We are living in a new era of the Internet Revolution, which is also commonly referred to as the “Digital Revolution.” Here, anything and everything can be accomplished online—right from sending a text message to a friend or sending a space shuttle to Mars. A phenomenal work of this revolution is digitalizing the traditional software or data distribution systems over cloud computing, which we now call SaaS.
What is SaaS and the Pricing Models Associated with It?
Software-as-a-service or SaaS model template is how cloud providers host applications to make them available for the users on the internet. In this model, the Independent Software Vendors (ISV) come in terms with a third-party hosting provider for applications or databases, networks, servers, and other computing resources.
Some SaaS Research Findings
- Gartner forecasted that the SaaS model template remains the largest market segment on public cloud services, and it is forecasted to reach $122.6 billion in 2021.
- A recent McKinsey & Company report infers that the tech industry analysts predict software as a service market growth and foresee it for SaaS model template products close to $200 billion by 2024.
Features of SaaS:
SaaS is a software delivery model that offers many potential features to the businesses over the traditional business software models as below:
- Nearly 80% of businesses use at least one SaaS application. The users can access the applications hosted on the cloud through a network-connected device. In most cases, applications are accessed from web browsers (in the case of mobile phones). As it is generally available on a range of devices, it makes SaaS more accessible than the conventional business software installation anywhere in the world.
- SaaS providers offer various subscription options and the ease of scalability to change subscriptions as and when required so that more users can access the service when the business expands.
- Users can pay a subscription fee to access the ready-made software. As an outcome, companies that use SaaS applications are relieved from the tiring work of maintaining software.
- SaaS is associated with ASP, an application service provider that delivers application functionality and associated services across a network to multiple customers using a rental or usage-based transaction. The SaaS pricing model is a software delivery model which the provider hosts and delivers to the end internet users in an enterprise when required.
- The cloud provider provides applications access for distributing SaaS. The application code is the same for every customer. It gets dispersed to all the customers during the delivery of new features.
- The service agreement includes the customer data in the SaaS model template, which is stored in the cloud or local device.
- Using APIs, organizations can amalgamate the SaaS applications with the software, and the software tools for SaaS providers can be written.
SaaS products are diverse. They range from audio streaming services to professional business analytics tools. SaaS applications exist for internal business implementations such as billing, emails, customer relationship management (CRM), sales management, financial management, human resource management (HRM), and collaboration. Enterprise SaaS products are also for specific industries, such as insurance or medical, known as vertical SaaS products.
There are multiple reasons why the SaaS model template is handy and economical.
- It offers high scalability.
- It is available at a lower cost to service providers.
- You can upgrade it faster.
- It offers wider accessibility.
- It offers flexibility in licensing.
- It allows for easy deployment.
- It offers the latest software versions.
- You can scale it based on user needs.
- It offers a predictable revenue stream.
- It offers less expensive subscriptions.
SaaS products are fundamentally marketed to B2B and B2C markets, or both.
Top Six SaaS Pricing Models
Using a SaaS product is much more cost-effective than a traditional software licensing model for enterprise software as the setup and hardware installation are not necessary. SaaS providers use one of many customer subscription-based SaaS pricing models.
If your SaaS company is still missing out on a pricing strategy, huge revenues will sideline you as a result - you won’t understand your customers, they can get driven away by poor pricing packages, you may miss out on elevating your growth by charging exorbitant prices for your products or services.
SaaS incorporation isn’t so tedious. In the upcoming section, we will focus on SaaS pricing and its importance. We will also learn to build an exceptional pricing strategy. We will be considering real-world examples of some great pricing strategies and models.
Here are some of the best SaaS model templates that prove to be a win-win for both the company and the users:
- Ad-Based SaaS Pricing Model
SaaS service can be free for users, with the SaaS provider generating revenue through selling advertisement space. You can also upgrade to a paid tier exclusive of intrusive ads in this model.
This model is similar to freemium, but the major part of monetization comes from the ads. A consumer-centric SaaS product should monetize free users. This pricing model fits well for large companies with a greater customer base.
Advantages of Ad-based SaaS Pricing Model:
- This model works well for SaaS companies that offer customers a free option but still want to get revenue from those users.
- It will suit you if you want to adopt a freemium model but do not want to cut the available functionality and offer customers an upgrade by adding advertisements.
Disadvantages of Ad-based SaaS Pricing Model:
- The intrusive ads can falter the user experience and your brand eventually.
- You need to hire specialists who are responsible for selling ads.
- Flat Rate SaaS Pricing Model
In the flat-rate pricing model, you can offer a product with a set of features at a stipulated price. It is similar to the software licensing model used before the cloud infrastructure existed but has an add-on benefit of being billed monthly.
With this model, customers can access the full suite of software features for a certain monthly or annual subscription fee. In the flat-rate SaaS pricing model, you receive the SaaS product with a set of features at a predetermined price. There are no options for pricing or elements to choose from. With this pricing method, you will charge your customers the same monthly or annual amount despite the number of users or their usage.
Advantages of Flat-Rate SaaS Pricing Model:
- This SaaS pricing model is simple & easy to comprehend.
- With this model, revenue forecasting is much easier and accurate as there is no complication or diverged price points to consider.
- With this model, you can easily communicate, sell, and focus on your marketing and sales on a single and clearly defined SaaS pricing model.
- For a SaaS product, this model can obtain the customers quickly due to the simplicity this pricing model offers.
- This model will gain customers faster due to its simplicity
Disadvantages Of Flat-Rate SaaS Pricing Model:
- Ironically, the one size fits all SaaS pricing strategy won’t work for all customers. It is impossible for businesses that need custom plans; it discourages them from choosing your product.
- Customers don't have a choice but to take or leave the product.
- You cannot upgrade plans and can completely miss any upselling opportunities.
