3 Common SaaS Pricing Models Explained

When working with clients who are preparing to launch a new product, one question always arises: How should we price this product?

Well, developing a successful pricing strategy is a science. You can build a fantastic product, but you won’t see success if you don’t have a strategic business plan behind it. Selecting the right pricing model is an essential component of your larger business strategy. And if things weren’t complicated enough, choosing the ideal subscription-based pricing model can be more challenging than choosing the ideal price for a more traditional, single-transaction product. Our goal is to help you ask the right questions to optimize your pricing strategy, get your target customer’s long-term buy-in, and increase their lifetime value to your business.

And remember that just like your product itself, your pricing strategy is never truly “done.” Nailing this piece of the equation requires ongoing experimentation and evolution as your product grows, industry dynamics shift, and your users’ needs change.

Great Digital Product + Right Pricing Model = Increased Chance of Success

A SaaS pricing model describes how you package and present your pricing to your users. Determining a suitable pricing model for your SaaS product should be a calculated process. 

First, we must understand the multiple factors that impact your overhead costs, such as hosting and third-party licensing fees, ongoing expenses for maintaining and enhancing your product, customer support, acquisition costs, etc. This information will inform our pricing recommendations with the understanding that, first and foremost, your digital product must be financially sustainable.

Next, we must also consider: How much is someone willing to pay for this? You want to be confident that the value of your product aligns with the amount you’re charging and provide the right balance of options without overcomplicating things for your users. Here are some helpful questions to consider:

  • Who is our ideal buyer, and what pain point are we solving for them?
  • How much value does my product offer them?
  • Is this product a “nice to have” or a “must-have” for my users?
  • How can we quantify the value this product offers my users (time savings, increased revenue, reduced costs)?
  • How sticky is this product? How hard is it for a user to stop using it or switch to a competitor?
  • What pricing model will best cater to our buyer personas? Which are they most likely to be comfortable or familiar with?

Choosing the right pricing model can make or break the success of your product. Finding the right alignment between your product’s pricing, your overhead costs, and the margins your business needs to grow and succeed is the sweet spot we’re targeting.

3 Types of SaaS Pricing Models

Flat-rate

In a flat-rate pricing model, users pay a preset price for the product with a fixed set of features that they own indefinitely. Alternatively, users may pay a yearly or month-to-month fee where they can access the latest updates immediately. This option is easy to explain and easy for users to understand, demystifying their decision-making process. A simple, consistent price also makes it easier to project revenue accurately for your business. Basecamp is one of the most common examples of a successful flat-rate pricing model. One potential drawback is running the risk of restricting your buyer audience. By offering all users the same product at the same price, you may be limiting your ability to sell the product to a broader range of users (i.e., users with simpler needs and lower budgets vs. users with more complex needs and larger budgets). As a result, you may be limiting your market and “leaving money on the table.”

Tiered

A tiered pricing model offers various access levels (such as usage volume, number of users, or features) at different price points. The opportunity to select the ideal tier based on users’ needs and budget empowers them in the decision-making process. This pricing gives SaaS companies the chance to upsell and market your product to a broader range of users with varying needs and budgets. Hubspot’s tiered pricing structure is an excellent example of a business that’s meeting a variety of users at different price points. The greatest challenge for SaaS companies using the tiered approach is correctly structuring the tiers based on the anticipated needs of each buyer persona. Of course, you also want to make sure the various tiers and options don’t become so complex that they overcomplicate the buying process.

Freemium

A Freemium pricing model gives users free access to a limited version of your product to ultimately get their full buy-in after they’ve seen the product’s value. With Freemium pricing, users often quickly adopt the free software, but the tricky part is converting them to a paid subscription. Ideally, the upgrade will unlock enticing features and functionality that are strategically advertised while users are in the incubator, no-cost period. Canva is an example of a company that’s succeeding with this model.

Adapt or Die: Optimizing Your SaaS Pricing

Selecting the ideal pricing model is a complex cross-departmental decision that boils down to a precise understanding of your buyer personas and business needs. If you take anything away from this blog post, remember to price your product based on the value it provides to your users and your anticipated overhead costs and business needs. And if you can help it, don’t overcomplicate the decision-making process for your buyers.

At Tyrannosaurus Tech, we understand that having a great product is just the beginning of expanding your digital footprint. Our goal is to understand the context of this product within your big-picture business goals and help you decide how to sell your product to your target market. By asking the big questions, we can understand how your business is evolving, how your product will impact those plans, and provide expert guidance and insights to optimize your product for a successful launch and lifetime value. Whenever possible, we try to close the gaps in your team with our specialized skill sets and be a true partner. Ready to put an apex programmer behind your product? Contact us to schedule a free consultation.