Unlocking Success: Choosing the Best Pricing Model for Your SaaS Company

Selecting the ideal pricing model is a critical decision for SaaS companies. Your pricing model can make or break your success, and with so many options available, it can be overwhelming to decide which one is right for your business.

Should I charge a flat rate or a per-user fee? Is a freemium model the way to go, or should I opt for a tiered pricing structure?

Worry less! In this article, we’ll explore the six most popular pricing models in the SaaS industry and provide you with real-world examples to help you select the perfect fit for your business. These pricing models include:

• Flat Rate
• Pay-As-You-Go
• Per User
• Per Feature
• Freemium
• Tiered

In my view, these six SaaS payment models have stood the test of time. I have thoroughly researched each model and examined the companies that employ them. To ensure that I select the most suitable pricing model, I posed a critical question:

What makes this payment model effective for this particular SaaS company?

Without further ado, let’s dive into it.

1. Flat Rate Pricing for SaaS Companies

Let’s begin with a straightforward pricing model that simplifies things: flat-rate pricing.

Under this model, you offer your software as a service at a fixed price, regardless of the number of users or features. The price is non-negotiable, and customers can either accept or decline it.

While flat-rate pricing may seem like the easiest pricing model to implement, it may not necessarily be the best. Simplifying the pricing structure in this way may lead to losing out on a significant portion of your customer base that would prefer a different plan.

This pricing model is similar to how software was sold in the past, with the exception of recurring subscriptions replacing one-time licenses.

Example: Basecamp

Why does Flat Rate Pricing Work for Basecamp?

This pricing model is beneficial for customers since it’s uncomplicated to comprehend. There’s no hassle, and the customer most likely feels like they are receiving the most value. Moreover, this pricing model aligns with their business and overall view of how businesses should function.

Why might a flat rate pricing model be suitable for your SaaS company?

It depends on various factors such as your product, your customers’ needs, your company’s mission/values/ethos, and the number of features included in your software. For instance, if you’re in the beta stage and have limited functionality, a flat rate pricing model may be a good fit for getting a feel for your customers’ needs.

Similarly, if simplicity is a core value of your company, flat rate pricing may align with your ethos. However, it’s important to note that the suitability of a pricing model depends on the unique offerings of your SaaS company. If there are only a few features and they make sense to be included in one plan, it’s best to avoid complicating the pricing structure with multiple plans.

Flat Rate Pricing is Best For:

• Simplifying the pricing structure
• The initial product offering or beta users
• Products or services with limited features or only one plan

2. Pay-As-You-Go Pricing Model for SaaS Companies

The usage-based pricing model, also known as pay-as-you-go pricing, involves customers paying a fee for each transaction made. Essentially, the more they use the service, the more they pay. This pricing model is quite rare, but it has its place in the market.

One of the main reasons why usage-based pricing is not more widespread is that it can be difficult for customers to monitor costs and for SaaS companies to predict revenue. However, this pricing model is particularly popular among payment processing SaaS services. This is because the amount of money a customer processes through the service directly correlates with the revenue earned by the company.

Example: Snowflake

Why does Pay-as-You-Go Pricing Model work for Snowflake?

Snowflake is a cloud computing service that offers a unique combination of Infrastructure as a Service (IaaS) and Software as a Service (SaaS). Its pricing structure is comprehensive and flexible, allowing customers to choose from various payment options, including usage-based pricing. This feature enables customers to pay upfront on a month-to-month basis or with a standard per-credit format, providing greater control over their spending.

Should You Consider Pay-As-You-Go Pricing for Your SaaS Business?

For pay-as-you-go pricing models in SaaS, it’s important to consider whether customers will pay a fixed monthly fee. If they only use the service occasionally, a flexible “we don’t earn unless you earn” approach may be more appealing.

However, predicting revenue can be challenging with this model since usage patterns are the only way to estimate it. This means customers may use the service once and forget about it without committing to a long-term subscription.

Pay-As-You-Go pricing is best suited for:

• Transaction-based solutions
• Customers who are hesitant to commit to a subscription model.

3. Per-User Pricing for SaaS Companies

Most SaaS companies use per-user pricing to charge their customers, as per Pacific Crest’s survey. This pricing model means that customers are charged based on the number of users utilizing the service. It’s a straightforward pricing structure that benefits both customers and companies, minimizing server and maintenance costs when more team members use the SaaS service.

