The software-as-a service (SaaS) market is worth about $3 trillion and could reach $10 trillion by 2030 McKinsey estimates. With growth projections at extraordinary levels, getting your pricing strategy right is even more critical. SaaS pricing models rely on your offering’s perceived value, and that means striking the right balance between your offering’s value and its price so you can differentiate your business in this increasingly crowded market.
The Rise of SaaS Business Models
From its humble beginnings in the 1960’s when MIT developed the first Compatible Time-Sharing System (CTSS) to today, the SaaS business model continues to advance, evolve and incorporate technology. In the mid 1990’s, a few online marketplace SaaS sites like Amazon and eBay entered the scene. By 2000, Amazon took a leap and branched out from its origins as a bookseller into other products. When Salesforce launched the first customer relationship management (CRM) SaaS system, it solidified the business model.
A few things attribute to the rise in popularity. First is the supply and demand side of business. From the supply side, cloud technology enabled organizations to provide low-priced software subscriptions.
Many times they use a “freemium” pricing approach to attract customers. This business model’s success doesn’t depend on experienced salespeople traveling to find customers, so it reduced costs. Hiring and compensation, travel, entertainment, and administrative expenses all decreased.
On the demand side, customers were becoming increasingly content with handling interactions and purchases remotely. During the same time period, we experienced low interest rates and an abundance of investor capital. All this helped SaaS businesses to grow and profit. Finally, the pandemic necessitated more online interactions, further fueling the SaaS business model.
The SaaS Pricing Model & Technology
Looking at its popularity from a tech perspective, a few important factors helped it develop and grow.
- Mobile Devices: We’re a mobile society and SaaS organizations continue to focus on developing and adopting a mobile-first approach, ensuring their offerings are accessible at anytime from anywhere.
- Cloud Infrastructure: Cloud providers continue investing in cloud infrastructures, expanding their cloud services and making it more resilient.
- Platformization: Throughout the years, SaaS providers moved beyond standalone applications, creating platforms that allow third-party developers to build and deploy applications on top of the SaaS infrastructure. This provided new opportunities for innovation, customization and cross platform integration.
- Artificial Intelligence (AI): SaaS organizations are increasingly using AI to offer advanced functionality like predictive analytics, natural language processing (NLP), and machine learning (ML) functionality.
- Security: Data security is top of mind for all organizations and SaaS providers are no different. They’re on the leading edge of providing advanced security features such as access controls, encryption, and authentication.
SaaS Pricing Models: Explained
Let’s discuss how we define SaaS pricing models before diving into them. To do this we went to the source of the modern-day SaaS business model. As described by Salesforce, SaaS is a way of delivering applications over the Internet as opposed to installing and maintaining on premise hardware and software. SaaS applications run on a SaaS provider’s servers and the provider is responsible for managing access to the application, availability, performance, upgrades, and security.
For software application usage, as well as maintenance, compliance, security services, etc. customers are charged an inclusive recurring fee – either monthly, quarterly, or annually. This brings us to pricing strategies. For SaaS providers there is an abundance, and each comes with its own idiosyncrasies and complexities.
To help you choose the pricing model(s) that best fits your business and delivers the most value, we’ve highlighted the pros and cons, and provided examples of businesses that are successfully using each of these strategies.
Flat-rate Subscription SaaS Pricing
Frequently used in the early days of cloud computing, this pricing model enables SaaS businesses to charge customers fixed, recurring fees for access to products and services. You usually collect payments for flat-rate pricing on a monthly or annual basis.
Pros: Easy to understand and sell, subscriptions are typically evergreen contracts, meaning they auto-renew each billing cycle – providing SaaS businesses with a predictable revenue stream.
Cons: Customers can cancel their subscriptions at any time, and pricing isn’t directly tied to utilization. In addition, customers who want more flexibility may find flat-rate subscriptions too constraining.
Example: A B2B and B2C company, Adobe Creative Cloud provides a variety of applications for individuals, businesses, students, teachers, schools, and universities. Depending on the target market and the application, prices vary widely but are typically fixed per segment.
