Want to differentiate your brand and increase your enterprise’s appeal? If so, there is no faster way than by disrupting the status-quo enterprise pricing models of your industry. Before diving in, let’s look at pricing strategies versus pricing models. While these terms may be used interchangeably and are invaluable for the profitability of your software-as-a-service (SaaS) enterprise, there are distinct differences.
A pricing strategy refers to the processes and methodologies used to set prices for products and services. Some of the most popular pricing strategies include value-based, competitor-based, cost-plus, dynamic, and penetration.
A pricing model is a framework for setting prices and is based on how you package your products or services. Designed to optimize the enterprise’s revenue and profitability, this critical process is often overlooked. In fact, it is estimated that SaaS businesses spend just six hours defining, testing, and optimizing their pricing models. If you’re thinking six hours a quarter or even six hours a year, think again. Research revealed that the average SaaS enterprise spends six hours – TOTAL – on their pricing models.
Enterprise Pricing Models
There are certainly plenty of enterprise pricing models to choose from, each with its own advantages and disadvantages. Let’s look at some SaaS pricing models, their descriptions, advantages and disadvantages.
Flat-rate pricing model
The least complicated of all enterprise pricing models, it provides for a single product and a predetermined set of features offered at a set price.
Advantages:
- Its simplicity makes it easy to explain and for customers to understand.
- By clearly defining the product, features, and price it easy to market and sell.
- Provides for easier and more accurate revenue forecasting.
Disadvantages:
- Without an upgrade path, you forfeit upsell/cross-sell opportunities.
- Since the charge is the same regardless of whether the customer is a small business or large enterprise, you lose the ability to extract additional revenue from heavy software users.
- This pricing model eliminates your ability to sell to customers that require custom packages and pricing.
Usage-based pricing model
Provides the flexibility to bill and rate on a variety of aspects such as clicks, API calls, downloads, transactions, seats, text messages, minutes, bandwidth – virtually anything you can think of. The usage-based pricing model consists of numerous variations, including:
1) Pay-as-you-go pricing model: Charges are based on exact usage of your products and services.
- Advantages:
- Pricing scales alongside usage, providing customers with more transparency.
- Has wide customer appeal because they can control their spend.
- This pricing model is easily adaptable to fluctuating usage.
- Disadvantages:
- Pricing may not accurately convey the true value of your products and services.
- Revenue prediction is more problematic since you can’t be sure of future usage.
2) Tiered pricing model: Provides for pricing packages that contain different combinations of features, usage parameters, number of users, number of active users, etc. Customers pay a set amount based on the tier purchased.
- Advantages:
- Provides for upsell opportunities to the next tier.
- Has wide customer appeal as you are able to tailor packages to meet a variety of buyer personas.
- Empowers customers to select the tier that best meets their needs.
- Disadvantages:
- Since this pricing model can quickly become difficult to explain and understand, it is recommended that no more than five tiers are created.
- Revenue prediction can be more complex since it’s hard to predict tier upgrades and downgrades.
3) Volume pricing model: Customers are provided pricing discounts based on quantities purchased, and pricing is based on the highest tier the customer reaches during the billing cycle.
- Advantages:
- Incentivizes customers to purchase more.
- Pricing strategy is easy to explain and for customers to understand.
- Volume discounts can be used to attract new customers.
- Disadvantages:
- Lower prices for volume sales reduces the profitability of a single product.
- Has the potential to decrease brand value.
4) Per-user-based pricing model: A fixed monthly or annual amount is charged for each person using the product or service.
- Advantages:
- This pricing model is easy for customers to understand.
- Promotes product adoption across the buyer’s organization.
- Future revenue is easy to predicts
- Disadvantages:
- Multiple individuals can use a single login, resulting in decreased profitability.
- The customer can limit the number of users.
- Pricing may not accurately convey the true value of your products and services.
Freemium pricing model
This enterprise pricing model provides access to a specific set of functionality for free, and access to additional features and functionality incurs a cost.
Advantages:
- Opens the door to a larger prospect pool by allowing them to try the product or service for free.
- Drives faster product adoption and is more cost-effective than other pricing models.
- Can be used to test the acceptance of new products and services.
Disadvantages:
- High operational costs are a possibility if freemium users place a disproportionate burden on your resources.
- Can result in low conversion rates which will affect profitability.
- Has the potential to decrease brand value.
Although these are some of the most common SaaS enterprise pricing models, there are others such as per-active user, per-feature, per-asset, etc.,
How to Know Which Pricing Model is Right for Your Enterprise
Did you know that even small variations in pricing can increase or decrease your revenue by as much as 50%? Despite this sizeable variation, fewer than 5% of enterprises have an internal team dedicated to enterprise pricing models, and most organizations treat pricing models as an event rather than a process.
Knowing which enterprise pricing models are right for you takes consideration and research. Here are a few pointers to help you get started.
- Conduct a competitive analysis to determine what comparable enterprises are charging for their products and services. Gain an understanding of your competitor’s strengths and weaknesses and benchmark your offerings against the competition.
- Have a clear understanding of the costs of your products and services, including product development, manufacturing, supply, service delivery, etc.
- Understand your customers, their needs, and willingness/ability to pay.
- Know your customer lifetime value and customer acquisition cost (LTV:CAC).
- Involve other departments such as product development, marketing, sales, product management, etc. for insights into buyer personas, target markets, positioning, and packaging.
- Test the agreed-upon enterprise pricing models and adjust until you reach your predetermined goals.
It’s important to remember that this isn’t a one-and-done activity but rather an ongoing process that requires continual analysis of your product and services usability and profitability.
Is Your Pricing Model Leaving Money on the Table?
Since the right enterprise pricing models depended on your industry, demand for your product and services, competitive positioning, and strategy; you may find that none of the conventional SaaS pricing models are providing the revenue needed to meet your profitability goals. This is where BillingPlatform can help!
BillingPlatform gives you the ability to develop pricing models that meet your specific needs and your customers’ requirements. Let’s look at a couple of pricing models that are beginning to gain traction.
Dynamic pricing model: Enables you to develop innovative pricing models such as formula-based, time-based, demand-based, and event-based. With a dynamic pricing model, you can create pricing based on a combination of factors or by using formulas, enabling you to appeal to a wider target market and improve profitability.
Hybrid pricing model: Allows you to charge for any combination of one-time charges, recurring, subscription, usage, formula, overages, etc. to create the pricing model that best fits your enterprise’s needs. Some hybrid pricing model schemes include subscription + one-time fees, subscription + pay-as-you-go, subscription + overage, and multi-part pricing.
Are you ready to become an industry trailblazer and set yourself apart from the competition? Let BillingPlatform help you along the way.
