Simply put, SaaS pricing is important. No matter how good your product is, you won’t be able to maximize your profits without a robust SaaS pricing strategy and model.
Although optimizing SaaS pricing is a headache for many businesses, it doesn’t have to be difficult.
With this guide, you’ll learn everything you need to set the right pricing for your SaaS products. Let’s get started!
How Does SaaS Pricing Differ from Traditional Product Pricing?
Most SaaS businesses use the subscription-based revenue model. This is the main reason why SaaS pricing is different from traditional product pricing, where you charge your customers a one-time fee for a product at the time of purchase.
SaaS companies essentially rely on receiving recurring monthly or annual payments from customers.
A poorly chosen SaaS pricing model can deter customers from committing to ongoing payments. Because of this, SaaS businesses have to invest more time and effort into developing the right SaaS pricing strategy that can help attract and retain customers.
Not to mention, SaaS pricing strategies and models can and should change over time as you improve your product and grow your business.
Why it’s Important to Set Your SaaS Pricing Right
Now that you know the differences between traditional pricing and SaaS pricing, let’s see why it’s important to optimize your SaaS pricing. Setting your SaaS fees right can help you:
- Improve customer satisfaction: optimizing your SaaS pricing to match the value you provide for customers can increase your customer satisfaction. In turn, this helps to retain those customers. If your SaaS pricing is too high for the value you provide, for example, your customers might feel like they’re overpaying, which can lead to customer churn.
- Increase revenue growth: setting the right SaaS pricing ensures that you aren’t underselling your products either, thus helping you make more revenue.
- Gain a competitive edge. Your customers are always on the hunt for the best price-to-value ratio. Setting the right SaaS pricing, and modifying it based on the market situation, can help you gain an edge over your competition. And, if you nail it right, you can even win the customers of your competitors.
Top 3 SaaS Pricing Strategies
There are many SaaS pricing strategies that you can choose from, so let’s take a closer look at the top 3 SaaS pricing strategies: cost-plus, value-based, and competitor-based pricing.
#1. Cost-Plus Pricing
Cost-plus pricing, also known as cost-based pricing, is perhaps one of the most prevalent SaaS pricing strategies, especially among startups.
With the cost-plus pricing strategy, you’re basically selling your products at a higher price than it cost you to create them so that you make a profit. For example, you can add a 20% profit margin to the amount it cost you to create your SaaS product, to ensure you’re making a profit.
Although the cost-plus pricing strategy is very simple, it lacks flexibility and therefore isn’t the best option for most SaaS companies. SaaS business expenses can fluctuate, and modifying your subscription prices every month to cover and exceed your expenses simply isn’t an option.
For example, if one month you need to increase your marketing spend, your profit margin will be affected, resulting in less profit that month.
#2. Value-Based Pricing
With value-based pricing, you’re essentially aligning the price of your SaaS product with the value it provides for your customers.
Unlike other SaaS pricing strategies, however, value-based pricing can be complicated. You can’t simply calculate your expenses or analyze your competitors to adjust your pricing. Instead, you must research your target audience to learn their needs, requirements, and what they value most in your SaaS product.
Despite its complexity, value-based pricing is still the best choice for most SaaS companies, and here’s why:
- Charging more. With value-based pricing, you can charge your customers higher prices than your competitors. That instills the fact that they’re getting more value from your product, which justifies the higher price.
- Increasing prices over time. The value-based SaaS pricing strategy enables you to raise your prices as long as you’re adding new features—and thus more value—to your product. This essentially enables you to both regularly improve your product AND generate more revenue, which is a win-win for both your company and your customers.
#3. Competitor-Based Pricing
The competitor-based pricing strategy simply means that you’re setting your product prices based on your competitors’ pricing.
This is another popular SaaS pricing strategy among startups, as you don’t have to do extensive customer research or calculate your business expenses. Instead, you analyze how your competitors are pricing their products and set your prices accordingly.
Although this pricing strategy is very simple, it isn’t the best for SaaS products. If you base your product pricing solely on your competition instead of your product value, you might end up underpricing your SaaS product.
That said, knowing your competitors’ prices should only help you get a rough idea of how to price your products. If you offer your SaaS at double the average market price though, for example, it’s unlikely you’ll attract many customers.
Ultimately, it’s important that you customize your pricing strategy, as no two SaaS businesses are the same, even if they operate in the same niche.
7 Most Common SaaS Pricing Models
SaaS pricing strategies are essentially different approaches used to determine product pricing.
SaaS pricing models, meanwhile, refer to the way you offer and package your SaaS product to your customers. In most cases, your product will determine the best SaaS pricing model for your business.
Now that we’re clear about the difference between SaaS pricing strategies and models, let’s see what the 7 most popular SaaS subscription models are among SaaS businesses.