Usage-Based SaaS Pricing
SaaS businesses that need more advanced billing capabilities are gravitating towards usage-based (pay-as-you-go) pricing that scales with utilization. Oftentimes usage, or “consumption-based”, pricing sits on top of recurring subscriptions.
Pros: This billing strategy provides customers with greater flexibility since they can link consumption to a variety of activities. With usage-based SaaS pricing models, companies charge users based on resources consumed, time spent using services, the number of events triggered, and more. Essentially, customers who use more resources incur a higher recurring charge.
Cons: Although a straightforward pricing model, revenues can be hard to predict, as usage can fluctuate from month to month.
Example: With countless product categories, Amazon Web Services (AWS) provides customers with over 160 cloud services at varying tiers. They also offer a free tier that contains over 90 products and services. Customers only pay for services consumed, such as certain cloud services that handle micro-processes incurring a per-second charge.
Tiered SaaS Pricing
A popular and flexible pricing model, SaaS companies can offer multiple packages at different price points. Packages can differ depending on the features, widgets, or activity thresholds they include.
Pros: Provides SaaS businesses with the ability to target their offering to specific buyer personas and upsell to existing customers. This pricing model makes it easy for customers to know exactly what they’ll receive at each tier.
Cons: Customers can become overwhelmed with the number of choices if presented with too many pricing options. For this reason, it’s recommended that you create only 2 – 4 tiers per offering.
Example: Zendesk, a provider of customer relationship management (CRM) solutions, provides support, sales, and platform options. Within each of these applications, they offer 2 – 3 pricing tiers. For example, there are 3 support pricing tiers starting at $5/agent; their sales suite provides 2 options, starting at $19/seat; and they offer 3 platform choices with Lite at no charge, Professional at $19 per agent/per month, and Enterprise at $59 per agent/per month.
Per-User SaaS Pricing
For many SaaS businesses, it makes sense to charge clients based on how many users or seats they need. This pricing strategy allows customers to pay a fixed monthly or annual fee for access to a predetermined set of features and functionality.
Pros: With this fixed pricing model, revenue is highly predictable. To make the option more attractive, some SaaS companies deploy variations on this pricing model. Some offer per-user prices by tiers, and others only charge for active users. The latter strategy is better suited for larger enterprises that may not always know the exact number of users who need access to a given service or platform.
Cons: A one-size-fits all approach to pricing, it’s becoming dated given the way customers now use applications. In addition, you may lose revenue if login details are shared among employees, instead of the company purchasing additional licenses.
Example: With 15 application options, Salesforce provides different editions with varying features within each of their solutions. Prices range from $25 per user/per month to over $300 per user/per month, enabling them to target businesses of all sizes.
Per-Storage SaaS Pricing
The cloud storage market is rapidly growing, and per-storage SaaS pricing models are a direct result of this trend. SaaS companies in this sector charge individuals or businesses based on how much digital space they need.
Pros: To make their offering attractive to users, many cloud storage sellers offer space for free up to a certain amount. Once the customer reaches the limit, you charge them based on various tiers.
Cons: With this pricing model, cloud storage sellers may incur IT maintenance and management expenses for a large proportion of users who aren’t generating revenue.
Example: Dropbox lets users store up to 2 GBs worth of data for free. Beyond that, the company charges $9.99 per month for up to 2 TBs of storage, and $16.58 per month for up to 3 TBs of storage. Within each of these options they provide various storage and access functionality.
A La Carte SaaS Pricing
Some SaaS providers allow customers to choose the features and functionality they want and need. Accomplished through eCommerce-style shopping interfaces, users add individually priced features to their carts and are charged on a recurring basis.
Pros: From a customer perspective, they only pay for the features and functionality needed. By enabling customers to choose what they want, SaaS businesses gain tremendous insight into what their users value.
Cons: This pricing tactic makes it difficult for customers to make accurate comparisons across different providers, especially if only one SaaS provider offers a la carte options. It’s also one of the more complex SaaS pricing models for companies to manage.
