Choosing between the multiple SaaS pricing models is an essential step that every business needs to take to drive product growth.
But what’s the right approach?
Today we’re going to cover various pricing models, when to use freemium, and how you can leverage psychological tactics in your pricing strategy.
- SaaS pricing strategies differ from traditional products because most businesses use a subscription-based SaaS pricing model.
- Flat prices are simpler but limit the range of demographics you can appeal to.
- Freemium models lead to higher churn rates and lower recurring revenue but can be an effective way to maximize rapid adoption — especially for expensive or complex products.
- Tiered pricing creates a natural upgrade path for customers which increases the probability of expansion revenue.
- Per-user pricing can bring in more revenue but it may also discourage companies from getting more licenses.
- Pricing your product higher than competitors can bring in high-value customers but you’ll need the brand and track record to back it up.
- Psychological tactics like price anchoring, charm pricing, and the center stage effect are effective ways to make your SaaS plans seem more appealing to potential customers.
How is SaaS pricing different?
SaaS pricing models and strategies differ from traditional products because most businesses use a subscription-based SaaS pricing model.
The fact that prospective customers need to commit to ongoing payments means it will be harder to convince your target market to make their first purchase.
However, many SaaS companies also benefit from the high commitment level inherent to a subscription-based pricing model because of how many customers refuse to switch SaaS providers once they have an existing plan.
SaaS pricing models types
Here’s a list of the most used pricing types, illustrated with examples from real successful businesses.
Flat-rate SaaS pricing models
Flat-rate pricing is the most straightforward method of selling a SaaS solution since you offer one product and its features for a flat monthly price.
It’s similar to the software licensing model that predates cloud infrastructure except most companies offer monthly billing.
Userpilot is an example of how flat-rate pricing can help users get more value for a fixed monthly price rather than having to on a per-feature basis. The only difference between our Growth and Enterprise pricing tiers is the extended support and SLA that our enterprise clients need.
Pros of flat-rate pricing
- Clarity. Flat-rate pricing models make it clear how much customers are going to pay for your product. This stands in contrast to more complicated SaaS pricing models that leave prospective customers guessing how much your product will actually cost them.
- Easier marketing. Flat-rate pricing allows you to focus all your sales and marketing efforts towards a single offer rather than spreading your campaigns too thin between numerous pricing tiers.
Cons of flat-rate pricing
- Low margin for error. When customers have only one option to choose from, they’ll either subscribe or look elsewhere. In contrast, a feature-based pricing model could offer them a wider range to choose from — increasing the odds that at least one plan aligns with their use case.
- Limited market. If your flat-rate pricing model targets SMBs then those are the only type of customers you’ll acquire. Conversely, a tiered pricing model could help you acquire freelance or enterprise customers which broadens your market.
Freemium SaaS pricing models
A freemium model can be an effective pricing strategy for SaaS companies with complex products.
If your solution is too complicated for users to fully explore during a 14-day trial then offering a free version for them to use indefinitely can improve the conversion rate.
Most SaaS companies that have become household names have a freemium plan as part of their tiered pricing model.
This includes Dropbox, Slack, Evernote, and many others. You can impose limitations like maximum team members or locked features to incentivize users to upgrade at a later date.
Pros of freemium pricing
- Foot-in-the-door pricing strategy. Giving customers a chance to test your SaaS product indefinitely can give them enough time to take the leap towards upgrading to a monthly fee, thus leading to revenue growth.
- Viral marketing. Dropbox’s referral program helped them grow 3,900% because the concept of getting free storage in exchange for referring friends was a shocking proposition at the time. In essence, offering freemium plans can help you stand out from different pricing models.
Cons of freemium pricing
- Higher churn. As most SaaS companies have observed, it’s a lot easier for users to churn when they got their solution at a discounted price or no cost at all. It takes away the biggest benefit of subscription pricing: financial commitment.
- Lower revenue. Having a portion of your user base on a freemium plan will bring down the per-user income and LTV:CAC ratio for your company. Be sure to factor these free users in when you predict customer costs and forecast revenue to keep your burn rate under control.
