In today’s fast-paced, digital economy, legacy billing systems simply can’t support the nearly limitless Software-as-a-Service (SaaS) pricing scenarios required. Although organizations have invested billions of dollars, without a strong SaaS pricing strategy in place, the limitations of these systems are too great. This results in a plethora of challenges that are having a direct impact on the revenue and profitability of companies large and small. In fact, a survey conducted by MGI Research revealed that 59% of respondents are challenged by customer friction due to billing disputes, 44% by legacy systems that are becoming a barrier to growth, and 42% by revenue leakage.
So, what’s the answer to these profit-draining problems? “Organizations need a strategic approach to pricing,” explained by Tom Nagle, senior adviser, and Georg Müller, managing director, at Deloitte Consulting LLP. “As rapidly evolving technologies and business models transform many industries, strategic pricing – a holistic approach to delivering value and capturing revenue in a way that maximizes profitability – has become a priority for many C-level executives.”
Taking the Mystery Out of SaaS Pricing Models
A subset of cloud computing, SaaS refers to software applications that are delivered via the cloud, and in this case, we’re referring to pricing strategies for your SaaS business.
Why do so many SaaS companies face challenges when creating a pricing strategy? With the ability to package your SaaS offerings within different plans, you’re able to develop different versions of your offering – increasing the complexity of your pricing strategy. In addition, more so than any other business model, SaaS pricing relies on your offering’s perceived value.
Depending on the industry, you need the flexibility to price your offerings and bill your customers in a way that’ll best monetize your assets. Luckily, SaaS pricing strategies are plentiful, giving you the option to choose from basic structures such as flat-rate pricing to more complex models like hybrid billing.
Get the Most From Your SaaS Pricing Strategy
Not all SaaS pricing models are created equal and not every pricing strategy is right for every business. Let’s take a deep dive inside five SaaS pricing models, their trends, the industries that they are best suited for, pricing strategy examples, and benefits.
The most basic pricing model, flat-rate billing provides simple, one-size-fits-all customer pricing, regardless of how often the customer uses the product or the number of features they access.
Although this pricing strategy is easy to understand and sell, delivers predictable revenue and results in fewer billing disputes, many SaaS companies have evolved to more advanced pricing strategies in an effort to cater to their customers’ individual needs, better align value to their pricing, and boost revenue. A notable exception to this evolution is Basecamp who include all features, unlimited projects, unlimited users and no per-user fees for $99 per month.
To meet the growing demands of buyers, many SaaS businesses are adopting more subscription-based billing models, which include the ability to charge daily, monthly or annually for flat-rate or simple tiered plans.. This SaaS pricing strategy provides consumers and businesses alike with convenience, predictability and simplicity.
Typically associated with TV streaming services, >music streaming services, and digital gaming, it also has many B2B use cases. For example, Google’s G Suite provides a variety of packages to appeal to nearly every company. Their pricing structure is easy to understand and features per-seat and value-based tiers. Hubspot is another company that has had great success with SaaS subscription-based billing. They offer three different marketing packages, with each one geared towards a specific buyer persona.
For many SaaS companies, this is a common pricing strategy. Tiered pricing enables you to target your offering to specific buyer personas and upsell to existing customers. A word of caution when it comes to tiered pricing. You need to be sure that your pricing schemes aren’t overly complicated. To get the best results, it’s recommended that you create only 2 – 4 pricing tiers for your customers to choose from.
From a B2C perspective, the most recognizable SaaS tiered pricing strategies belong to the cable and satellite industry. Take Dish Network for example, they offer four packages that will appeal to just about any viewing preference. Switching gears to B2B, let’s take a look at Slack. They have three pricing plans – small and medium-sized businesses, larger businesses, and enterprises – enabling them to attract businesses of all sizes.
As mentioned above, when basic subscription-based pricing isn’t enough, many SaaS companies incorporate a “pay-as-you-go” model. Once a customer signs up for a service, they simply pay for what they use. You often see this model for cloud storage services and bicycle rentals.
As one of the first companies to introduce a usage-based cloud computing model, Amazon Web Services (AWS) offers customers a wide variety of cloud computing products and services. This straightforward pricing strategy is based on consumption, with no additional costs or termination fees.
Usage-based pricing strategies have many variations, including time-based, pooling, usage rollover, overage, etc., as well as combinations of its many applications. By moving beyond simple subscriptions to usage-based SaaS pricing, you gain the agility to develop innovative pricing strategies that enable you to attract and retain customers, increasing your revenue potential.
What if none of these Saas pricing strategies fits your business model? The hybrid SaaS pricing model doesn’t lock you into a single strategy. It provides the best of multiple worlds, enabling you to deliver affordable and personalized services that will increase your revenue and give your customers the solutions they want at a price they’re willing to pay.
Providing SaaS products as well as durable and nondurable goods, Amazon Prime embodies the hybrid pricing model. This one-stop-shopping giant customizes its pricing options to meet the needs of virtually every shopper. For example, they provide streaming entertainment as part of the membership fee, as well as give members the convenience of renting or purchasing video titles with one-time payments that are combined with their subscriptions. Another company using hybrid billing in an innovative way is Zendesk. Like their competitors they offer monthly pricing options, but where they differentiate is by allowing customers to purchase additional features a la carte.
Although hybrid pricing is a bit more complex than other SaaS pricing models, you’re able to mix and match pricing strategies that best fit your buyer personas, personalize your offerings, and give customers exactly what they want.
Deploy a SaaS Pricing Strategy That Takes You Beyond Simple Subscriptions
Large or small, to grow your SaaS business you need a SaaS pricing strategy that helps you attract and retain customers. However, building the right model for your business takes time and effort.
Are you ready to take your SaaS pricing strategy to the next level? Let BillingPlatform help. We give you the opportunity to incorporate your unique requirements, your buyer personas, and the perceived value of your offerings to create a pricing strategy that is right for your business and right for your customers.