Every SaaS company might be different—but almost every single one makes the same mistake that puts the company in jeopardy: it doesn't understand its pricing.
Companies pour blood, sweat, and tears into creating a great product and bringing in new customers. Yet most SaaS companies don’t know what they’re worth to their customers or how best to communicate value.
If your SaaS company doesn’t have a pricing strategy in place, you’re leaving huge revenues on the table. You don’t understand who your customers are, and you have no idea if you’re driving them away with poorly framed pricing packages or missing the chance to elevate your growth by charging more for your products or services.
Yes, nailing your pricing strategy is crucial to SaaS success—but it doesn’t have to be that difficult. Let’s take a dive into SaaS pricing: why it’s important, how to build your own killer pricing strategy, and some examples of great pricing strategies and models from the real world.
How is SaaS pricing different?
In the subscription-based pricing model, customers pay on a regular basis for continued use of a service or product. This means the strategies for setting subscription prices are very different than pricing traditional products—ongoing customer payments and complex product packages mean SaaS companies need to put more thought into their pricing.
Why it’s important to nail your SaaS pricing
Most SaaS companies we come across take one of two approaches to their pricing:
- They either set their prices on instinct when they start the business and then forget to ever take a second look.
- Or, they’re simply too terrified of scaring away potential customers to make the changes needed to keep the business profitable and growing.
If you can get over the fear of failure, though, the benefits of nailing your SaaS pricing are worth it. You’ll not only gain a valuable advantage over your competitors (who themselves are too afraid to manage their own pricing), you’ll also unlock fresh growth and sustainability for your company.
Gain a competitive advantage
You’re not the only company that struggles with pricing—many other SaaS companies you’re likely competing with are avoiding optimizing their pricing for all the same reasons.
Provide true value for customers
More than anything, customers want to buy products they can easily justify; purchases they can reflect back on later and think “that was a great decision.” Finding a price your customers are eager to pay means pricing based on value instead of your business costs or competitors’ pricing models.
I’ll dig into this in more detail in a later section, but if you haven’t factored in value-based pricing on your current SaaS pricing, you might want to read this.
Unlock an untapped growth lever
Ask any SaaS founder what growth means to them, and they’ll likely respond with “more customers.” But, it turns out monetization has a far bigger impact on the bottom line than acquisition.
In fact, our study of 512 SaaS companies showed monetization was 4x more efficient than acquisition in improving growth and 2x more efficient than efforts to improve retention.
By concentrating on nailing your pricing and squeezing out every ounce of possible improvement, you’ll give your SaaS company a much greater chance of success.
Strengthen your SaaS unit economics
Boiled down, SaaS success depends on the balance of two metrics: customer lifetime value (LTV) and customer acquisition cost (CAC). At its most basic, you need to make sure your LTV is substantially higher than your CAC; otherwise, you’re not going to grow.
Optimizing your SaaS pricing has a double effect on this equation:
- It lowers your CAC through better positioning and packaging and targeting ideal customers; and
- It increases LTV through higher prices and better retention.
The result? A stronger SaaS business, faster growth, and increased revenues.
Now you’ve seen all the benefits of optimizing your SaaS pricing, it’s time to leave the kiddie pool and dive deep into creating your own pricing strategy,
The 4 steps that make up a great SaaS pricing process
Pricing is an ongoing process, a set of steps companies should keep repeating until they find a viable (and profitable) pricing strategy.
The process we follow here at ProfitWell covers four main steps: Problem, Cause, Solution, and Implementation.
1. Problem: find the main obstacles your company is facing
The #1 question any SaaS company asks is, “What is stopping us from growing?”
It might seem like a straightforward question on the surface, but the problems range far and wide—it could be product, people, customers, or any one of a dozen other areas. The only way to find the answer is to chip away at this question, drill down into your biggest problem areas, and your gaps in understanding.
SaaS companies tend to face five major problem areas when it comes to growth:
- Poor unit economics
- Poor user retention
- Poor MRR retention
- Poor acquisition volume
- Poor conversion
Almost all of these (with the exception of acquisition volume) can be solved by improving your pricing strategy. You need to explore these areas deeper, focusing on one at a time, and collect the necessary data to define the problem. These are the things that are stopping you from succeeding and stopping your customers from succeeding with you.
