One of the key decisions a tech startup needs to make is how they bill their customers. This can be a challenge within the Software-as-a-Service (SaaS) space, as the nature of the industry doesn’t lend itself well to a cost-based pricing model. That’s a model where you figure out your costs and then add on a profit margin. 

In manufacturing, for example, this is relatively easy. Costs are generally stable and predictable  and manufacturers make profits when a customer buys a unit. In the world of SaaS, however, things work differently. Providers require a robust customer support system, such as a cloud call center, to keep subscribers happy. Moreover, changes in demand can be sudden and unpredictable.

So, what now? If you’re reading this then there’s a fair chance you’re trying to figure out a suitable pricing model. As a SaaS provider your options are typically limited to subscription models. These ensure a predictable and recurring income stream for your organization. Furthermore, they give your customers flexibility.

There are several subscription models from which to choose. We’re going to explore five common SaaS pricing models to experiment with. We’ll examine some details and lay out the advantages and disadvantages of each. If you’re just starting out, you have an opportunity to play around with pricing models. You’ll need to find out what works best for your business and your customers.

1. Tiered Pricing

This model allows customers to choose from several fixed-price packages. Each package contains a different offering. They could differ by the number of users allowed or by data allowance for cloud storage, for example. How you break down the tiers depends on what service you provide.

The idea is to show customers upfront the advantages of moving up the different tiers. This gives customers the flexibility to choose the package that works best for them. For you, as the provider, it gives upselling opportunities. You’ll be able to see how customers are using the service. If they’re approaching the limits of a tier you can contact them to inform them that a higher tier may be more suitable.

When using this approach, it’s vital not to give customers too many choices. You want to make the buying journey as seamless as possible. Customers overwhelmed by options will simply look somewhere else. Therefore, offering three or four packages is optimum. 

A potential drawback of this model lies at the top tier. Say, for example, you offer VoIP services. If you offer unlimited users at the top tier then a customer can take advantage of that. They may demand a number of users that you hadn’t predicted and didn’t price in. This will clearly increase your costs and be detrimental to your profit margins. 

_Advantages

• Customers have the flexibility to choose the right product for them.

• Appeals to a wide variety of potential customers by offering multiple packages.

• Gives you upselling potential.

Disadvantages

• A lot of work is needed to craft effective tiers.

• Too many tiers will put off potential customers.

• Users at the highest tier may take advantage of the system and affect your profitability.

2. Flat-rate for all

When a company charges all their customers the same amount it’s known as a flat rate. It doesn’t matter how much a customer uses the service or what features they use, billing is the same. 

The simplicity of this model is a great strength. Customers needn’t choose from a myriad of packages so the buying journey is seamless. But, it won’t appeal to customers looking for flexibility.

SaaS subscriptions sold through this model have a narrower appeal than other models. On the plus side, it means providers can run more focused marketing campaigns. If you think this will work for your business you’ll need to know your target customer inside and out. A downside is that you won’t be able to attract the widest possible range of potential clients.

This pricing model isn’t suitable for services that need to be scalable. Take the example of Databricks MLOps, a useful approach for the creation and quality monitoring of machine learning and AI. Its primary benefit is scalability. That means costs can vary and so a flat rate wouldn’t be suitable in this case.

Advantages

• Marketing can be more focused

• Provides you with a predictable income stream.

• Customers won’t be confused by multiple options.

• Streamlined buyer’s journey.

Disadvantages

• Narrower appeal than other models.

• Unappealing to customers looking for flexibility.

• No upsell opportunities.

• Unsuitable for SaaS requiring scalability. 

3. Freemium

This model is great for SaaS companies that wish to allow users to sample what they have to offer. It’s an effective way of providing a demo. By providing a low bar for entry, providers get their products into the hands of a lot more customers. 

The idea is to provide a pared-down experience that users can expand upon through a purchase. They experience the core features of the service but must make a purchase to unlock full functionality. Alternatively, you could provide a time-limited version of your product with more features.

Let’s look at an example where the freemium model works well. A customer who googles “how do VoIP phones work?” isn’t going to be an immediate high-volume user. However, they may be a great candidate for a free trial with limited functionality. They get a chance to try the service out before investing in the full product once they see it meets their needs.

One potential downfall of this approach is that users that aren’t paying still need support. That’s a cost to the provider. To compensate for this, some SaaS companies will use advertisements to support free versions. That keeps some income flowing and is a motivator for users to buy the ad-free premium product.

Advantages

• A low bar for entry allows users to “try before they buy.”

• Free versions get more new customers.

• Advertisements provide an income stream.

• Users are motivated to upgrade to remove ads.

Disadvantages

• Free users are a cost to the provider.

• Time-limited versions may see high numbers of users dropping off.

• Many users need to be supported to be profitable.

• Ads and free versions can give the impression of lower value.

4. Pay-as-you-go

This model is well known from the mobile communications industry. It’s also applicable to SaaS. Providers divide their services up and customers pay for what they use. Divisions can be made along feature lines, volume of use, or time spent on the service. Whether this is a suitable model for you depends upon what type of SaaS you provide.

This can be a good option for customers looking for flexibility. Yet, it can also be complicated for customers to keep track of what they’re using. Flexibility is good for some customers but it means an unpredictable income for providers. Moreover, unpredictable costs.

Usage-based pricing can be rolled into a hybrid model. You could bill a recurring monthly charge with a base amount of usage included. Customers are then able to top-up when they need to use more of your service. This provides customers with flexibility and gives you a more consistent income.

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Advantages

• Highly flexible for customers.

• It can be used as part of a hybrid model.

• Customers that use the service a lot pay their fair share.

Disadvantages

• Difficult for customers to track their usage.

• Unpredictable income for providers.

• Customers could reduce use to save on their costs. 

5. Pay-per-user

Users of this model need only pay for each individual that needs access to the service. This means they can easily control their budget. Additionally, it simplifies the tracking of income and costs for providers.

Unlike other models, customers know all the features are available from the get go. For you, the SaaS company, this makes marketing very simple. It’s much like the flat-rate model except divided along user lines. That means customers still get a sense of flexibility.

One of the biggest strengths in the model is the scalability. Let's say a business wants to expand their call center staff. They can easily budget for it using this pricing model. For the part of the provider, they’re able to scale up with a predictable impact on costs and revenue. It’s a very manageable model for providers and users alike.

Advantages

• Easy for customers to calculate costs.

• Simple for providers to monitor costs and revenues.

• Full features for every user.

• Excellent for customers that want to scale a business successfully.

Disadvantages

• No upsell opportunities.

• Individual users could use the service heavily, increasing costs.

• Potential for customers to use single log-in for multiple users.

Find what works best for your SaaS company

You’ve got your business set-up. You’ve built your Minimum Viable Product (MVP). Now’s the time to figure out how to charge for it.

The model you choose to implement will depend on what kind of service you offer. Also, you’ll need to know what kind of customer you’re targeting. It’s important to consider what works for your business, some models work better for a “mom and pop” operation than they would for a multinational.

It’s worth noting that you could also take a hybrid approach. We touched upon that in the pay-as-you-go section. There’s no reason why you couldn’t use the freemium model in combination with the tiered model. It’s about what’s right for your brand, your customers, and your bottom line.

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