The word ‘freemium’ combines two words—free and premium—and that’s exactly how this pricing model works. You offer a basic version of your SaaS product for free and an upgraded version for a certain price premium.
Most importantly, the main goal of freemium is to convert free users into paying customers.
Freemium Pricing Example
Asana is a project management platform that uses the freemium pricing model:
Besides the free plan, Asana has two paid subscription plans: Premium and Business. Both of these plans also charge you per number of users. As such, the company uses the freemium pricing model in combination with user-based pricing.
Pros of Freemium Pricing
The main advantages of the freemium pricing model include:
- Attracts users. A free SaaS product is an attractive deal to many people. As such, it can help you cut down on customer acquisition expenses.
- Facilitates growth. If your users are happy with your free product, they’re more likely to share their excitement with their friends and family. This can boost your business growth, as referred customers are 4 times more likely to buy your product.
Cons of Freemium Pricing
The main downsides of the freemium SaaS pricing model are as follows:
- Can impact financial health. Free users don’t generate any revenue, which can lead you to lose revenue.
- Conversions can be difficult. If your product solves their problem, most people will be more than happy to continue using it for free, even if it doesn’t come with all the features.
#2. License or Flat Rate
The license or flat rate pricing model is among the simplest SaaS pricing models. It means that you’re selling your product for a one monthly or annual price.
Flat Rate Pricing Example
Basecamp is a collaboration and project management tool that uses the flat rate pricing model:
Basecamp offers a business plan at $99 per month, that you can also try out for free. The company also offers a free plan for light users, thus combining the freemium and flat rate pricing models.
Flat rate pricing differs from subscription plans because it has only one price tier.
Pros of Flat Rate Pricing
The main pros of the flat rate SaaS pricing model are:
- Simplicity. The flat rate pricing model is simple to communicate, sell, and manage.
- Easy marketing. The flat rate pricing model enables you to focus all of your marketing efforts and resources on a single product plan, which can yield great results.
Cons of Flat Rate Pricing
Here are the main drawbacks of using the flat rate pricing model:
- Limits your buyer personas. If you focus your product on enterprises, for example, the price might be too high for small and mid-size businesses.
- Lacks flexibility. You can’t upsell your customers with flat rate pricing. Moreover, you only have one shot at selling a product – if your product isn’t exactly what the user is looking for, they simply won’t buy it.
#3. Pay-as-you-go or Usage-Based
The pay-as-you-go or usage-based pricing model means that you charge your customers only for what they use. The more your customers use your SaaS product, the more they pay.
The usage-based pricing model is becoming increasingly popular with SaaS businesses, often in combination with the freemium model. SaaS companies can charge their customers based on the number of invoices created, calls made, tasks completed, etc.
Usage-Based Pricing Example
Mailchimp is an email marketing automation platform that uses the pay-as-you-go pricing model:
Mailchimp uses a combination of three pricing models: freemium, feature-based, and usage-based. It primarily charges users based on how many contacts they have. The more contacts a user has, the more they will pay.
Pros of Usage-Based Pricing
The key advantages of the usage-based SaaS pricing model include:
- Fair pricing. This pricing model is fair both for the customer and the business, as the more your customers use your product, the more they pay.
- Attracts a wide audience. With the usage-based pricing model, virtually anyone, from startups and small businesses to large enterprises, can afford your product.
Cons of Usage-Based Pricing
Here are the main cons of the usage-based pricing that you should be aware of:
- Hard to predict your revenue. With the usage-based pricing model, your monthly recurring revenue (MRR) can vary greatly from month to month, making it difficult to predict future earnings.
- Can hinder business growth. Being unable to predict your MRR can affect your business growth timeline (e.g. you might not be able to add new features as planned).
The user-based pricing model means that you charge a fixed monthly rate for each user part of an organization.
Some SaaS businesses use a variation of the user-based pricing model known as per-active user pricing. With this SaaS pricing model, companies don’t charge inactive users.
User-Based Pricing Example
Trello, a productivity app owned by Atlassian, uses the user-based pricing model. Here’s what that looks like:
Trello combines user-based SaaS pricing with the freemium pricing model. All of their paid subscription plans have a per-user price. Opting for annual SaaS billing allows customers to get a discount that applies to each user.
Pros of User-Based Pricing
The user-based pricing model brings two key advantages to your SaaS business:
- Simplicity. User-based pricing is simple and easy to understand for potential new customers.
- Predictability. The user-based pricing model makes it easy to calculate your monthly and annual recurring revenue (ARR).
Cons of User-Based Pricing
Here are the main two disadvantages of the user-based pricing model:
- Encourages dishonest use. Some companies might try and cheat by sharing a single login between several members to lower the subscription price.
- Limited upselling possibilities. Unless you combine user-based pricing with other pricing models (e.g. feature-based pricing), you might miss out on upselling your customers.
