SaaS Pricing Models For Entrepreneurs
In recent years, more and more tech entrepreneurs consider software as a service (SaaS) as a promising model for starting a cloud-based business. For sure, they are incentivized by the steady growth of the market over the past few years.
Gartner predicts worldwide user spending on cloud computing services should grow 20% in 2022 to total $494.7 billion. The SaaS segment keeps dominating the cloud market and is expected to reach $176.6 billion by the end of 2022. This trend is likely to continue in the years to come.
To grab more market share, SaaS founders consider different factors. Barring non-stop improvement of a solution, it is critical to justify a pricing model. Before delving into existing pricing models, we suggest you take these initial steps:
Create a dedicated pricing team
Experiencing a lack of independent employees, SaaS startups make the mistake of delegating price formation to the sales or accounting departments. To avoid a conflict of interests, it is better to assign such a job to an independent team or a dedicated employee. Both sales managers and accountants generally pursue different aims, for instance, to increase margins and reduce costs.
A dedicated pricing team, however, must take into account long- or short-term profitability for the company. For example, developing a solid customer base can be prioritized over receiving positive revenue for a while. That strategy typically contradicts sales and accounting goals, however, it sustains a profit in the future.
Do market research
External factors strongly affect the value of your product. It’s better to keep an eye on competitors’ pricing, their set of features, and customers’ preferences. Try to investigate where customers are spending time and money and offer a faster or cheaper way to do the same with your solution. Ultimately, try to estimate the value you bring.
Consider internal factors
SaaS entrepreneurs should remember that the product price is equivalent to their development, marketing, and sales efforts. These variables are constantly changing, which is a valid reason for revisiting your SaaS model pricing at least once a year. Perhaps it is worth upgrading to higher tiers to cover growing expenses. In some cases, tech companies update pricing strategy either quarterly or biannually.
When you have done these things, you are ready to define the way you will earn money and set up pricing mechanisms.
To make an informed decision on SaaS product pricing, you need to know the common pricing models SaaS businesses use.
By choosing flat-rate pricing, SaaS businesses limit their product to a single set of features and a single price. At the same time, the price can be changed if you set monthly or annual billing. Usually, SaaS companies set flat rates or one-tier pricing at a very early stage of their business because it’s quite simple.
The model implies that you don’t differentiate the price for different customers. It seems to be an advantage as you don’t have to spend time designing several offers for each buyer persona. However, that might be difficult to attract them without varying pricing. Each segment has its own needs and demands. One group of customers may feel they are overpaying and don’t need certain features of the plan. While the other group expects new advanced options in the next product update.
The tiered pricing model is used by most SaaS companies. That is why customers expect to see on SaaS pricing pages at least three packages filled with different features. This type of pricing allows subscribers to switch to higher tiers whenever they want to take advantage of the necessary functions. As you probably have admitted, employing a tiered pricing model enables you to expand the audience coverage.
At the same time, this approach requires the development team to conduct careful research on targeted audiences’ needs. That may lead to the postponement of the launch date.
According to a usage-based pricing model, the charge that subscribers should pay derives from the number of features they use in a product. The list of additional paid functions might include various kinds of services (messages, calls, scheduled posts on social media, etc.). Thus, the usage-based model is easy to adopt.
The model has disadvantages as well. Usage-based pricing makes forecasting revenue challenging since it typically varies from month to month.
This B2B SaaS pricing model is linked to the number of users that employ a service. In this way, an enterprise pays for accounts that can be accessed simultaneously. This is a flexible model which eases the work of the development team. Nevertheless, SaaS strategists should consider how to prevent customers from cheating as this pricing model isn’t immune to multiple logins in a single account.
Using this pricing model, subscribers pay only for functionality. Customers can move to a higher pricing tier when they need enhanced functionality. With per-feature pricing, it is easy to pay off the development efforts required for the update. It also simplifies marketing efforts when you come up with a fresh, innovative add-on.
Consumers, however, perceive value differently. Experienced users will find a newly introduced feature quite useful, but the rest of the audience might not understand the value.
Freemium is one of the most well-known pricing tactics. It implies a SaaS platform offers basic features for free. With this strategy, customers test the product to some extent. Meanwhile, they can always upgrade their account to a paid plan. This approach is often combined with tiered and per-feature pricing.
Deciding on your growth strategy, it is better to pay attention to the free and paying users ratio. While free accounts don’t make a difference to your revenue, try to think about how to increase the number of those who are ready to spend on your product.
As you can see, each type of pricing has a different impact on revenue, customer acquisition strategy, and initial development efforts. Assuming these factors, SaaS companies are tempted to design a complicated pricing model. We suggest not doing that and keeping it simple enough that customers can understand what services they acquire.
To recap, a SaaS business has to research the market and calculate labor input before setting a pricing strategy. An internal pricing team also should consider the company’s growth stage while adjusting prices. It impacts the pricing model that the company will choose. However, the initial price setting is designed for a limited period. In order to keep up with the fast-growing SaaS industry, pricing should be revised at least 1-2 times a year.
Tim is a sales and marketing specialist, who solves business challenges like an engineer by focusing on data insights, analyzing what works, what doesn’t, and what can be improved from a technical and financial perspective. Over the years he has supported the transformation of new clients into long-term partners and expanded services provided in the work space, ultimately facilitating revenue generation and business success. Tim strongly believes that you can’t be in charge of the outcome and results. However, you are 100% in charge of the input.