- When scaling, acquiring new market users can be tricky as your SaaS pricing model is upgraded for a specific market niche.
- Storage-Based Tiered SaaS Pricing Model
This pricing model offers customers free access to the service, but a payout for storage is needed if they continue to use the product after the free threshold is passed. It has gained traction with the rapid growth in the cloud storage market. In this model, SaaS companies businesses or individuals based on the amount of digital space they require.
This model is one of the basic SaaS pricing models, and the cost varies according to the amount of space.
Advantages of Storage Tiers SaaS Pricing Model:
- You can allow users to know your software, making them willing to purchase your additional space.
Disadvantages of Storage Tiers SaaS Pricing Model:
- You should ensure that you do not offer too much free space as it can clip off your profitable users.
- It can be a costly option for supporting your non-revenue producing users because IT maintenance and management for the users by the cloud storage providers is costly.
- Feature-Based Tiered SaaS Pricing Model
In this pricing model, the pricing tiers are determined by the features of subscriber users, which reduces available software versions with finite features at a lower cost to the maximum functionality tier. There can also be surplus features between the minimum and maximum tier.
Based on the real-world pricing scenario, the tiered SaaS pricing model drew from the tiered SaaS pricing strategy. People use these labels reciprocally, bringing about confusion and the difference between the two.
This SaaS pricing model provides different product versions at different pricing variations based on the product features, deciding users or usage by the business based on its product. It customarily creates two to five tiers, and customers can choose as per their specific needs.
You can boost your customers incrementally based on this pricing model, including features as and when they are scaled. The pricing tiers must be constructed meticulously with an appropriate SaaS pricing strategy failing which your customer can get confused.
Advantages of Feature-Based Tiered SaaS Pricing Model:
- With this model, customers can select the plan that works the best.
- This model appeals to different customers from beginners to advanced levels, increasing market share and revenue potential.
- It allows you to cross-sell to your existing customers, improving the existing MRR without making any marketing payouts.
Disadvantages of Feature-Based Tiered SaaS Pricing Model:
- The tiers must be optimally constructed based on the targeted customers. Multiple tiers are confusing, and poorly constructed tiers don’t reap the benefits of the tiered model.
- With every tier, the complexity increases with the customer’s decision-making process.
- Usage-Based SaaS Pricing Model
The usage-based SaaS pricing model or the “pay as you go” model is a SaaS pricing model in which the customers are charged based on their product usage. They pay more if they use more and less if used less. Thus, the more customers use the service, the more their billing and vice versa.
This pricing strategy is common in infrastructure and platform-related software companies (Amazon Web Services). Companies are charged based on the number of API requests, processed transactions, or used data gigabytes.
SaaS companies are increasingly finding ways to adapt this model, such as social media tools charging for scheduled posts or accounting tools billing per invoice.
The usage is charged based on various factors: the number of sent emails, per API, call and transaction. Some usage-based SaaS model variants are simply based on usage. Some others are free from the base subscription fee and then charged as per the usage.
Advantages of Usage-Based SaaS Pricing Model:
- Customers might like this SaaS pricing model as it is fairest and directly proportional to their service usage. If they use more, they pay more. It is a transparent pricing model and has no hidden fee.
- This SaaS pricing model adapts to fluctuations in your customers’ business easily.
Disadvantages of Usage-Based SaaS Pricing Model:
- You cannot charge customers as per their organization size, and there is a risk of losing revenue in the process.
For instance, you might end up charging your enterprise customers less because they use their services in fewer amounts, while you charge a startup more if they use more. You might fail to include the revenue that your enterprise customers could produce.
- As the users are charged based on their usage, they may not notice your product value.
- Revenue prediction can be tough as it considers your customer’s product usage, a factor you may not accurately measure.
- Freemium SaaS Pricing Model
Users can use the platform for free but with a limited number of features. If users need more functionality, they will have to pay to access those functionalities.
This model is used as a part of a tiered pricing strategy. The regularly paid packages are enhanced with a free and entry-level tier limited across certain dimensions. The users can upgrade at a certain usage level by employing feature-based, capacity-based, or use-case limitations.
Advantages of Freemium SaaS Pricing Model:
- It is easier for the company to attract a large user base by offering a free product.
- It gives up a good opportunity for free beta testing, which may further help companies try and test new features.
- Since the companies will have a large customer base, they will have more accessibility to collect essential data and feedback to create and improve effective paid plans.
- Users will be more willing to use the free products, further reducing the marketing costs.
Disadvantages of Freemium SaaS Pricing Model:
- Companies will incur an extra cost for user support.
- Companies may face lower conversion rates problems.
- Users may just try the product and leave if they didn’t enjoy the service, knowing they haven't paid anything.
- Companies will receive lower incoming revenue, that too, only from the paid users.
In this SaaS pricing model template, customers can regularly pay for the continual product or service usage. This aspect implies that the SaaS pricing strategies for choosing the correct prices are different from pricing traditional products.
SaaS pricing models are meant for estimating the billing usage for the client based on the number of users and the volume of resources consumed. Here we have given you a comprehensive list of the top six SaaS-based pricing models, among which you can opt for one as per the requirements. There’s no need to stick to just one pricing model. You can always make a shift to another model that works better as per your business growth.
Moreover, there is also a provision to use some models together to target varied market segments or use cases. No matter how good the service is, the SaaS pricing model for your product or service is as essential as the quality of the service. Making a balance between value and revenue and your potential to assist customers and be fairly compensated for it will make or break your SaaS company.
Fixing perfect and relevant pricing for the services is not a cup of tea. That is why a thorough SaaS model pricing strategy is a must when you want your customers to buy without sacrificing a significant profit margin. To read more such interesting articles, go to the ATC blog here!