The feature-based pricing model is when you offer several subscription plans that vary in features and price. The more features and functionality a subscription plan includes, the higher it costs.
Generally, the feature-based pricing model works well for most SaaS companies, as it sets the price in accordance with the value customers receive.
Feature-Based Pricing Example
Evernote is a note-taking and task management app that utilizes the feature-based pricing model:
Evernote combines feature-based pricing with freemium SaaS pricing. The company offers three plans at different prices. Each next tier offers the same features as previous tiers, in addition to extra features and functionality.
Pros of Feature-Based Pricing
Here’s what makes feature-based pricing a great option:
- Incentivizes plan upgrades. Feature-based pricing encourages users who want more out of your app to upgrade their subscription plan to get more features.
- Appeals to a wide audience. With feature-based pricing, you can easily make your subscription plans affordable and suitable for all user groups.
Cons of Feature-Based Pricing
Feature-based pricing has its downsides too, which include:
- Complexity. Getting feature-based pricing right off the bat can be difficult. You need to carefully analyze your buyer personas and their needs, and make sure that each subscription plan offers exactly what your customers are looking for.
- Unsatisfied customers. Some customers might feel dissatisfied as, although they are paying for a subscription plan, they don’t get the functionality of your product they expect.
In short, storage-based pricing is similar to feature-based and pay-as-you-go pricing models. The difference here is that you base your pricing tiers on storage allowance – the more storage a subscription plan provides for your customers, the higher it costs.
Storage-Based Pricing Example
Dropbox is one of the oldest cloud storage services and an excellent example of storage-based pricing:
Dropbox offers two types of subscription plans: ‘Personal’ and ‘Business’. Each subscription plan provides a certain amount of storage, whereas their ‘Advanced’ plan provides unlimited storage.
Pros of Storage-Based Pricing
The pros of storage-based pricing are as follows:
- Easy conversions. If you use storage-based pricing alongside the freemium pricing plan, you can easily convert free users to paying customers.
- Incentive to upgrade. Similar to the point above, storage-based pricing offers your customers an incentive to upgrade their plans to a higher tier to get more storage when they run out of it.
Cons of Storage-Based Pricing
Storage-based pricing has a few cons you should know about, including:
- Hard to get it right. Just like feature-based pricing, it can be difficult to make storage-based pricing work exactly as intended. If you offer too much storage for free, for example, your customers may never need to upgrade to paid plans.
- Providing enough storage. If a pricing plan doesn’t provide enough storage or offers it at a very high price, you might lose some customers.
#7. Custom Pricing for Enterprises
Custom pricing for enterprises is exactly what it sounds like – it simply means offering a custom-built subscription package to enterprises.
This enables enterprises to request subscription packages that offer a feature set that is tailored specifically to their business requirements.
Because these packages are custom-built for the enterprise, they are also sold at a custom price depending on the features requested.
Enterprise Pricing Example
Sprig is a product and user research SaaS tool that offers a custom enterprise plan:
Sprig’s pricing model is very simple, as the company offers just two plans. One of them is free, whereas the other one is an enterprise plan that Sprig sells individually.
Pros of Enterprise Pricing
The main pros of enterprise pricing are as follows:
- Increases revenue. Enterprise packages cost significantly more than pre-built subscription plans, allowing you to generate more revenue each month and improve your ARPU.
- Customer satisfaction. Because enterprise subscription plans are personalized according to the company’s needs and requirements, enterprise pricing can boost your customer satisfaction.
Cons of Enterprise Pricing
Like other SaaS pricing plans, enterprise pricing also comes with its own downsides, including:
- Lacks transparency. Most SaaS businesses that offer enterprise pricing don’t disclose any pricing estimates, which can deter some customers from inquiring about the cost.
- Time-consuming. Tailoring each individual subscription package to ideally match what each enterprise is looking for can take a lot of time, effort, and energy.
How to Choose the Best SaaS Pricing Model for Your Company
For many SaaS businesses, choosing a SaaS pricing model is a matter of trial and error.
So, here are some tips that will make it easier for you to choose the right SaaS pricing model for your company:
- Understand your product. To choose the right SaaS pricing model for your business, you want to consider all aspects of your product and see what stands out about it. For example, if your product has a wide range of features, you might want to go for the feature-based pricing model.
- Know your target audience. If your SaaS product pricing doesn’t appeal to your target audience, you’ll struggle to sell your product. As such, you want to learn who your target audience is, what they value, and at what price.
- Combine several pricing models. As you might’ve noticed from our SaaS pricing examples above, many businesses use a combination of two or more pricing models. This way, you can customize your pricing model to best fit your product, customers, and business goals.
3 Metrics to Track Your SaaS Growth
Once you optimize your SaaS pricing, you also want to track your SaaS growth. This way, you can find out whether your SaaS pricing works or needs some tweaking.