Usage-based SaaS pricing models
Usage-based pricing — sometimes known as the pay-as-you-go pricing model — lets customers pay based on how much they use your service rather than charging per user or feature.
If you use the service more, your subscription price increases and vice-versa.
The pay-as-you-go pricing strategy is most common with infrastructure software companies like Amazon Web Services where their clients are based on gigabytes used, transactions processed, and similar criteria rather than per-user pricing.
Pros of usage-based pricing
- Affordability. By reducing upfront costs, you’ll be able to cater to both startups and enterprise clients since your pricing model scales with their usage. You’ll also avoid situations where users outgrow your service.
- Power users. Usage-based pricing is the best pricing model to account for power users who would otherwise consume a disproportionate amount of resources while paying the same fixed subscription cost.
Cons of usage-based pricing
- Revenue prediction. It’s harder to project future revenue and measure growth when the amount users pay for their subscription varies on a month-to-month basis. Customers may also experience unexpected rises in their monthly bills during high-volume months.
- Value disconnect. The pay-as-you-go model makes it harder to use your pricing strategy as a tool to emphasize the value of specific features. Instead of focusing on native functionality or integration support, your pricing page will cover the number of API requests or GB allowances.
Tiered SaaS pricing models
Tiered pricing is one of the major SaaS pricing models that strikes a balance between a flat-rate and usage-based pricing model — making it a very popular choice.
This pricing strategy lets SaaS companies offer multiple packages with varying features at different price points.
The average SaaS business might have between 3–4 plans catered towards serving low, middle, and high price points.
HubSpot is a prime example of how to target different types of customers whether they’re new to marketing or full-blown marketing teams.
Pros of tiered pricing
- Diverse appeal. SaaS pricing models with a single plan limit themselves to a narrower pool of customers that might want the package. In contrast, having multiple tiers lets you tailor different packages to multiple buyer personas.
- Upselling path. Customer expansion comes naturally when you’re offering more than one plan. Once a user outgrows their current tier, they’re likely to upgrade their subscription. You can also use in-app messaging to prompt these upgrades.
Cons of tiered pricing
- Confusion. Having too many plans can make it more difficult for customers to figure out which one is right for them. The worst-case scenario would be a lead falling into analysis paralysis and looking for alternatives with simpler pricing models.
- Power users. Even if your heaviest users subscribe to your enterprise package, there’s still the risk of them using up more resources than expected. In such an event, you wouldn’t be able to charge them extra for their usage since they’re already at the highest tier of your pricing model.
Per feature SaaS pricing models
The per feature pricing strategy basses subscription costs on the features provided to your customers. Those who use more features pay a higher price and those who only need the basics enjoy lower monthly costs.
As their needs expand, customers will organically upgrade to a plan that can solve their more complex problems.
Using value-based pricing in this way ensures that customers are paying a fair price for what they’re getting out of the product.
QuickBooks is a prime example of how to divide features.
Pros of per feature pricing
- Upsell opportunities. Since this is a value-based pricing strategy, there’s a clear incentive to upgrade since customers will unlock extra functionality when they do. In contrast, usage-based plans have them paying more for the same features.
- Wide appeal. Dividing features with a tiered pricing strategy helps you cover more use cases with your product or service. By separating its invoicing features from its inventory tracking into different plans, QuickBooks is able to attract both freelancers and businesses to its product.
Cons of per feature pricing
- Negative user sentiment. Some users may feel resentment when facing such pricing strategies. After all, they’re paying a monthly fee for the product yet get prompted to pay more when they want to use a specific feature.
- Guesswork. A lot of guesswork goes into SaaS pricing that centers around features. You may end up placing core features in overpriced tiers or putting all the beneficial aspects into the entry plan. Put yourself in the customers’ shoes to try and strike a balance.
Per-user pricing model
Per-user — sometimes referred to as per-seat — is one of the most popular SaaS pricing models.
In fact, a 2016 study showed that more than a third of providers use this pricing model so it’s clearly favored by many SaaS companies.