Example: From free tools to a variety of CRM applications, HubSpot gives customers product and plan options, as well as bundles. The company’s interface is easy to use, and they provide invoices that list charges by feature(s) purchased.
Freemium SaaS Pricing
To attract customers to an unfamiliar brand, some SaaS companies offer free access to a limited set of features/functionality. Companies can put various restrictions on free usage, such as time limits for software usage, charging for certain features, or charging for support. Another option is to provide free access to the software but incorporate watermarks or advertisements.
Pros: Once these company’s onboard customers and gain their confidence, they have a captive audience for upselling initiatives.
Cons: An obvious downside is the cost of supporting high volumes of non-paying users. Additionally, some customers will become reliant on using your software for free, and may become annoyed if you begin to charge for certain features, functionality, or upgrades.
Example: Many drag-and-drop web builders, like Weebly, allow customers to build and launch basic websites for free. However, connecting a custom domain or removing the company’s branding from their sites charges users.
Hybrid SaaS Pricing
Increasingly, SaaS companies are deploying hybrid pricing models that combine multiple tactics. A strong combination is a pricing model that has a fixed rate and charges based on usage. This model provides users with flexibility in both cost and features. Alternatively, some SaaS companies offer the subscription/usage combination within different pricing tiers and add a la carte options for add-ons.
Pros: This pricing model provides SaaS businesses with several upsell opportunities, as well as an increase in recurring cash flows.
Cons: Hybrid pricing can quickly become extremely complicated. SaaS businesses must have a powerful billing solution to efficiently manage these pricing tactics at scale.
Example: Zoom uses hybrid pricing to give customers options on how they use and pay for platform access. The company offers four different pricing tiers, each with its own set of add-ons and usage rates.
A Glimpse into the Future of SaaS
Significant evolution, technology advancements, and changing business/customer needs have occurred over the past decade. These will continue to drive SaaS innovation. Trends that are likely to impact this business model include:
- AI/ML: AI and ML continue to allow SaaS providers to provide more intelligent and personalized experiences, as well as automate certain processes. It’s expected that these technologies will further revolutionize SaaS by making AI-powered SaaS applications the norm – providing data-driven decisions and performing predictive analytics. Chat bots are also expected to provide coding assistance, lowering the barriers for creating SaaS solutions.
- Internet of Things (IoT): It’s anticipated that future SaaS systems will interact with IoT hardware, enabling organizations to accurately analyze data from a variety of sources. Ultimately this will help them to make more informed decisions.
- Application Programming Interfaces (APIs): APIs will allow users to integrate with other applications and services, creating a versatile ecosystem of interconnected SaaS solutions. These powerful tools will enable developers to quickly build applications at scale.
- Edge Computing: The integration of edge computing into the infrastructure will allow SaaS applications to be processed closer to the data source, improving performance and reducing latency. This will be the foundation for innovative SaaS solutions designed for the edge, providing real-time insights and intelligence to a range of applications and industries.
- Security: Blockchain technology has the potential to secure digital information and verify identities. It can aid in protecting privacy by providing users with greater control over their personal information. Down the road it’s expected that autonomous AI systems will be used to locate software security vulnerabilities, giving rise to privacy-centric SaaS solutions.
While not a comprehensive list, it’s clear that the nature of SaaS is changing and that technology is the driving force for the future.
Differentiate Your SaaS Business
The SaaS industry will grow even more over the next few years. Not only in innovation but in extending the boundaries to include industries that previously weren’t able to profit from this business model. Incumbent SaaS providers will find themselves facing new and innovative competition.
To keep pace, SaaS organizations will need to stay on top of trends, push the limits when it comes to innovation and pricing strategies, and deliver exceptional customer service. And this is where a billing platform, built for tomorrow’s SaaS requirements, will provide the agility and freedom to innovate and accelerate ideas into revenue.
BillingPlatform is an industry leading cloud-based solution that gives SaaS providers the power to support any billing model – even the most complex SaaS recurring revenue strategies. From product inception through revenue recognition, we empower companies to monetize any revenue opportunity and deliver frictionless customer experiences. Contact our team today to learn more about how BillingPlatform can help accelerate your business growth!
