How to Price Your SaaS Correctly
6 min read
Most founders only take 6 hours to determine their SaaS pricing strategy, only to realize later that they've priced incorrectly. 98% of SaaS companies changed their prices and saw positive results. If you aren't properly thinking through your SaaS pricing, you may be leaving a ton of money on the table. Or worse, you might price your business into the ground.
There are a few commonly used pricing models for SaaS you need to understand before pricing your product. You can (and should) use a few of these models together. But try not to use more than 2 or 3, as it will confuse your potential customers into not buying.
SaaS Pricing Models
Flat rate pricing is when you offer a set monthly price for customers to use your product.
It's much easier to understand flat rate pricing than the other models. You can focus all of your copy on just selling a single product at a single price. On the flip side, it's difficult to target multiple types of similar customers when you only have one flat price. You may be out-pricing some of your customers.
Tiered pricing is when you offer multiple pricing options to customers, and is very common in SaaS. You usually see this as three or four columns of varying prices.
Tiered pricing can help you target multiple types of customers, making sure that you have a good fit for users with different levels of needs. Just make sure you're not offering too many tiers. Too much friction during the purchasing flow can hurt sales.
Tiered pricing is also great from a negotiation point of view as well. When you offer three or more options, prospective customers are less likely to research alternatives, and more likely to view your tiers as their only options.
Tiered pricing can create challenges if a user exceeds the limitations of what your maximum tier offers. So make sure you have a plan for that, possibly using one of the other pricing models like usage based pricing.
Per user pricing is when you charge a flat rate for each user on an account using the product. It's not my favorite pricing model. But probably fine if you're building some kind of collaboration software, because then it acts as usage based pricing in a way.
Per user pricing is very easy for customers to understand and calculate, but may not accurately reflect your overhead per user. It is also easy for customers to cheat by having multiple users sign in to a single account.
The freemium model is when you allow anyone to use your product for free, but users have to pay to unlock some features of your product. I would consider this more an acquisition method, not a pricing strategy, but I'm still going to include it on this list as it still should be considered at the same time you're setting your SaaS pricing.
Freemium is great for acquisition since it instantly shows users the value of your product (TTV, or "time to value") with considerably less friction signing up. The only downside is that it can unnecessarily increase your overhead. So just make sure you've factored your free users' usage into your paid plans to make sure overhead is covered. Also, make sure you're not giving away too much for free. Free tiers can lead to a higher churn rate if your paying users realize your free product works for them just as well as the paid options you offer.
Usage based pricing is when you charge for some kind of usage unit, like for bandwidth, API calls, or storage space.
Usage based is definitely the safest pricing model you can choose as you can directly tie it to the factors that influence your overhead. There is also a lower barrier for small use cases, since the cost might be pocket change for low-usage users.
Unfortunately, usage-based pricing can often be the most difficult pricing model to set up from a technical point of view since your payment processor will need to be wired up to your infrastructure. The development time can sometimes be costly.
Hidden pricing is when you don't publicly show your pricing on the site, but it can be provided upon some kind of request, like a phone call or email.
I've heard some people say to not do this, but I would say it definitely depends. There are some products that work better with hidden pricing. Hidden pricing can be good any time you're doing a lot of processes by hand that may take a different amount of time or overhead for each customer, which is common in SaaS products still in beta. So I say just use it when it makes sense. But if you don't have a good reason for doing it, don't do it.
Annual subscriptions are a form of flat rate pricing, but it has enough differences to make it worth examination as its own model.
Annual pricing is great if your product is something easily stealable by your users after purchase, like source code licensing. This model can protect you from the churn cost of customers who might dip out early for this, or any other reason.
Just make sure it doesn't clutter up your pricing page if you're also offering monthly plans. A simple toggle button between monthly and annual pricing is usually all you need. Don't change the features in your annual pricing, and give a discount for choosing it over monthly.
Choosing the Right SaaS Pricing Model(s)
You'll want to choose 1-3 models and combine them to create your own pricing strategy. The right models for you can depend on your product and overhead, and there's no single strategy that will work for everyone.
It's usually good to profile different use cases and base your pricing off of each profile of person that is likely to buy your product. Consider what the benefits of your SaaS might be worth to them, not just what it's worth to you. Also, be very aware of the overhead each type of user will need and make sure your pricing covers it and leaves room for margins you can reinvest in the growth of your business.
General Tips for Choosing Your SaaS Pricing
- You can use a spreadsheet to run calculations on how many users you need to hit your target. Make each row a different pricing setup and play with the numbers to see which pricing model setups get you closer to your goals.
- Don't do free pricing for beta. This doesn't validate your product. Validate whether or not people will pay for your product, not whether or not they will use it for free.
- Y Combinator determined that the biggest mistake startup founders make with pricing is pricing their products too low. It's more beneficial, and easier to start with higher prices and reduce them when necessary. People get angry when you raise pricing, but everyone celebrates when you lower it.
- Lastly, don't listen to customers on what you should price your SaaS. They don't know your goals, overhead, or anything else that's going on behind the scenes. You have more knowledge about your business than anyone else on planet earth. Use that knowledge to your benefit.