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The Ultimate Guide to SaaS Pricing Models

Ultimate guide to SaaS pricing models

There are many things that impact your business revenue. But the culmination of all the revenue-growth strategies is to decide the right pricing of your product. There are many SaaS pricing models in B2B that you can adopt. But which is the right one for you and how do you find it? We will see these details in this blog.

The right pricing of a product depends on various factors. How much cost is incurred in building the product is the main factor that decides pricing. Few of the cost factors are resource cost, services cost, infrastructure cost and maintenance cost.

Your product pricing must cover all the above-mentioned costs while including a lucrative margin of profit. The cost varies from one organization to another. The location of the company and skillset of the developers are few of the cost evaluation factors. Additionally, all the business processes must also be able to sustain based on the revenues a business generates.

How is SaaS pricing different?

Unlike traditional software pricing, SaaS based pricing models depend on subscription delivery model. Hence, the strategy for pricing is different. The pricing should be decided in such a way that the overall revenue generated accounts for the subscription-period of a customer.

This is where the Customer Lifetime Value (CLV) comes into picture. It is the expected revenue an average customer generates over the entire relationship with a company. Your pricing should account for the total revenues expected over the entire period of subscription.

How can the right SaaS pricing model help your business?

There are four ways it can help your business grow:

  1. Competitive advantage
  2. Value for customers
  3. Directly grows your revenue
  4. Business unit’s optimization

Competitive advantage

Pricing is one of the key differentiators from your competitors. Cost-conscious customers first compare the cost before they even look at the product features. No matter how exceptional your product is, until you optimize your pricing, you would most likely hit a roadblock in customer acquisition.

Value for customers

Value-based pricing is one of the key strategies for SaaS companies. When you optimize your pricing based on the value you provide to the customer, it becomes a growth factor. Important point here is you must know the right methods and metrics to quantify the value your product brings.

Directly grows your revenue

Most of the SaaS companies say it is by acquiring more customers their business grows. While it is partially correct, choosing a right pricing model comes prior to that. In a study by PriceIntelligently, they found that improving monetization is 2x more efficient in bringing results than customer retention. And it is 4x as efficient in improving business bottom-line as acquisition.

Business unit’s optimization

For a healthy business, you must have the right balance between two metrics: Customer Lifetime Value (CLV) and Customer Acquisition Cost (CAC). CLV must always be as high as possible than CAC. Only then your business turns into a growth machine. A right SaaS revenue model can help you optimize the business units associated with these two metrics.

Four most common SaaS pricing models

Four most common SaaS pricing models

Companies use different SaaS pricing models based on their product, niche and production cost. While they all differ in ways they bring value to the customers, four of the most common ones are as below.

Per-user pricing model

It is exactly as it sounds. Companies following this approach charge their customers based on number of users. It is one of the most common pricing strategies. Sometimes they create packages for a bulk of users. Examples for this kind of SaaS pricing model can be like $1000 per month for 10 users, $1500 a month for 20 users and so on.

Flat price

When you keep a flat price, it makes your job easier on many fronts. Tasks like projecting future revenues, current valuation and optimizing costs become much easier. There is no need for customer segmentation as everyone is on the same plan. The number of customers is the only metric needed to calculate revenues.

Usage-based pricing

This SaaS pricing model is especially helpful when you are dealing with bandwidth or API requests in your product. Most common example for this is the telecom industry. The more a customer uses your product, the more you charge.

It is one of the fairest pricing strategies from a customer’s standpoint. They can start with a low cost based on their initial usage. This is beneficial for beginners as the cost for them grows only according to the value they derive from the product.

Feature-based pricing

This model allows you to group different sets of features in different tiers of pricing. Customers start with the cheapest tier that allows them to use only the basic features. As they get more mature, they can upgrade themselves to higher packages with enhanced features.

This is one of the best strategies for product adoption. A gradual rise in their usage facilitates the progressive adoption of the product. The pricing is directly proportional to the value a customer derives at any point in time.

How to customize pricing for enterprise customers?

Enterprise customers often don’t prefer off-the-shelf solutions. Reason – their technical environment and business needs are more complex. Hence, you need to do a proper evaluation of their environment for the technical implementation of your product.

You cannot recover all the cost just from your product for the extra support you provide to them. Most of the companies don’t charge for implementation but this is not the same for enterprise customers. A proper due diligence and cost estimate must be done before both the parties sign the contract.

Apart from the implementation, you must also account for the maintenance cost of these customers. Oftentimes you have to maintain a high-touch engagement with them and that must be included in the enterprise SaaS pricing models.

Final thoughts

Deciding your pricing is one thing, updating it regularly is another. The business environments of both yours and customers are always in a state of flux. Hence, you must regularly reevaluate your production and business management cost factors. Based on that, proper pricing should be revised in every fiscal year.

Apart from the production cost, the value you provide to the customers is also important in deciding the pricing. There are chances that your production cost can be too low but you add immense value to the customers. In that case, you must not refrain from keeping a high price on your product.

When done comprehensively and intelligently, your pricing strategy becomes one of the growth factors for your business.

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