A user-based pricing model can make things very simple for your customers.
One user pays a fixed monthly price. If they add another, the subscription cost doubles, and so on.
This also makes it a lot easier for a SaaS business like Monday.com to predict revenue.
Pros of per-user pricing
- Adoption scaling. When you use the per-user pricing strategy, your revenue will scale with adoption. If the customer has a positive experience and adds multiple team members to their plan, you’ll make more money on that contract.
- Simplicity. Since per-use repricing is one of the simplest Saas pricing strategies, it makes the sales cycle easier for both customers and your reps. After all, closing a deal is far less challenging when the customers can calculate the total monthly cost in their heads.
Cons of per-user pricing
- Adoption obstacle. By increasing the costs on your pricing page as customers increase the number of team members they’d like to add, you’re creating a reason for them to keep the number of licenses to a minimum.
- Churn risks. Since there’s more friction in the adoption journey with per-user pricing, you also face increased churn risks. If existing customers were able to add more team members to their plan without additional costs, it would make your SaaS product more sticky in that company.
Per active user pricing model
While charging the annual cost for 100+ employees may be the right pricing strategy for a SaaS company targeting enterprise customers, it doesn’t work nearly as well at smaller scales.
SMBs may think twice before paying thousands of dollars upfront without the guarantee of employee adoption.
Per active user pricing strategies seek to remedy that problem since customers will only be billed for team members who actively use the product which reduces their risk significantly.
This type of SaaS pricing can greatly benefit providers who want to increase the number of licenses sold. Slack is one example of SaaS applying this pricing model, calling it the ‘’Fair Billing Policy’’.
Pros of per active user pricing
- Encourages adoption. When you only bill companies for active users rather than the total number of licenses, you remove their fear of wasting money — incentivizing them to include more licenses in their subscription.
- Less signup friction. It’s easier to convince potential customers to signup in droves when they know that they won’t be billed for employees that don’t actually use the software. The reduced friction will thus bring down your customer acquisition costs.
Cons of per active user pricing
- Narrow appeal. Enterprise customers are usually fine with paying for hundreds of licenses upfront and small teams tend to have 100% adoption in their tool stack. This means using the per active user SaaS pricing strategy will only help you target prospects in the middle ground.
- Revenue prediction. It can be very easy for a SaaS business using per active user-based pricing to overestimate the amount of revenue they’ll generate in a quarter or year. If a customer signs up with 200 members but only a fraction of them adopt the product, your revenue will take a hit.
SaaS pricing strategies
While finding the ideal pricing model is a crucial step for SaaS companies, understanding the underlying strategies can also go a long way towards increasing growth while reducing the customer acquisition cost.
Free trial pricing
Free trials can be a lifesaver for specialty solutions with high subscription prices since they let customers test the product out.
They also reduce your customer acquisition cost since you can allocate resources towards optimizing the free trial to paid conversion rate rather than lead generation alone.
It’s essential that you have a solid follow-up sequence to seal the deal since half of all conversions happen after the trial ends.
Alternatively, you could consider demos if your product has a steep learning curve and would be better suited to a show-and-tell format and use the demo to qualify trial prospects.
Cost-plus pricing factors in expenses like marketing and development then add a set profit margin to determine the price of your product.
This makes cost-plus pricing a good starting point for a SaaS company that isn’t sure how much their product should cost yet.
You could target a 20% profit margin then adjust the prices later on based on market research into how much your competitors are asking or how much customers are willing to pay.
Cost-based pricing can also serve as a placeholder if you haven’t decided which SaaS pricing model to go for yet.
GetCheddar breaks down how to calculate a cost-plus pricing strategy.
The reason that cost-plus pricing isn’t a viable long-term solution is that it’s too company-centric.
You choose the profit margin you want without factoring in your customers. Conversely, value-based pricing relies on the perceived value of your product as the basis for pricing.
The idea is that, by tying the price to the value provided, a SaaS company will also focus its efforts towards trying to improve upon its product. A good rule of thumb is that the value provided should be 10 times the price of the product.