2. Cause: use data to discover the root cause of these issues
To find out what that underlying disease truly is, you have to go to the source: your customers.
Customers are the only people who can tell you why they don’t value your product as it stands. Unfortunately, the vast majority of SaaS companies usually avoid this step for three main reasons:
- It takes time.
- They’re scared of what they’ll find out.
- They think they already have the answers.
By asking the right questions of your customers and adding the right data to your buyer personas, you can find out more about where your company is succeeding and where it is failing than you ever would looking at an analytics dashboard.
I won’t beat around the bush—it takes hard work. You’ll no doubt hear things you don’t like, and you’ll need to face the harsh reality of your current pricing strategy.
But all of this is data that makes your company better and moves you up and to the right.
3. Solution: use data-driven experiments to test viable solutions
This is the fun (and also the scary) part. Running tests and gathering data to validate or invalidate your hypotheses are vital for identifying the best long-term pricing strategy that you can.
By testing small changes often, you can quickly get reliable data on each of your individual hypothesis. You can see what works and what doesn’t, and only take the time and effort to permanently implement the changes that maximize growth and revenue.
4. Implementation: put into action the best solutions
This is where you take the results from your experimentation and embed them into your pricing.
This is the entire point of your pricing process, though also the part that companies rarely follow up on. Going live with major pricing changes is terrifying for any SaaS company. Will customers recoil at the new prices? Will acquisition drop off a cliff?
With quantified buyer personas, though, you can make these changes confidently, safe in the knowledge that the value you provide aligns with what the customers want and what they are willing to pay.
Now you understand the process for developing your pricing, let’s take a look at a few strategies you can use to determine how much you should be charging.
3 Popular SaaS pricing strategies
SaaS pricing strategies run the gamut from picking numbers out of thin air at one end of the spectrum all the way to fully optimized, value-driven pricing plans at the other. Think of pricing like a game of darts: you can throw at random, or you can aim for specific points on the board, but without data to tell you where to aim, you might as well be shooting in the dark.
The reality is that pricing for maximum revenue doesn’t have to be difficult—you just need the right pricing strategy. Each of the pricing strategies below has its place for different business types, but in SaaS, the only viable option is value-based pricing.
1. Cost-plus pricing
Cost-plus pricing is what people automatically think of when they think of “pricing strategy.” It’s the most basic form of pricing: add up all your costs, add a few percentage points of profit margin, and that’s where you set your prices. For a SaaS company, those costs might include things like product development and design, the company’s own SaaS providers, and the costs of the team.
Going back to our darts analogy, cost-plus pricing ensures you’ll at least be landing on the board—but anything beyond that is left to chance.
So why is cost-plus pricing popular? Once again, it all comes back to simplicity. Assuming you have a clear idea of your business costs (if you don’t, you likely have bigger fish to fry than your pricing strategy!), cost-plus pricing is easy to calculate, and you can be confident you’ll always be covering your costs and bringing in some profit.
That’s where the good news ends, however. Cost-plus pricing is nowhere near the best solution for maximizing SaaS revenue since the costs for delivering a single account of a SaaS product can be very low. Your pricing should be based on the value that your customers will get out of using your product, not how much you paid your developers.
2. Competitor-based pricing
Instead of using your business costs as a benchmark for your pricing, competitor-based pricing involves setting prices based on what your competitors are already charging. Depending on how well your competitors have set their pricing, competitor-based pricing can get you closer to a pricing bull’s-eye—the strategy works particularly well for newer companies unsure of the value of their product and without existing sales data to back up their decisions.
Unfortunately, following a competitor-based pricing strategy is also less-than-optimal—after all, you’re offering more value and a better product otherwise you shouldn’t be building it, so you should be able to charge more.
My advice? Look, but don’t touch. You want to know where your competitors are pricing their products so that you’re in the same ballpark, but they should not be guiding your decisions.
3. Value-based pricing
To put it bluntly, value-based pricing is the only pricing strategy you should choose for your SaaS company. Instead of looking inwardly at your own company or laterally towards your competitors, with value-based pricing, you look outward. You look for pricing information from the people who are going to make a decision depending on your price: your customers.
