SaaS Pricing Models: A Guide to Pricing Strategies for Startup Founders
There are four primary pricing models that govern SaaS offerings, with the majority of pricing structures being either derived from a form of or a blend of these fundamental models.
Freemium pricing: You offer a limited free plan to attract customers, with the aim of upselling them later. It should include limited features but it is always free.
Flat-rate pricing: You charge a universal rate to all customers, without any variations, discounts, or additional fees.
Tiered plans based on features: You can customize your pricing plan based on tiers if you offer a variety of different features or target different markets.
Tiered plans based on deliverables (e.g. users, storage, transactions). You can customize pricing tiers based on users or deliverables rather than tiered pricing plans based on features.
As a founder, why is it important to understand these various models?
Understanding pricing structures and getting a sense of what other companies in your space charge provides insight into what customers expect. This doesn’t mean you should adopt the same pricing model as your competitors; in fact, opting for a different model might be a more strategic choice.
Either way, your SaaS pricing strategy should be based on an amalgamation of factors such as value, customer feedback, competitive analysis, and overall costs.
Here are 4 additional tips to help you optimize your B2B SaaS pricing:
Keep It Simple: Simplicity is the cornerstone of an effective pricing strategy because it breeds understanding and, in turn, trust. A cluttered pricing menu can overwhelm potential customers. A pricing structure that's easy to grasp, limiting options to a few clear choices, instills confidence in potential customers.
Identify the Right Value Metric: Your value metric defines not only what you charge but also how you charge. Whether it's the number of features used, the volume of data processed, or another pertinent factor, the right metric can make all the difference.
How to do this: Evaluate your potential value metric by asking critical questions:
Does it align with your customer's needs and perceptions of value?
Is it intuitive and easy for prospects to understand?
Does it grow with your customers as they evolve and expand their usage?
Differentiated Pricing or Tiers: While tiers are a common approach, they're not always the answer. Consider differentiated pricing based on your value metric. This could include a core product with various add-ons, allowing users to create their personalized pricing structure. For example, SMBs might not need a full HCM suite, plus advanced reporting, and integration capabilities, so you could offer the core HCM product for one price and a bundled package for larger businesses.
Free Trials or Freemium Plans: A free trial is where you put the weight on time. Freemium is a type of acquisition model, where you offer a limited version of your product for free.
With higher volume and free trials, you can provide a free trial period and then offer the user the option to purchase more or wait until the next month to reset their free offer.
A freemium plan typically works best for SMBs, startups, or early-stage enterprise clients testing out your product or working with you on an initial proof of concept. By offering a freemium (limited version), you can attract quality leads before they’re ready to fully invest, and then once they begin to see the returns from using your product, they’re able to get buy-in from the C-suite and move to a paid plan. Freemium plans can be combined with other packages too, for example, you might offer feature-based tiered plans and a freemium plan.
The goal either way is to keep users in your system and use that momentum to get conversions.
Keep in mind there is no one-size-fits-all pricing strategy in this dynamic SaaS landscape. Your market, industry, and customer base all influence what you can and should charge. Begin your journey by collecting customer feedback, analyzing data, and having the flexibility to adapt your pricing model as your startup evolves. Over time, you’ll uncover the ideal pricing sweet spot tailored specifically for your business.