Instead of a flat fee for the entire Adobe suite, it prices each product individually based on its value.
Penetration pricing is a strategy where you reduce prices to gain as many users in your target market as possible.
Keeping the subscription affordable shouldn’t be your only selling point though.
You should also provide value to ensure competitors can’t beat you even with their higher prices.
This strategy works best for disruptive companies who want to make the most out of their first-mover advantage. Besides, you can always switch to a lucrative SaaS pricing model like feature-based pricing at a later date once your market share is secured.
New Relic offers one free full user to hook companies in so they purchase paid licenses in the future.
Captive pricing is a strategy where you offer the core product at a lower price with the goal of charging extra for add-ons and related products.
This strategy relies heavily on expansion revenue and your ability to cross-sell to users.
The SaaS industry has applied the same principles the printer manufacturers used to generate recurring revenue for so many years.
You’ll find that most printers are surprisingly cheap but the ink cartridges that end up more expensive than the unit itself.
Skimming pricing is a rather unorthodox approach since you’ll set a higher starting price for your new product then gradually lower it over time.
While your initial launch sales will likely be limited to enthusiasts and power users, you’ll still be able to get budget-conscious customers in the future.
This approach relies on the technology adoption lifecycle.
Early adopters will likely pay the most but they get access to cutting-edge solutions before the rest of the market.
As the product becomes older and more affordable, it starts to appeal to the masses.
Prestige or premium pricing is a strategy of pricing your product higher than competitors to instill a sense of luxury and exclusivity.
This naturally reduces the number of customers you get but each one will have a higher lifetime value.
However, to truly execute this SaaS pricing strategy you need to have a strong brand and a track record of famous companies using your product. Without these qualifications in place, you’ll just come off as overpriced.
Apple is the most notable example of prestige pricing with a $95 billion net income in 2021.
Psychological tactics often used in SaaS pricing
If you walk into a store and they offer you a $50 tie, you’d likely walk out.
However, being offered a $50 tie after buying a $2,000 suit makes it seem like a minor expense.
The bottom line is that price is relative and the perception can be swayed depending on what prices customers are exposed to.
This can be either your own prices or that of a customer.
Basecamp uses a competitor-based pricing strategy on their website to try and anchor customers to the monthly costs of using other solutions — thus making their own subscription seem cheaper.
Convert tool uses their own plans to anchor customers to a higher price and make their $699/month plan seem like a bargain.
By putting the $1,899/month Leader tier at the left, the two other plans look comparatively cheaper.
Charm pricing uses prices ending in the nine to increase total sales and conversion rates.
While it may seem silly, a study from MIT actually found that clothing priced at $39 outsold identical items priced at $34 and $44.
Let’s say we have two software solutions: one priced at $399 and the other at $400. Objectively, the price difference is a single dollar.
However, due to the “left digit effect”, our brain latches onto the first number it sees and thus reacts to the price as if it were $300.
Center stage effect
The center stage effect is a cognitive bias that draws people to the middle item when presented with three choices.
Essentially, consumers perceive options in the center as the most popular choice. It’s also seen as the average, such as options between small and large or cheap and expensive.
People gravitate towards where they’re comfortable, and taking a median approach to their purchase decisions can feel less risky than choosing an extreme.
You can even add tags like “most popular” to the tier at the center of your pricing page to amplify the effect.
Artificial time constraints
Offering limited-time discounts on your plan can be a great way to get prospective customers who are on the fence to convert.
Offering them savings if they purchase your product immediately will tap into their FOMO and dissuade them from browsing for alternatives before deciding.
However, you should avoid launching these offers too often as it could diminish the perceived value of your product.
In the same way, constantly displaying a countdown timer on your pricing page 24/7 will just damage the credibility of future promotions.
As you can see, there’s no one-size-fits-all method of finding the right pricing model for your product.
It all comes down to how complex your product is, what customers pay for similar solutions, and whether or not you can provide more value than competitors.
If you choose to go with a freemium model or offer a free trial to your users, don’t forget about their experience in-app. Try a product adoption tool like Userpilot and convert more free users into paying customers.