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Which SaaS Pricing Model Should You Use? 5 Pricing Models Explained

Choosing your SaaS pricing model is one of the most important choice for any new or existing SaaS business. Indeed, pricing is probably the biggest driver to your revenue and profitability. Your pricing will determine how customers see your product in light of the value it provides them, and whether they should buy it.

If you haven’t yet decided on your pricing strategy, or you are wondering whether you should change your current pricing model for a new product launch, there are a number of SaaS pricing models to choose from.

In this article we demystify what are the 5 most popular pricing models for SaaS businesses, their pros and cons, and what they mean for your business. Let’s dive in!

1. Flat rate pricing

Flat rate pricing is the easiest and simplest SaaS pricing model. With flat rate pricing, there is only one plan available to choose from for all customers. This plan includes all the product features as well as a maximum number of users who can use one account.

Pros

  • Easy to communicate: there is only price for any type of customer. As such, there is little room for misunderstanding or obscure pricing plans.
  • Easier to sell: because there is only one plan, all the sales and marketing efforts are focused on this single plan. Focusing on one plan maximise efficiency and eventually returns on investment: sales pitches and conversion funnels are all targeted towards the same goal
  • Forecasting is easier. With flat rate pricing, there is no such thing as upsell or downsell. Indeed, customers cannot move from one plan to another. As such, making projections for your SaaS business (especially revenue projections) are straightforward

Cons

  • You might lose potential customers as you offer less pricing options. Customers appreciate the availability of options to choose from: it allows them to make a choice based on their appreciation of price, and the features available. As you make it easier for them to make a choice, you also increase your conversion rate. Indeed, all customers have their own opinion on price (what is expensive and what is not). They also have their own needs (which features they need, and the ones they don’t)
  • You might leave money on the table. Because you try to appeal to different customers with the same plan, some of your customers could potentially be willing to pay more for the same features. The inverse is also true: you could acquire more customers who would pay less for less features.

Example: Basecamp

Basecamp flat-rate pricing model
Basecamp’s flat-rate pricing model

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2. Usage-based pricing

Usage-based pricing is essentially a “pay-as-you-go” SaaS pricing model: customers pay more when they use more of the product, and vice-versa.

This strategy is quite attractive for SaaS businesses which incur significant variable costs that are a function of usage. For instance, a e-signing businesses which incur hosting costs based on the number of e-signatures its clients process might see its profitability decline when users scale if they don’t use a usage-based pricing. Indeed, as customers process more and more e-signatures, hosting costs (e.g. AWS) increase whilst revenue remains the same. By using a usage-based pricing instead (for instance $0.2 per additional e-signature on top of minimum flat rate of $100 per month), revenue would increase in line with usage.

Pros

  • Price scales as customers do. As explained earlier, if your customers grow over time (which they would hopefully), you benefit from this as revenue grows in line with usage
  • You might gain more customers. Giving the ability for customers to pay online for what they use is a strong marketing argument. For instance, a user who use your product once in a while might be interested to pay for it as they will only be charged for what they use. With another pricing model, they could find the starting price unattractive instead

Cons

  • Marketing is more challenging as customers need to evaluate their current and future usage before they make a decision
  • Projecting revenue might be more challenging as it will be a function of your customers’ business volume
  • Revenue might be cyclical and/or seasonal. Depending on your product and your customers’ industry, as pricing is a function of usage you might experience swings in revenue over the year, which eventually impact your cash flow and profitability

Example: Stripe

Stripe offers one plan that charges a percentages of payments processed plus a fixed amount per payment.

Stripe's usage-based pricing model
Stripe’s usage-based pricing model

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3. Tier-based pricing

Tier-based is a pricing strategy whereby a company creates different versions of the product to cater for different types of customers. The versions are built using different assortments of the products features, the number of users included per account, or the usage included.

This is the most common SaaS pricing model today. Usually, companies will have 2 to 4 tiers for customers to choose from.