Value-based pricing truly gives customers what they need in order to trust your product and brand:
- Your pricing matches exactly what they’re willing to pay for the value you provide.
- You can offer packages and price points that precisely meet their needs because you understand what your customers truly want.
- You can start at a higher price point than your competitors—if you find that customers are willing to pay that price—which leads to higher revenue from the start.
- You can also re-evaluate prices as you add value to your product and find out more about your customers and their needs.
So what’s the downside, then? All this research takes time. Learning how willing each customer is to pay isn’t the easiest thing to do, which is why most people stick to competitor-based or cost-plus pricing. You have to be dedicated to finding out about your customers and your product to perform value-based pricing effectively.
Keep in mind, too, that even value-based pricing doesn’t give you a silver bullet. Instead, it spits out a range of prices that still forces you to make a decision on the exact price and how you package those prices for customers, leading perfectly into our next section: how should you package your SaaS pricing?
5 frequently used SaaS pricing models
Just like skinning a cat, there are dozens of ways to price your SaaS product, but most companies tend to follow a handful of popular pricing models. Let’s take a look at the five major SaaS pricing models and help you single out which model is best for your business.
1. The usage-based pricing model
Like cell phone data, prices increase along with usage—the more you use, the more you pay. It’s a model that doesn’t appear very often in SaaS companies—instead, it’s more heavily used for platforms charging for bandwidth or API requests performed. SMS platform Twilio, for example, charges a base rate of $0.0075 for each text message sent.
Usage-based pricing has its pros—upfront costs are low for users who are only just starting out and using less of the product, while at the other end of the spectrum, heavy users are charged appropriately for the services they’re utilizing.
The downside, though, is that more usage doesn’t always correlate to more value for customers. Pricing based on usage also makes predicting costs and revenue more difficult since usage can often change dramatically from month to month.
2. The per-user pricing model
The de facto pricing model for many SaaS companies, per-user pricing is just as it sounds. Companies charge a fixed rate per month for each user on an account—for example, G Suite (whose pricing we’ll look at in more detail later) charges a flat $6 per user, so 10 users would cost $60 per month.
Since per-user pricing always scales linearly, it’s easy for both customers and companies alike to understand and manage what they’re paying (or being paid) each month. It does mean, though, that customers are penalized for adoption—more seats mean more cost, so customers often resist adding seats whenever possible, sometimes even “cheating” the system by sharing licenses.
Per-user pricing kills your growth and sets you up for long-term failure—it should never be the be-all and end-all of your pricing strategy.
3. The tiered pricing model
Tiered pricing tends to be the best pricing model for most SaaS companies, and the one we most often recommend. It's the same strategy used by companies like HubSpot and Slack—we'll dig into their pricing in more detail below.
Tiered pricing lets SaaS companies offer two or more packages, or fixed sets of features, for a specific price. Each tier can be tailored to meet the specific needs of a particular buyer persona—for example, beginner users versus enterprise—with tier prices increasing as you provide more value.
Why is tiered pricing so effective? It’s simple: better persona targeting leads to higher conversions and maximum revenue. Upselling customers also becomes easy, assuming your tiers are structured right—customers can simply step up to the next tier when they outgrow their current package.
Be careful not to offer too many tiers, however—overcomplicating your pricing tiers can confuse customers and reduce conversions.
4. The flat-rate pricing model
Flat-rate pricing is the most basic pricing model for SaaS companies. One price, one product, one set of features—every customer is on the exact same plan. It’s a model used by a limited number of SaaS companies, Basecamp being one of them—$99 per month gets unlimited access for unlimited users.
Even though flat-rate pricing is easy to communicate and easy to sell, it isn't used by many SaaS companies today, since tiered plans that cater to the needs of different users are far more profitable. Charging one rate for unlimited access blocks off any possibility of aligning your pricing with your value metric—you don't make more money for providing more value.
5. The per-feature pricing model
Per-feature pricing is somewhat similar to tiered pricing, but instead of charging by users, customers pay for different features within each tier—as tier prices increase, so does the functionality you provide with your product.