However, there is a higher risk of users cheating or discontinuing the service if the fees become too costly for their budget.

Example: Canva

Why does Per-User pricing work for Canva?

Canva uses a per-user pricing model that offers different plans for different customer segments. The Pro plan provides a flat rate for up to 10 people, which is ideal for small teams. For larger companies, the Enterprise plan charges a per-user rate of $30, making it a cost-effective option for businesses of all sizes.

Canva’s pricing model is an excellent example of how SaaS companies can combine different pricing models to create a structure that works well for their product and customers. By providing a freemium plan, a flat rate plan, and a per-user plan, Canva caters to different customer segments and offers them a pricing plan that fits their needs and budget.

Is per-user pricing right for my SaaS company?

To determine whether per-user pricing is the right pricing model for your SaaS company, you need to consider your customers’ needs and how they use your product.

If your product is frequently used or relied on by teams or companies, per-user pricing might be a good fit. It ensures that companies only pay for the number of users they have and can easily manage and control their users’ access to the product.

However, if your product is used by individual customers or doesn’t require user management, per-user pricing might not be the best fit. In this case, a different pricing model such as per-feature or tiered pricing might be more suitable.

Per-User Pricing is Best For:

• Products that are frequently used or heavily relied on.
• Products that work well with teams or companies.

4. Per-Feature Pricing for SaaS Companies

Per-feature pricing is a common SaaS pricing model that allows companies to cater to different customers with varying needs. This is ideal for software with broad functionality and multiple features that not all customers need.

There are typically three plans, including a basic plan with limited functionality to attract customers. Some companies offer only two plans depending on the number and type of features. This model is useful for industries like sales where different teams require different features.

Customers can upgrade as their business scales, paying only for the features they need. This model is simple and attractive to customers, while also allowing SaaS companies to generate revenue based on the value they provide.

Example: Salesforce SMB Sales Pricing Model

Why does Per-Feature Pricing work for Salesforce?

Per-feature pricing works for Salesforce because it allows the company to offer a range of plans that cater to different customer segments. By offering plans with different sets of features, Salesforce can differentiate between customers who have different needs and budget constraints.

This approach allows customers to select the plan that best fits their business requirements and budget, which can help to reduce churn rates.

Additionally, the use of per-feature pricing allows Salesforce to generate more revenue by charging customers for specific features that they value. By offering a range of plans with varying feature sets, Salesforce can attract customers with different needs and budgets, making per-feature pricing an effective pricing model for the company.

Is Per-Feature Pricing Right for my SaaS company?

Yes, per-feature pricing could be the right pricing model for a SaaS company, depending on its customers’ needs. It allows the company to differentiate between customer segments and offer each segment exactly what they need, instead of a one-size-fits-all solution.

To determine if per-feature pricing is the right model for a SaaS company, it’s essential to consider the needs of different customer segments. If customers have varying needs and don’t require all features, then per-feature pricing could be a good fit. However, if customers’ needs are more uniform and require all features, a different pricing model might be more suitable.

A/B testing is crucial to determine what works best for the company’s customers. It helps to understand how customers react to different pricing options and identify the most effective pricing model.

Per-Feature Pricing is best for:

• Products that can segment well between different customer groups.
• Companies offering a freemium plan.

5. Freemium Pricing Model for SaaS Companies

Freemium is a point of contention in the SaaS space, and for a reason: it can be very hard to separate features in a way that covers all the requirements:

• Can our company live without charging for this?
• Do we have enough features to stimulate users to upgrade to a paid plan?
• Are we being unfair to our paying customers?
• Where do we say: “Stop. That’s premium”?

However, freemium is a great way to introduce our SaaS to the world and attract more customers.

It’s like offering snacks in a grocery store as a promotional tactic; if they like it, they’ll buy it.

If freemium is packed with quality features, it can also be a strong referral generator. However, it’s hard to stop the value and say: “This was just a free trial. If you want more, you have to pay.”

This puts you in a pretty tough spot, as you can either risk turning away your potential customers or completely devaluing your service by offering too much.

There’s also the risk of increased churn. There’s no commitment — they can just leave whenever they feel like it. And since they’ve been using your resources, you’re losing profits. In fact, you can even cross the threshold where you’re operating just out of hope while covering server and tech costs for people who may not even upgrade.