Pros

  • You may appeal to different types of customers, thereby increasing revenue. As explained earlier (see flat rate pricing), by providing different options to choose from you also offer customers the ability to compare easily. Improving the decision process by providing transparence and multiple options may lead into more customers and increased conversion rates
  • Tier-based pricing offers a clear upsell strategy. Indeed, smaller customers choosing the entry plan might grow over time and upsell (or “upgrade”) to more expensive plans later on

Cons

  • Different plans can create confusion for the customer. The distinction between the different products must be as clear as possible to avoid any confusion. Customers who would find it hard to choose from one plan to another might simply give up and find another solution instead

Examples: Shopify, Crisp

Shopify offers 3 plans catered for any type of ecommerce business.

Shopify's tier-based SaaS pricing model
Shopify’s tier-based SaaS pricing model

The instant messaging app Crisp offers 3 plans, including a freemium, based on the features each plan includes.

Crisp's tier-based SaaS pricing model
Crisp’s tier-based pricing model

4. User-based pricing

With user-based pricing, SaaS companies charge their customers based on the number of users they have. SaaS companies charge “per seat”: any additional user within an account is billed separately.

Pros

  • It offers a lot of upside, similarly to usage-based pricing: the more users a customer has, the more revenue you generate. For example, a company who would join as a startup and buy 2 seats upfront might hire 50 employees in the next 18 months. If they require the product for these 50 hires, revenues increases accordingly
  • It is relatively straightforward, making it easier to sell. Unlike usage, customers can forecast easily the number of users they will need over time as they grow. Customers might be more willing to pay as budgeting is simplified

Cons

  • User-based pricing is not suitable for all SaaS products. If users access the product and have the same experience (for instance, access to a database), they might just share login details to avoid paying for multiple users instead

Example: Notion

Notion offers 4 plans (including a freemium) that include different features (API calls, storage, service, etc.) but all are a function of the number of users.

Notion's usage-based SaaS pricing model
Notion’s usage-based SaaS pricing model

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5. Feature-based pricing

With feature-based pricing, SaaS companies charge customers based on the features they choose (they have previously added to their plan).

Unlike tier-based pricing where the same features are available across different plans, feature-based pricing works as an add-on pricing strategy instead. On top of the core product subscription (which might be a flat-rate price), customers choose among a number of additional features for which they pay.

Pros

  • It caters to different types of customers. Offering a core subscription as well as additional optional features allows customers to “cherry pick” the product features they need. Similarly to tier-based pricing, it may increase the number of customers you acquire as you offer multiple options
  • Tier-based pricing offers a clear upsell strategy. Like tier-based pricing, the available add-on features of the product are all potential product upgrades for existing customers

Cons

  • It may be misleading thereby adding complexity to sales & marketing. The additional features as well as the core subscription need to be marketed as clearly as possible. Customers could potentially not understand the value between one feature to another, or from the core subscription to additional features. Also, some customers might see add-ons as “nice to have” features, and be reluctant to pay for them at first (whilst they might need it)

Example: Mailchimp

Mailchimp offers a rather complex feature-based SaaS pricing model. It has different plans for 3 different products (4 for Marketing, 3 for Websites & Commerce and 1 for Transactional emails). Users can add up multiple plans based on the features they need and scale up or down based on the number of contacts they have and/or emails they want to send.

Mailchimp's Marketing feature-based SaaS pricing model
Mailchimp’s Marketing feature-based SaaS pricing model

Our SaaS resources

Pricing is one of the most important driver to your revenue. Yet, it isn’t the only one. If you are fundraising for your SaaS startup, or simply need to build a rock-solid budget for your SaaS business, we can help.

Check out our SaaS and Enterprise SaaS financial model templates on SharpSheets.

Need a SaaS financial model?

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✓ Charts & metrics
✓ Tutorial + how-to video

We have lots of free resources for SaaS businesses as well: