Nothing will affect your revenue as much as your software pricing models. But with so many different types of software pricing options to consider, knowing how to price your product to find the sweet spot for your customers and your bottom line can be a challenge.
If you undercharge, you’ll always be playing catch up on revenue goals. If you overcharge, you’re likely to drive away interested customers who know they can always find a similar product elsewhere, even if it’s not as good of a solution.
To make things clearer, here are some of the most common software pricing models examples:
Flat Rate Pricing
Flat rate pricing makes SaaS pricing simple. Using this model, companies are guided by the power of one - one product, one set of features, one price. Flat rate pricing is leftover from the “good old days” of software pricing when users paid once for a product, but with the advantage of billing monthly.
Flat rate pricing makes software license pricing simple for producers and customers. There’s no consumption-based pricing mathematics, tiered pricing confusion or features-based choices to take into account. The downside, though, is that either the product and the price work for the customer or they don’t. With this SaaS pricing approach, there’s no chance of adding extra features or removing elements the customers don’t need.
Also known as the “Pay-as-you-go” model, usage-based pricing offers customers an easy-to-understand SaaS pricing strategy: you pay for what you use. That means, the more you use it, the more it costs, which makes it simple and easy for customers to understand. The downside for businesses that opt for this software pricing model is that it is harder to predict revenue.
Tiered Pricing Model
The tiered pricing model is often confused with volume pricing and is where SaaS pricing models begin to get complicated. With both tiered and volume pricing models, the more licenses purchased, the more the pricing changes. With volume pricing, the price for all users comes down the more licenses, for example, that are purchased.
Under the tiered pricing model, users receive a discount for exceeding a certain number of licenses. However, unlike volume pricing, the discounts are not applied across the board, rather across tiers.
For example, 123SaaS Inc. offers three pricing tiers:
- Tier 1: 1-50 licenses cost $100 per license
- Tier 2: 51-100 licenses cost $80 per license
- Tier 3: 101+ licenses cost $60 per license
So, if a customer buys 101 licenses, the cost would be $5,000 (50 x $100) + $3,920 (49 x $80) +$60 (1 x $60) = $8,980
Per User Pricing Model
The Per User Pricing Model, in which companies offer all features and benefits to users with the price changing according to the number of users, has historically been one of the more popular SaaS pricing models. Lately, however, it has been falling out of favor.
One downside is that charging per user means customers - who are just as motivated by price as you - will try to minimize the number of licenses they buy to save costs. With just a few users, there’s also more chance of churn - of your customer jumping to another company that offers a similar product but with a more amenable pricing structure. Without your product being seen as offering fundamental value, there’s no reason for a customer to stick with it, which is why it may be better to try a different approach for how to price your product.
Per Active User Pricing Model
If your customer is a large enterprise, there might be some reluctance to buy licenses for software that not everyone will use. That’s where the per active user SaaS pricing strategy comes in. Using this particular software pricing strategy, customers are encouraged to sign up as many users as possible, but they only pay for those who actively use the software.
The best example of this type of SaaS pricing is Slack, which bills itself as a “collaboration hub.” Slack has a “Fair Billing Policy” that operates on a per-user basis and guarantees customers credit if active users become inactive.
The upside of this SaaS pricing model is obvious - customers are only billed according to what their users actually use, making it easier for companies to take a risk with new software.
Freemium Pricing Model
The freemium SaaS pricing model works on the “get ‘em to try before they buy,” principle. This software license pricing strategy has worked well for companies such as Dropbox that offer a limited amount of storage (2GB) for free with Dropbox Basic and then get users to sign up for anything from 2TB or 3TB of space to endless storage with Dropbox’s Enterprise tier. The point of this pricing strategy is to get your customers hooked on what you offer and leave them wanting more of it - even if they have to pay for it.
The Bottom Line
No matter which of the many software pricing models you opt for, remember that for optimum revenue and return, pricing cannot be a static entity. You must monitor your SaaS pricing models to make sure you’re expanding and keeping your customer base. If you see an unreasonable amount of churn or if you’re no longer getting the number of sign-ups you once were, it’s time to take another look at how to price your product and see if a different price point or a different SaaS pricing strategy altogether can turn things around.
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