Businesses, whether small or big, choose SaaS over traditional software delivery methods mainly because of low initial costs and the flexibility SaaS model offers. Aside from these, more and more businesses in different parts of the world are investing in SaaS models because these offer scalability, integration, and usability. These features can be very beneficial, especially for new and growing businesses. Instead of incorporating new tools to their business whenever they reach a milestone, they can simply upgrade the features of the SaaS model they have been using since Day 1.
While most people think of SaaS as simple monthly/quarterly/annual subscriptions, there are a few other things to consider to ensure that you get the best value for the IT investment.
As a general rule of thumb, businesses should consider flexible subscriptions that help them easily scale as they grow. Businesses change over time and have to quickly adapt to changing market trends. Regardless of the pricing model you choose, you should be able to upgrade or downgrade your subscription in less than a 30-days’ notice, allowing you to scale operations in real-time.
The flexibility of the pricing model is always an important factor to consider when introducing SaaS tools for the business. The more flexible the pricing model is, the easier it’ll be for the business to adapt to changes and earn a return on investment.
This guide covers the most popular SaaS pricing models and strategies, which should help decision-makers choose the best model according to their unique requirements.
SaaS Pricing Models
Per-User pricing is one of the most popular pricing models due to its simplicity. You pay a fixed subscription fee based on the number of users. Per-user cost usually includes all the features and businesses only have to decide on the total number of users.
- Makes it easier for businesses to calculate costs
- Predictable, helps make accurate forecasts
- Small businesses can cut costs by paying for fewer users while having access to all the features
- Might not be the best option for large teams
This is one of the best options if you own a small-scale business and is still testing the waters on using SaaS models. Since you will only pay based on the number of users, you can select who among your employees will try out the tool, and from their experience, assess if SaaS models are suitable for your business needs. From there, you can decide whether or not you should continue using SasS models or opt to look for another tool.
Per Active-user Pricing
Per active-user pricing is a variant of the per-user pricing model and commonly used by enterprises. The model is suitable for businesses that have a lot of users but are not sure how many of them would actually use the software. This allows businesses to sign up for as many users as they want/anticipate without having to actually pay for all of them (if they are not using the software). Businesses are only billed based on the number of active users instead of paying for all the users.
Slack is a great example of per active-user pricing. You only pay for users who are actively using the service, while a prorated credit is made in case active users become inactive.
- Businesses only have to pay for active users
- No wastage of money on un-used seats
- Easier for businesses to roll-out the software company-wide
- Might not be suitable for all SMBs, especially when the team size is small
If your business is regularly losing and hiring employees, this pricing strategy is suitable for your needs. This pricing strategy can help you save a lot of money in the long run – you won’t have to end up paying for accounts that are no longer in use, and you can easily add accounts whenever you welcome another member to the team.
The pay-as-you-go pricing model enables businesses to only pay for the services they use and works well for businesses that have predictable usage patterns. This model is mainly used in pricing IaaS (Infrastructure as a Service) solutions such as Amazon Web Services. Examples of usage-based pricing include data used in GBs, transactions processed, API requests, and so on.
- Reduces barriers-to-use
- SMBs only pay for actual usage
- Costs are hard to predict if usage is volatile, making it difficult to forecast and plan
If your business operates similar to Amazon Web Services, and you think that this pricing strategy might work well for your business, spend some time to weigh the pros and cons of this strategy first. Do not make rash decisions thinking that you will attain the same success as Amazon. As mentioned, the cost of this pricing strategy can be challenging to predict and committing to this without considering this can lead to profit loss and bankruptcy.
Tiered pricing is essentially a hybrid pricing model that allows businesses to choose different software packages with varying features and subscription costs. SaaS providers design each tier around different budgets and features. For example, HutSpot offers tailored pricing for beginner as well as professional marketers who need specific features and functionalities. The main advantage of tiered pricing over other pricing models is the flexibility it offers, but businesses need to consider the features they need to opt for the most relevant option.
- Packages are tailored to meet the needs of specific segments
- Businesses only have to pay for the features they actually need instead of paying extra for the whole package
- Tiered pricing can be confusing, making it difficult for SMBs to decide between different packages
Features/Functionality based Pricing
Similar to tier-based pricing, feature-based pricing model allows businesses to choose and pay for features/functionality they need. Costlier subscriptions include more features and integration options and allow users to upgrade their package as they grow. This pricing model works well for businesses that are clear about their requirements and understand what to pay for and what to skip.
- You only pay for features you need
- Suitable for users who need a specific functionality/features
- If can become difficult to determine which features you need and the ones you don’t
- A package within your budget might not include all the features you need
Flat Rate Pricing
Flat-rate pricing is pretty similar to traditional software licensing i.e. a single software with specific features for a specific price. The main difference between the two is that SaaS flat rate pricing gives you the flexibility of paying on a monthly/quarterly/annual basis. Although this model has become a rarity these days, it does provide businesses with access to all the features at a fixed price, making budgeting and planning easier.
Flat-rate pricing model offers little room for scalability and customization and might not be a good option for growing businesses. Fixed-price software can also mean wasted money on features/functionality you don’t use.
- The product is clearly defined
- Simple and easy to understand
- You get all the features, no separate pricing for different features
- Does not work for all types of businesses
- Very little flexibility, more like a black-and-white pricing model
Freemium pricing allows businesses, especially SMBs to try a solution before going the paid route. Users can use the software for free (usually limited functionality, locked features) and buy paid packages if they are satisfied with it and want to unlock more/all features.
This pricing model is often used as part of tiered pricing in which users pay more for extra features. The key difference is that users can get started for free and upgrade as needed. Some freemium services are ad-supported and although they include most of the features, users have to keep watching ads or pay a fee to remove them.
- Easier adoption, almost no barrier to use
- Small businesses who just need basic functionality can access services without having to pay anything
- Users may approach freemium services with a throwaway mentality
Many SaaS providers allow businesses to roll their own pricing model in which they can customize the package keeping their unique requirements in mind. This allows users to hand pick the functionality/features they need. The pricing model works pretty well for small and medium businesses who have clearly defined requirements.
- Highly flexible
- No need to pay for bundled features you won’t use
- Can be costlier than other options
- Businesses may need more features/functionality in the future
There is no one-size-fits-all in the SaaS world when it comes to pricing models. Small and medium businesses don’t have the same IT budget as large businesses, while enterprises cannot skip on essential features/functionality. Different SaaS pricing models enable businesses of all sizes to pay for what they really need instead of wasting money on features they won’t be using.
Choosing the right pricing model mainly depends on the budget, current requirements and future growth forecasts. The popularity of SaaS model made it possible for small and medium businesses to take advantage of modern technologies, without having to heavily invest in their IT infrastructure, and choose form a variety of pricing models to get the best possible value for their IT investment.