A pricing model decides how you charge customers for your software. This is different from your pricing strategy, which decides what you charge.
An example of a pricing model is tiered pricing, which offers different subscription options at different prices. Another one is flat rate pricing, where you charge all users the same fee regardless of their usage.
It's important to choose a pricing model that's profitable, attractive to customers, and practical. To help you figure it out, we cover 9 pricing models below.
Competitive pricing strategies can come in many forms, a business can choose to always be the cheapest of their competitors or always offer the average price of the highest and lowest priced competitors
A competitive pricing strategy is a price-setting that is based on your competitors’ prices. This pricing method focuses solely on the prices of your competitors that are public, but it does not take into account how much customers value the product or production costs.
A strong competitive pricing model is based on thorough market research. When you know how the prices of your top competitors in your market and how those prices might meet customer expectations, you have a basis for determining the rates of the prices of your own products or services. Competitive pricing strategies can come in many forms, a business can choose to always be the cheapest of their competitors or always offer the average price of the highest and lowest priced competitors - they all count as competitive pricing strategies.
Your costs. How much does it cost to run your core service? How about extra features, extra bandwidth, extra licenses? Your pricing model needs to compensate you fairly for whatever you're providing.
Competitive landscape. What are your competitors doing? What's the industry-standard pricing model? You can choose to do what users are used to - or get an edge by doing something different. For example, offering flat fees with unlimited bandwidth can be a massive advantage.
Your product. What's your product like? If it's B2C software meant for mass adoption, a freemium model makes sense. If it's meant for teams, user-based pricing makes sense. Look for models that fit your product.
Your customers' needs. What kind of pricing model would feel fair to your customers? How can you maximize your own profit margin while driving down costs for them? The better your answer, the easier it is to sell your product.
Also known as pay-as-you-go, this pricing model charges customers based on how much they use. The more your customer uses your software, the more they pay. This is ideal for software with variable usage levels.
This model is often seen in SaaS businesses like hosting and content delivery networks. Users pay monthly for a certain amount of bandwidth or storage space; the more they use, the more they pay.
The usage-based pricing model for SaaS can help businesses stay competitive while appealing to a wider range of users. However, this model can be difficult to manage from a technical and administrative perspective.
It may also be harder to market, as buyers may be hesitant to purchase if they are unsure of the value they'll receive. Amazon Web Services (AWS) is an example of a company that successfully uses the usage-based pricing model.
Flat rate is the simplest of all pricing SaaS models. You offer your product with a specified amount of features and for a set price. This means all your customers pay the same rate for your product regardless of usage, features, and other variables.
Prospects can easily understand what they're getting and how much they pay. This pricing model works best for SaaS businesses with a single product offering and a steady customer base.
One example of this model comes from IXACT Contact, who offer a free trial and a flat rate fee.
Tiered pricing is a model that charges customers different prices depending on the features or services they require.
This model lets customers choose from different tiers that have varying levels of features and add-ons. It allows customers to choose the level of service they need at the price they are willing to pay.
Customers can choose tiers that work for them and move up or down tiers anytime, making this a flexible pricing model. As customers use more of your product, they can adjust their subscription to fit their needs.
Clio, a law firm SaaS, offers a tiered model with three distinct plans.
Custom bundles consist of features and add-ons with individual pricing. This model is similar to tiered pricing, but the tiers are custom-made for each user.
Custom bundle pricing has a lot of advantages. It lets users get personalized pricing plans that make sense for them, which is appealing. But in the past, this only made sense for large accounts on the sales side; creating custom bundles for small clients was just too expensive.
The good news is that today, with Salesbricks, you can quickly create custom quotes for mid-sized and even small clients. That’s because we make it easy to create interactive quotes in seconds… Customers can fine-tune these quotes to create custom bundles, which makes sales easier without stressing your team.
An example of a SaaS business offering custom bundles is Semrush. Semrush provides a range of set tiers, with a custom plan option for their business customers.
The freemium model is when you offer prospects a free version of your product with limited features. If they want to upgrade later, they can opt into a paid product version. This is a clever way to gain trust, build a customer base and eventually increase revenue.
Many SaaS companies run suggestive upgrade prompts alongside the free version. Once your customer has tried your product and sees it is a good fit for their business, the likelihood of upgrading increases.
Grammarly is a strong example of this SaaS pricing model. They offer a free version with the option to upgrade and gain more advanced features.
This pricing model has two main flavors: charge per user or per active user. When charging per user, your customer pays a fee every time they add a new user to their account. With active user pricing, you charge your customers based on the number of users actually use the product.
User-based pricing is an excellent option to keep track of usage and create pricing plans that your customers will find valuable.
Slack offers an active user-based pricing model, charging customers for each user using the messaging service each month.
The hybrid pricing model is an amalgamation of various SaaS pricing models. For example, you may charge a flat fee and usage-based fees based on bandwidth used.
Hybrid pricing can give you the best of multiple pricing models. For example, a flat fee can guarantee a certain level of revenue each month while user-based pricing increases your upside.
The downside to hybrid pricing is that it can be difficult to execute well. You need to know your market, know your product, and understand your customers to get it right.
Dropbox is an excellent example of a SaaS business using the hybrid pricing model. They offer a freemium product for everyday consumers and then tiered upgrade options, which are calculated on a per-user basis.
With performance-based pricing, you charge based on results delivered. For example, let’s say your software is a marketing automation that uses A.I. to deliver leads. You may choose to charge based on total lead count, i.e. on performance and results. Another example: your software is an image compressor for CMS platforms. You might only charge if a compressed file is at least 50% smaller than the original version.
Performance-based pricing is rare, but it can be practical for results-oriented SaaS companies. This is attractive to customers because it means they only pay for what they get. If you can make this pricing model profitable for your business, it can be a massive value-add.
It’s important to remember performance-based pricing can be part of a hybrid model. For example, you might charge a base fee and then extra performance-based costs.
This SaaS pricing model is ideal for businesses that want to offer tiers, bundles, or custom product versions based on features. Prospects can pay for the needed features and upgrade as their business grows.
One example of feature-based pricing actually comes from our own brand: Salesbricks. PRO Plan users get extra features, such as multi-currency pricing and access to approval workflows.
Feature-based pricing makes sense when features are more important than usage, team member count, etc. For example, a company like Hubspot has dozens of features spread around different functions.
By creating offers and pricing them based on these features, they are able to create specialized, appealing products people want. They are also able to offer multiple pricing tiers based on feature sets. This lets them market to more audiences successfully.
It is rare for any business to remain static, especially in B2B SaaS. As customer needs change over time, you have to update your pricing models too. You can do this by:
Picking a suitable SaaS pricing model, and being willing to make adjustments when necessary, will ensure the success of your business. With the right strategy in place, you can create a pricing model that aligns with your business goals and offers the best value for your customers.