THOUGHTS

SaaS pricing models – which is the right one for me?

Dec 20, 2023

Written by: Srinivas R

Mirror, mirror on the wall, which are the best SaaS pricing models of all?

The advantages of the software-as-a-service (SaaS) model are self-evident for the most part. In this software licensing and delivery approach, customers pay a subscription fee (monthly, quarterly, or yearly) to avail cloud-based software services. Users might also be billed based on the resources they consume. In either case, users can get started on these platforms without making significant capex investments in the first place. It is also relatively easy to quit a SaaS platform. Essentially, SaaS pricing models charge customers for what they use (and don’t charge for whatever they don’t use). That’s the beauty of it! Customers can start their innings on a small budget and then quickly ramp up computing capacity, storage, or bandwidth to accommodate increasing workload. With SaaS, there are more surprises (all pleasant ones!) in store for users. As their resource usage approaches a certain threshold, customers become eligible for usage-based discounts. This means the more they use the less they pay per GB. For instance, AWS offers volume-based discounts to different tiers of usage, so such users pay a lower rate for each GB beyond a predefined consumption level. Volume users of a SaaS product might also benefit from free or discounted usage of another product. The SaaS model comes in 5-6 flavors and customers typically go with payment models that meet their specific needs. Vendors themselves admit pricing SaaS software can betricky. Let’s consider three SaaS pricing models that are still wowing the market as 2023 begins to taper off.

Tiered pricing

This is a popular SaaS billing option that presents users with multiple packages at differently priced tiers, and users can migrate to higher tiers as their needs and wallet sizes grow over some time. In effect, tiered SaaS pricing models acknowledge that customers have multifarious requirements, and no one size can possibly apply to all. A customer service software vendor, for instance, offers three levels of access to users, priced at $50, $80, and $100 per agent per month. Users can opt for small sums payable every month or commit to a full year subscription. The latter is more cost-effective since customers pay a discounted subscription fee, apart from being spared the impact of any upward revision of prices. The tiering in this model is often based on the number of complex features (e.g., essential, professional, enterprise), usage (per unit/minute/hour), or the number of users (say 1-5, 6-10, 11-20).

Feature-based pricing

Often paired with price tiering, feature-based SaaS pricing models charge users based on varying levels of feature enrichment. Basic tiers (featuring email and contact management software, essential analytics tools, etc.) might be priced at, say, $6 per month. A middle tier, boasting advanced features, like real-time analytics and enhanced security, could carry a monthly price tag of $9. More sophisticated features – such as AI/ML-curated tools, custom report builder – are limited to advanced tiers with higher going rates (e.g., $14-15 per month).   

Flat-rate pricing

Though somewhat rare, this model is still around. In flat-rate pricing, a single product with a fixed set of features or services is offered at a fixed price. There is no provision for add-on features or services at differential price points. In a way, these SaaS pricing models save customers the hassle of making the right choice from a confusing medley of plans – the so-called tyranny of choice. The downside is that flat-rate pricing limits upgrade opportunities for customers.

How Infiniti Research can help you?

SaaS pricing models

Pricing is a critical success factor for any enterprise, large, medium, or small. Even so, many businesses underestimate the relevance of pricing strategies. The cold fact is that any enterprise can afford to overlook the price-setting mechanism only at its own risk. Price formulation goes way beyond the initial short-term value- generation phase, and this is where our expertise comes in handy. Our subject matter experts serve as the extended arm of the client teams, delivering the real-world insights they need to make timely decisions around product pricing. Our pricing intelligence helps clients tackle inefficiencies in price setting, which, left unattended, might potentially leave the business bleeding cash! For instance, off-target SaaS pricing models are costing vendors dearly. Our experts not just stop businesses from losing money, but also scan competitive price trends as well as gauge customer perception and brand loyalty to work out optimal price points. 

Story of a product repricing journey with a North American SaaS vendor

Our client is a North American provider of SaaS-based enablement tools for customer relations, sales, and marketing operations. With these tools in place, businesses get integrated dashboard views of customer interactions, and instantaneous access to contact info. They also stand to gain more visibility into sales deal progress and performance. Incepted a little more than a decade ago, our client has invested significantly in new product development and feature-update older platforms. Since mid-2023, the SaaS provider has been consistently extending its product line with AI bots for sales and customer service automation. In 2022, the business achieved 1.5X of annual revenue from up to 30 country markets, and the company is expected to sustain this growth momentum, post 2023. Even so, in a hypercompetitive and dynamic market, the client faced several issues on the product pricing front.     

Our client has lingering doubts that at least some of its offerings are undervalued, and as a result, there could be some revenue leakage. Inefficient practices, including pricing inefficiencies, are reportedly costing businesses nearly a third of their revenue by failing to capture the true worth of their products. Suboptimal SaaS pricing models bring several issues in their wake like failure to recoup production costs and lost revenue. Customers might find overpriced products somewhat off-putting, and this could reflect in tepid sales and unsold inventory. Moreover, differential pricing is key in setting products apart from the competition and capturing what producers believe is the true value of their offering. Moreover, pricing SaaS software is something that demands careful consideration. So, in early 2022, the client turned to our experts for assistance in recalibrating the price structure of its flagship product.

Our experts set to work as soon as we got the heads-up from the client. The team proceeded to weigh up how customers value different attributes of the client’s product (e.g., features, user ease, scalability, data security, performance, and easy integration with other tools). The statistical technique of conjoint analysis was employed to the best advantage here. A survey panel comprising key decision-makers and influencers was brought into play to collect real-world feedback on the client’s products and the benefits they deliver. Our experts also gauged the degree to which the prevailing price points impacted buyer behavior. Furthermore, our team structured volume-based discounts with high precision with a view to growing sales and revenue. Using our study as a baseline, the client has shaped an optimal pricing strategy. On top of that, the business has repriced its tier-1 product and reframed its SaaS pricing models, and this is having a positive impact on sales and revenue.

Summary

A North American SaaS products business worked with our pricing and revenue management consultants to recalibrate its top-end offering. The core objective was to drive sales and revenue growth in the near to mid-term. In the past, our pricing experts and fact-based insights have enabled large, medium, and small enterprises to set optimal price points for flagship products. Insight-centered pricing decisions are crucial to business growth. Setting SaaS pricing models based on a gut feeling is like waving at someone in pitch dark. It might just work. But a majority of times, it may not! Banish blind chance from your pricing considerations.

Contact us now to know more about how we can help set optimal prices for your products.

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