or models would work best for your business.
With so many models out there, it is a good idea to familiarize yourself with some of the most useful pricing strategies for SaaS.
Below, I will go through some of the basic pricing models, as well as some that are more complex. For each, I will highlight the use-cases in which they would be most effective.
1. Flat Rate Pricing
Flat rate pricing is a pricing model in which a user has a flat price, usually on a monthly or yearly basis, to access all features of your product.
This is the most basic pricing model a company can adopt.
Example of Flat Rate Pricing
When to use Flat Rate Pricing
Since the company only offers one product with one price, they likely will not have a Sales team that is running deals. They would likely integrate directly with a billing platform and collect billing.
When to avoid Flat Rate Pricing
Most enterprise SaaS companies will outgrow this type of pricing model since it does not provide expansion revenue.
2. Volume-Based Pricing
Volume-based Pricing is a type of pricing model used to bill for physical or virtual services.
When volume rates are invoiced, a rate is selected by the quantity consumed for the billing period as defined by the model.
Volume vs Tiered Pricing
Volume pricing can often be confused with tiered pricing. However, there are some distinct differences. Both are models of pricing that can have many iterations.
A tiered pricing model is priced per unit within a particular range. Once a user exceeds the top of the range of their given package, they are would move to the next “tier.” The pricing structure becomes cumulative so that as they go through the various unit limits, the price accumulates.
A volume-based pricing model, on the other hand, calculates the price only based on the per-unit cost at the particular tier a user reaches.
The concept is a bit complicated, so here’s an example to help:
|Units||Pricing (per unit)|
|Units||Pricing (per unit)|
If someone has purchased 50 units:
The tiered price would be calculated as (1040) + (2020) + (50*15) = $1,250
In the volume model, the price would be calculated as (50*15) = $750
As you can see, the final price for the same amount of units can vary greatly between these two models.
When to use Volume Pricing
Volume pricing can be a good model for businesses who really have a handle on their numbers. They need to understand their profit margins and break-even points. They need to understand the seasonality of their product. They also need to understand their customer segments and their buying habits.
When to Avoid Volume Pricing
Many SaaS businesses rely on the recurring revenue model. In the volume-based pricing model, there is little commitment from the customer to continue using the product or service once they’ve exceeded their volume limit. While providing great experience will keep them coming back, a younger stage company that is still in the process of developing their product and has fewer sales resources may have a much harder time retaining these customers.
3. Tiered Pricing
A tiered pricing model is one that offers different versions of the same product used at different price points. Generally, it is a pricing matrix that dictates a price based on quantity or another variable.
A tiered pricing model allows you to offer a variety of product packages that include different feature combinations.
Example of Tiered Pricing
When to use Tiered Pricing
Businesses that focus on a variety of buyer personas benefits the most from a tiered pricing model. With this model, businesses can create tailored packages for their different personas, enabling them to maximize revenue and potential for greater up-selling in the future.
When to avoid Tiered Pricing
If your business has a limited set of target personas, a tiered pricing model might not be a great fit. In addition, if you have a few “power users” that have significantly higher usage of your product, you may be losing out on a lot of revenue as compared to a usage-based model.
“Product-Led Growth” is all the rage in the SaaS space. Founders look to unicorns like Slack and Dropbox as the ultimate freemium success stories. The concept of freemium is to offer a limited version of your product for free indefinitely under the assumption that a user will love it so much that they will pay for additional features. The limits on a free plan can be based on different variables such as user seats or features.
Example of Freemium Pricing:
When to use Freemium Pricing
Freemium pricing has become the ultimate model for exponential growth in the SaaS space. However, some types of products are more conducive to this model than others. Given that freemium works best when the product is shared, creating a viral effect, it is best used for collaboration or communication tools such as email software or project management tools.
When to Avoid Freemium Pricing
The success of a freemium pricing model relies on the ability for your product to not only sell itself but be easily shareable amongst potential users to create the “Flywheel” effect. A product that is highly complex made for a single user, and requires hand-holding during the onboarding process is not a good choice for freemium.
5. Usage-Based Pricing
Usage-Based pricing is a “Pay as you go” model where customers are charged more the more they use the product.
Example of Usage-Based Pricing
When to use Usage Based Pricing
If you are a SaaS business that wants to provide benefits to both smaller startups as well as enterprise customers, usage-based pricing is a model you should consider. By tagging cost to usage, a smaller company will be able to get all the benefits without worrying about the cost of an enterprise-level product. In addition, if your customer base includes both “light” and “heavy” users, this model will make sure you capture as much revenue as possible from the heaviest users.
When to Avoid Usage Based Pricing
The downside to using a usage-based model is that it becomes harder to predict revenue, given that usage may vary over time with a given customer. In addition, this model may cause smaller companies to be surprised at the end of the pay period that their bill is so much higher than it was previously.
6. Per User Pricing
In a per-user pricing model products are priced per “Seat” or “User License.” The product may also have features enabled/disabled or limited. However, these features are not priced separately.
The quantity or number of licenses purchased determines the total cost of the purchase, regardless of whether the licenses are used or not.
When to use Per User Pricing
In the recurring revenue model, predictability is the key. a per-use pricing model enables businesses to track and forecast revenues more easily.
When to Avoid Per User Pricing
This pricing model works well for products where each user has their own unique experience of using the product since this model incentivizes users to “chat” by sharing a single login.
7. Per Active User Pricing
Active User pricing differs from User Pricing insofar as the customer only pays for seats that are actually being used. If a company creates many seats, but only a few of them are ever active, they will only be charged for the active users.
When to use Active User Pricing
Per Active User pricing is really to benefit the customer. It helps make enterprise customers more comfortable adding many seats. However, the challenge then becomes making sure those users are active. For companies that have invested heavily in their activation process, this model works well.
When to Avoid Active User Pricing
Small to medium businesses with small sales and success teams would likely not benefit. Given that LTV increases the more seats are activated, a company would have to have its product growth strategy really nailed. This would include really focusing on helping users find value and motivating them to bring the rest of their colleagues into the platform.
8. Feature-Based Pricing
Described as “add-on” or “modular” pricing. This model differs from models such as the standard tiered pricing model due to its pricing packages being based entirely on the features they offer. Higher priced packages include more features.
Example of Feature-Based Pricing:
When to use Feature Pricing
For companies whose offering has both basic and extremely resource-intensive features, this model works quite well. In addition, there is a greater incentive for upgrading when a user gets their initial value. For greater upselling success, have the features they don’t currently have access to visible in their dashboard with an indication that they can get access to them if they upgrade their plan.
When to Avoid Feature Pricing
The potential downside of this model is the difficulty in understanding the minimum set of features a user would be willing to pay for. In addition, if certain features are basic requirements for anyone interested in your product and they are only available in the highest-priced package, it will negatively impact customer acquisition.
9. Credit Pricing
Credits could be purchased either through a subscription or a one-time transaction that is redeemed in the app.
This pricing model works well for products that don’t have continuous use but is more common with consumer-based products such as Classpass and Audible.
Example of Credit Pricing
When to use Credit Pricing
This model isn’t often used in the SaaS space. However, it may be a good option for products such as stock photo websites in which users require a certain amount of photos in a given month. In terms of B2B apps, it’s hard to find a great use case for this model.
When to Avoid Credit Pricing
If your product is something that would be used daily, a credit pricing model is not a great fit. Users being limited to credits will inhibit the “stickiness” of your product and increase the likelihood of churn in the long run.