Navigate the world of pricing models and pricing strategies with this comprehensive SaaS pricing guide.
In this guide, you’ll learn:
Let's dive in!
Your pricing model determines how much a customer will need to pay to acquire the software license and access the features of your product.
Popular pricing models include one-time purchase fees, subscription-based models, usage-based fees, tiered pricing, or value-based pricing.
Selecting the right B2B SaaS pricing models can impact revenue growth, customer retention, and overall business success. Consider these three things when evaluating a pricing model for your product:
The target market and industry for your software offering can heavily influence SaaS pricing models. Consider factors such as the size of the businesses you serve, potential market growth, and potential geo-expansion.
Take your research even further by identifying the specific customer segments within your industry that are particularly enthusiastic about your product. Determine their unique pain points, needs, and then price and package to effectively address those challenges.
Identify where you add the most value, then charge customers accordingly.
Traditionally, SaaS companies charge a higher price for access to a product tier that includes additional software features.
Companies can also monetize usage, or resources consumed. For example, usage or storage-based models appeal to customers who are looking for a clear cost/value alignment.
Analyze your industry's competitive landscape, market trends, and emerging technologies. You may need to adjust your pricing strategy in the face of economic downturns or customer needs and behavior shifts.
Ultimately, there is no one-size-fits-all approach to pricing.
You might juggle numerous software pricing models, especially as you move into enterprise sales, utilize channel partners, or evolve from a single product to a platform. We’ll get into that further when discussing taking pricing models to the next level.
At the most basic level, there are two types of pricing models:
Traditional software providers generally use the up-front or perpetual model, while subscriptions are the core of SaaS billing models.
As more legacy software providers seek recurring revenue, SaaS pricing is increasingly relevant across all markets and segments.
With the perpetual license model, the buyer has access to the product indefinitely after purchasing it. This model is usually associated with traditional or enterprise software providers.
A subscription-based pricing model is when customers pay a regular fee to use a product at set intervals (monthly, yearly). Within subscriptions, businesses offer different pricing tiers based on the number of users, features, storage access, or other value metrics. Most successful SaaS companies use some form of subscription pricing.
Now that we understand the difference between subscription and perpetual pricing let's take a closer look at some of the most popular SaaS pricing strategies. Looking for examples of each pricing model? Click here.
A per-user or seat-based pricing model is a payment structure where the cost of a product or service is determined by the number of users or "seats" that will have access to it. The total cost increases as more seats are added.
For example, Acme Inc. offers three pricing tiers:
The usage-based pricing model usually includes multiple tiers based on the volume utilized (amount of data, time, storage, etc.). Users can upgrade as they reach usage limits.
In feature-based pricing, (also called tiered pricing) the price is determined by the number and complexity of the features included in the plan. This pricing model is popular for software with a wide range of features.
Value-based pricing models charge customers based on the perceived value of the software instead of basing it on production costs plus average marketplace markup.
This one is a bit of a misnomer because it is not a pricing model. It's an acquisition model. With freemium, customers can access the software for free. More advanced features or functionality are sold with a separate pricing model.
A hybrid pricing model combines multiple pricing strategies. For example, you could use a user-based pricing model sold via a subscription while monetizing add-on features.
As an early-stage SaaS provider, you probably started with a simple pricing approach that was easy to put into the market. However, your pricing model will evolve as you gain insights into customer preferences and value perception.
Here are a few ways to think about a more diverse pricing strategy:
Expand your customer base and consider packaging your core product to meet the needs of various segments. Tailor your product packaging to address each segment's unique needs and preferences. This approach allows you to attract a wider audience and increase sales. It also reduces the risk of relying on one customer segment.
Another monetization technique is pricing according to perceived value. The question is what pricing axis will incentivize buyers to move up a pricing tier. For example, your customer might want lots of users to be able to use your software product product. This means they'd be willing to upgrade to a new pricing tier if it provides access to more users. Others might be more incentivized to tier up if they get access to upgraded features.
The idea is that your monetization team prioritizes identifying a pricing axis that aligns with the value driver for your customers. With the correct tools and processes, you can take this method even further and introduce multiple pricing axis to satisfy a range of customer needs.
The ability to deliver new pricing fast, securely and at scale is directly linked to a licensing and entitlements infrastructure.
This integration involves a delicate interplay of various departments, systems, and processes. One of the most important, and often overlooked aspects of operationalizing pricing is software licensing.
It’s common for someone to say they are buying a license for software. But purchasing a software license is more like renting a movie instead of buying it. Your company still owns the software, but you let users access it. On a technical level, the software license mechanisms control customer access to features and components, allowing a company to operationalize a given pricing model.
Software license and entitlement management establish rules that operationalize a given pricing model. It does this by controlling access to the following:
Services the customer can access
The services the customer can access should be clearly defined and enforced. This ensures that customers have access to the features they are entitled to and prevents unauthorized use.
Time restrictions on user access
The license agreement also defines when the customer can access the software purchase. It should include the initial access rights, renewal terms, and a license enforcement capability.
Number of users with access
The software license also includes the number of users with authorized access. This component ensures you're compensated for each user and can help prevent unauthorized use.
Locations permitted for access
The software license or entitlement can also specify where users can activate their software. This includes geographic regions, deployment modes such as on-premises or cloud, and even specific hardware or networks.
Usage limits or restrictions
The license agreement may also include specific usage restrictions, such as limitations on the number of transactions, data storage, or API calls.
Access to features
Entitlements define the activation or deactivation of customer access to specific features within the software.
NOTE: In many environments, especially in complex enterprise SaaS pricing modules, entitlements are becoming just as relevant as licenses.
A license typically grants the customer the right to utilize the software in compliance with the agreed-upon terms.
Entitlements are like licensing 2.0. They control granular access privileges associated with a software license.
Entitlements are often utilized in complex pricing and packaging environments. They are central to operationalizing sophisticated enterprise SaaS pricing strategies.
The Sentinel platform, from Thales, provides the industry's most trusted licensing and entitlement capabilities.
For more on Entitlements, read The Guide to Entitlement Management.
If you’re considering new approaches to help better monetize your software, using a licensing and entitlement management platform could be a good option.
Thales' Sentinel platform provides comprehensive licensing and entitlement capabilities.
Software pricing and packaging is an art form regardless of whether it’s delivered as a service or as physical on premise software. There is also a lot of science involved. This paper explores the most critical aspects of introducing and managing SaaS applications and presents independent software vendors (ISVs) with ideas on how to build, execute and manage effective software pricing and packaging strategies for cloud services and recurring revenue streams.
When they evaluated Thales Sentinel to replace Flexera, Geocap found that Thales Sentinel solutions offered a complete set of utilities and variety of beneficial features, backed by exceptional support.
Like most software vendors, Geocap AS needed a licensing solution in order to control their licensing terms and conditions. The company originally chose FlexNet Publisher (FNP), a licensing platform sold by Flexera. Unfortunately, Geocap was dissatisfied with FNP for a variety of reasons.