The best way to track your SaaS growth is by monitoring the most important SaaS metrics such as: CAC, LTV, and Churn Rate.
Customer acquisition cost (CAC) measures how much your company spends on sales and marketing to acquire one new customer.
Calculating your CAC allows you to:
- See how much value an individual customer brings to your company
- Determine the ROI of acquiring a customer
- Attract more investors
- Evaluate your company’s financial health
- Measure the efficiency of your sales and marketing strategies
To calculate your company’s CAC, simply use this formula:
Customer Acquisition Cost (CAC) = Sales and marketing expenses / Number of new customers acquired
If your CAC isn’t optimal, you might want to rethink your marketing, sales, and SaaS pricing strategies.
Customer lifetime value (LTV, CLTV, or CLV) measures how much revenue your company earns from the average customer over the entire period of your business relationship.
Calculating your LTV can help you to:
- Identify high-value customers
- Manage and optimize your CAC
- Increase customer loyalty and retention
You can use this formula to calculate your LTV:
Customer Lifetime Value = Customer Value x Average Customer Lifespan
Optimizing your SaaS pricing can help you maximize your LTV or, in other words, increase the revenue you make from each customer.
Simply put, churn rate measures how quickly you’re losing customers in a given time period such as a month.
Churn rate is a useful metric that enables you to:
- Monitor your business health
- Predict your business growth
- Track and improve your customer satisfaction and retention
- Avoid revenue loss
You can easily calculate your company’s churn rate using this formula:
Churn Rate = (Number of churned customers over a specific time period / Total number of customers at the start of that time period) x 100
It’s also important to note that poor SaaS pricing can increase your customer and revenue churn. As such, optimizing your SaaS pricing strategy can help you retain customers and maximize your profits.
Struggling to keep your churn rate under control? Head on over to our churn analysis guide to learn what’s exactly causing you to lose customers.
3 Real-World Examples of Successful SaaS Pricing Strategies
If the SaaS pricing examples above weren’t enough, here are 3 more SaaS examples of businesses that have perfected their pricing – Lemlist, Copado, and Hopin.
Lemlist is a cold outreach and email automation B2B SaaS platform.
Lemlist was founded in 2018. Unlike most young businesses, however, Lemlist doesn’t use the freemium pricing model. And, unlike many SaaS companies that offer email automation, it doesn’t use usage-based SaaS pricing.
Instead, the company has a unique pricing model that looks like this:
Essentially, Lemlist uses a mix of feature-based and user-based SaaS pricing. Their middle and highest tier subscription plans charge customers per user, and each next plan offers more features than the previous ones.
Instead of offering a free subscription plan, Lemlist provides new users with a free trial of their middle and most expensive plans. This seems to work for them quite well: as of 2022, Lemlist makes $10 million in ARR and is valued at $150 million.
Copado is a low-code DevOps tool built on Salesforce for SaaS applications. Here’s what their pricing looks like:
Copado’s pricing combines three pricing models: freemium, feature-based, and enterprise pricing.
Essentially, Copado offers a free plan that comes with basic features. With each next tier, the number of features increases, and so does the price.
Besides free and premium plans, Copado also offers an ‘Enterprise’ plan. To find out how much it would cost you, you have to contact the company.
In 2022, Copado made $52 million in ARR with 400 customers, proving that they know exactly what they’re doing when it comes to SaaS pricing.
Hopin is a virtual events platform that was founded in 2020. In 2022, the startup made $100 million in ARR, so there might be a thing or two you can learn from their SaaS pricing model.
Here’s what Hopin’s pricing model looks like:
Hopin combines elements from four SaaS pricing models in its strategy:
- Freemium pricing
- User-based pricing
- Feature-based pricing
- Enterprise pricing
As a result, Hopin offers flexible subscription plans that appeal to a wide audience. Small and young businesses can use their free plan and upgrade it to a paid one if needed, whereas large companies can get their needs met with one of Hopin’s advanced plans.
By now, you should know all there is to SaaS pricing, including strategies, models, how to choose the right SaaS pricing for your company, and more.
Before you go, here’s a quick recap of the key points mentioned in this article:
- SaaS pricing differs from traditional pricing mainly because SaaS companies rely on receiving revenue each month instead of making one-time sales.
- Setting the correct SaaS pricing gives you a competitive edge, increases customer satisfaction, and boosts your revenue growth.
- Competitor-based, cost-plus, and value-based pricing are common SaaS pricing strategies.
- Some of the most common SaaS pricing models are: freemium, user-based, usage-based, and feature-based pricing.
- To choose the best SaaS pricing model, make sure you know your target customers, understand your product, and use a mix of different pricing models.
- Calculating your CAC, LTV, and churn rate can help you determine whether you’ve chosen the right SaaS pricing model for your business.
- Many of the most successful SaaS companies use a combination of different pricing models to maximize their revenue.