Freemium is a risk for SaaS companies, but there’s still a way to develop it right and generate enough revenue to keep the referral flywheel spinning.

Example: MailChimp

Why does Freemium work for MailChimp?

Freemium works for MailChimp because it allows potential customers to test out their service before committing to a paid plan. This approach has been successful for MailChimp because email marketing is a competitive market and businesses want to be sure they are investing in a tool that meets their needs. By offering a free plan, MailChimp can attract users who might not otherwise try their service, and once they are familiar with it, they are more likely to upgrade to a paid plan.

Another reason why freemium works for MailChimp is that it helps them build a large customer base. While not all free users will eventually upgrade to a paid plan, having a large user base can still benefit the company. For example, free users can help spread the word about MailChimp to their network, which can lead to new sign-ups.

Additionally, having a large user base can make MailChimp more attractive to potential investors or acquirers, which could ultimately benefit the company in the long term.

Does the Freemium pricing model work for my SaaS?

Certainly, the freemium pricing model can work for many SaaS companies, but it depends on a few factors. Firstly, it’s important to consider whether your product can be easily segmented between different customer groups. If you can create a clear distinction between what is included in the free plan versus the paid plan, then freemium may be a good option.

Secondly, it’s crucial to evaluate whether your product has enough features to entice users to upgrade to a paid plan. If your free plan includes all the essential features that users need, they may not see the value in upgrading. On the other hand, if your free plan offers just enough to pique their interest and leaves them wanting more, they may be more likely to upgrade.

Overall, freemium can be a powerful tool for attracting new customers and generating referrals, but it should be used strategically and with careful consideration of the potential risks and benefits.

Freemium pricing is most suitable for:

• Products that can be segmented effectively based on customer needs and usage.
• Companies that offer a free version of their product as part of their pricing model.

6. Tiered SaaS Pricing Model

Let’s leave the best for last — the tiered pricing model, a well-known pricing strategy among SaaS companies.

This approach emphasizes the importance of truly comprehending your clients’ needs, like no other pricing model does.

By offering several pricing plans, each with specific features, you can address the unique requirements of different buyer personas. The beauty of this model is that it doesn’t limit features, but rather offers feature adjustments, without devaluing your product.

However, be careful not to offer too many plans, as it can create confusion. Also, if your users max out on the most expensive plan and still require additional features, you may not be able to generate additional revenue.

Example: Tinder

Why does Tiered Pricing work for Tinder?

Why did the lonely smartphone download Tinder? Because it wanted to find a match!

Tinder’s tiered pricing model is a success story in the dating app world. By offering different membership levels, they cater to a variety of user needs and budgets. The free version lets users swipe and match with others, but with daily limits and fewer advanced features. The basic paid version, Tinder Plus, offers additional features like unlimited likes and undoing swipes, while the premium version, Tinder Gold, takes it up a notch with features like seeing who’s already liked your profile and swiping in different locations around the world.

The tiered pricing model enables Tinder to cater to different user segments and their needs, while also boosting revenue by encouraging users to upgrade to higher membership tiers. With options for everyone, Tinder makes sure that love (or whatever else they’re looking for) is just a swipe away.

Should my SaaS company use a Tiered Pricing model?

If you cover a wide range of needs for different kinds of customers, definitely. It’s a great way to standardize revenue prediction, optimize for customer feature satisfaction, and incentivize churn reduction.

Tiered Pricing is Best For:

• An established product that’s been successful in expanding its solution to different markets.
• You’re confident in your product and have proven historical stability with your revenue.

Wrapping Up

In conclusion, choosing the right pricing model for your SaaS company can be a daunting task, but don’t worry — it’s not rocket science. Unless, of course, you’re running a SaaS company that actually specializes in rocket science, in which case, you might want to charge a little extra for your services.

All jokes aside, the key is to understand your customers and what they value most. Whether you go with a simple flat rate, a pay-as-you-go model, a freemium option, or a tiered pricing plan, make sure you’re providing value to your customers and keeping their needs in mind.

And if all else fails, just remember the wise words of renowned philosopher and economist, Kanye West: “No one man should have all that power… unless they’re willing to pay for it.” So, go forth and find the pricing model that works best for you and your customers, and remember to always keep it real (and profitable).

All the best in your next big SaaS launch🚀