Pricing Models for SaaS
Picking a pricing model for a piece of software is probably one of the hardest thing that a company has to do and is often botched by teams small and large. Fortunately, prices are not written on stone and can be changed over and over again. Successful companies modify an aspect of their pricing strategy nearly every quarter. Whether you are a startup or an established business, you should never think of your prices as definitive and you should constantly experiment with your pricing model.
Is pricing for SaaS companies an art 🎨 or a science 🧪? Arguments can be made for both, but we want to provide you with a list of models with which you can leverage to approach your own pricing decisions.
Tiered pricing (flat rate)
Let’s start with the most common one. Tiered pricing is the pricing model in which you provide various tiers of access to your product and you charge a different amount for each one of them. Usually each tier gets called a “plan”, so you end up offering multiple plans. If you only offer a single plan, then it can be called a flat rate pricing model (which is just a single tier model and also highly discouraged).
It is very common to highlight the plan that we want to sell the most, the “popular” one. This tier typically has solid unit economics and makes up the majority of sales. Tiered pricing is almost always accompanied by monthly and annual prices (with a 10-30% discount), which we highly recommend. In some cases you’ll also see that the first, or “lowest tier” can also be free. If you’re just starting out, try to avoid free tiers…you’re trying to prove product-market-fit and offering your product for free is a much weaker signal than paid plans and tiers.
Example: 99% of SaaS businesses out there
Another common pricing model is offering your product for free and then charging for additional features or for more “resources”. Let’s make things clear, freemium pricing model is a customer acquisition strategy, not a pricing strategy, your pricing strategy will be to upsell the user and try to convert them to a paid plan, we see this mistake made too often.
It is mandatory that you incentivize users to upgrade either by limiting the features that they have access to, or by limiting the number of “resources” (think of them like workspaces, teammates or any other value-metric).
This pricing model is often used in conjunction with the tiered model (and all best practices) to inform the user when they will need to upgrade and which plan is best for them. Freemium pricing has been popularized by the Product Led Growth (PLG) Go-To-Market movement.
Metered pricing, also called usage based pricing, ties the amount that your customer will pay to a value metric or “resource”, so the more of that “resource” they want, the more they will pay. This is most common with infrastructure businesses where companies of very different sizes can coexist and the price needs to vary greatly between them or with businesses that directly affect revenue or expenses like affiliate programs or payment processors.
This model is also usually tied to a custom plan (with the pricing hidden), for enterprise customers, but can also be mixed with a flat monthly fee. Think about a marketplace where a seller pays a monthly fee to be listed plus a percentage on the transactions that they make.
Credit based pricing
Credit based pricing can be very similar to metered pricing, but we want to keep it separate since it is fundamentally different in the way you communicate it to your customers, which is all that matters in the end. In credit based pricing your customer is charged for buying “credits or tokens” that are used in the app for executing various tasks.
Let’s think about an SEO tool where each SEO check of your website costs one credit. If you want to do five, then you will buy five credits and if you want to do that every month, then you can opt in for a subscription of say 5 credits / month. Another great example can be email marketing software that charge for number of contacts, which are just credits. A third example is image manipulation APIs where each credit is consumed to complete one manipulation.
Usually credits are sold in bulk on a monthly recurring basis to incentivize the users to buy more. In some cases un-used credits can be “banked” and rolled over to the following payment term but that’s a bit more complicated to develop and execute.
Seat based pricing
Again, seat based pricing is also similar to the previous two, but there is still an important difference since your target customers are probably used to seeing prices “per seat”. This is usually used in products for teams where each additional team member added to the product, counts as an extra seat and is billed separately. You see this model a lot on tools sold to developers or in the team productivity and collaboration space.
This pricing model follows the same guides as the credit-based one so you can still sell in bulk, offer discount on bigger packages, etc..
In the above snapshot we see it used in conjunction with the freemium model.
Choosing the right pricing model is hard…it’s probably one of the hardest decisions a founder is asked to make; not only choosing the right price point, but even before that, choosing the right pricing model. Are you going to charge a flat monthly fee? Or is it better to charge per user? Or maybe a freemium model fits best?
When making this decision, it’s important to keep your ideal customer in mind… and not just your interest. The pricing model should be familiar to them and easy to understand.
This article has been a deep-dive on pricing models, we haven’t even talked about pricing strategies, which is how much you should charge and what consideration or strategies you can use to help you in that decision.
We hope this has been helpful to you, either if you already have a pricing model picked out or if you need to decide on the one that fits best for your product. For our company LlamaFi, we decided to go for a freemium model since we wanted to expand our acquisition funnel as much as possible and we believe that we can deliver value quickly to our users and convince them the tool is valuable enough to warrant an upgrade…this wasn’t our first pricing model and it likely won’t be our last. Remember, experimentation and iteration are key players in the world of building successful SaaS businesses!