The pros? Per-feature pricing is easy for customers to understand, and companies can easily charge more or less for specific features based on customers’ willingness to pay. The main downside of feature-based pricing is that there are so many different possibilities for tiers, it’s difficult to find a pricing structure that works well—at least, without a lot of data.
4 successful companies that crushed their SaaS pricing strategies
You might be tempted to ask which pricing model is the best, but there’s no silver bullet here. Different pricing models work best for different companies and different customer types—it’s only through following your pricing process and analyzing customer data that you can uncover the best pricing model for your company.
To help you out, let’s take a look at four different companies that are crushing it with their pricing strategies—you’ll no doubt find some inspiration you can apply to your own pricing.
Now, Slack combines two different pricing models, charging per seat but also giving customers multiple tiers to choose from. New buyers have a choice of three tiers, and each tier unlocks additional functionality:
- The Free plan includes unlimited seats but restricts message history and the number of integrations.
- The Standard plan lifts the restrictions on message history and integrations but excludes enterprise services like single sign-on.
- The Plus plan gives enterprise customers the whole shebang for the highest price.
What’s most interesting about Slack’s pricing page is how well these tiers align with their value metric. Once customers join the Free plan, adding team members and making Slack an essential part of their communication, the ability to go back and search past messages becomes invaluable, giving a clear path to upgrade to the Standard plan.
Likewise, Slack also knows that for larger teams—say, 50 to 100 people—enterprise features like single sign-on and compliance reports become essential, which Slack provides through their Plus tier.
You can read more about Slack’s “holy grail” of SaaS pricing in our Pricing Page Teardown—it’s one of the strongest pricing strategies we've come across.
Aligning your pricing tiers with your value metric isn’t the only thing to consider when setting your pricing—you should also try to align your pricing tiers with buyer personas, something HubSpot nails with their pricing strategy.
HubSpot offers three distinct packages for its all-in-one marketing software, and each is aligned to a specific type of customer. Each package is very different than the next, with clear hooks and balances to ensure prospects can find which plan is right for them quickly and easily. Having a clear structure to its pricing plans also simplifies the job of HubSpot’s sales team—sales folks can quickly funnel prospects into the right packages for them, increasing their chances of converting.
Check out more on HubSpot's pricing strategy in our Pricing Page Teardown.
Like Slack, Google's G Suite product intentionally keeps its pricing straightforward and easy to digest.
Also like Slack, each package differentiates on features to target a specific kind of buyer persona. We surveyed 7,291 current, former, and prospective customers of both Office 365 and G Suite as part of our Pricing Page Teardown and discovered their feature preferences tell a straightforward story: every feature Google offers is driving value—in some cases, more value than Google is currently charging.
Google’s tandem approach of per-seat pricing and value-based tiers makes sense, given their target market. Keeping prices affordable helps boost acquisition and lock in customers, with plenty of options for expansion as companies (and their business needs) continue to grow.
Sitting at the opposite end of the spectrum from Google, Zendesk’s suite of customer experience products offers up a range of challenges around pricing.
Zendesk offers a huge range of products, each with their own pricing tiers and per-seat costs. What’s most incredible, though, is how they manage to nail their pricing against their customers’ willingness to pay across all their products. You need to know your customers very well to get pricing that close. And, building on the suite model gives Zendesk a huge opportunity to optimize their product to the mid- to high-end market.
Check out our Pricing Page Teardown for more info on Zendesk’s pricing strategy.
Your SaaS pricing is too important to neglect
Whether you’re a large or small SaaS business, it never hurts to take a second look at pricing. If you haven't ever optimized your product/service’s pricing for your target/current customer base, you have room to grow.
If you take only three things away from this post, remember these key pricing points:
- Always, always charge based on value - no excuses. It’s far and away the optimum strategy for SaaS companies.
- Target the right buyers. Make sure your pricing tiers line up with your ideal customers.
- Don’t complicate things. Keep your pricing structure simple for better acquisition.
If you’re looking to get started on improving your SaaS pricing, ProfitWell provides free subscription metrics to help you identify opportunities and then has tools to help you reduce churn, optimize pricing, and grow your subscription business end-to-end.