How to Choose the Right SaaS Pricing Model
When you are creating a SaaS pricing model you should ask yourself a few questions first. Who is your persona, or ideal customer, that you are selling your service to? Before choosing a pricing model, you should also determine what kind of product you are offering. Is it a service that brings same or more value to customers every month or is it something your customers will only occasionally use?
You have to realize that the model you are going to create is much more than just a price page. It will help you determine your market position. In other words, if the service you are offering is something customers want. You should also clearly set it because it determines whether you will have a massive amount of low paying customers or less customers who are more profitable. Let us have a look on some of the most successful models you can use.
1. Freemium or Free Trial Model
This is often described as a pricing model on its own or as well as an option that you can include in other models. In Freemium, you basically provide a basic version of your product free of charge while more advanced features are paid extra. A good example of this service is Spotify.
With Spotify’s Free model, you can access all the songs in Spotify’s library, but you can only play them in shuffle mode. The free version also plays ads. If you upgrade to Premium, there are no restrictions to what you can listen to, there are no ads, and you get a better quality of sound. You can also download the music and listen to it offline. In addition, Spotify offers a 3-month free trial of the Premium version to try to get people hooked.
The main advantage of the Freemium and Free Trial models is that you can attract a lot of new customers at once. If you are able to show them the value your product can bring, chances are that they will decide to continue using it and purchase a subscription. On the other hand, Freemium might become costly as you need to support extra servers running for these customer and you do not get anything back from the users who do not pay.
If you decide on using a Free Trial, you offer your customers your full service for a limited amount of time. It is a better option if you do not have financial back up to support extra costs and if you are able to quickly show them the value of your service. As an example, Apple music offers a free trial. Therefore you can see that even similar services, Spotify and Apple Music, can choose different ways and be successful at the same time.
If you do not want to offer any of your services for free, you can do a 30 day money back guarantee. Show the value to your customers and then try to sell them an annual or a longer term subscription.
2. Subscription Models
Subscription models are a great choice when there is a continuous, daily use of the product. You can use scalable pricing when determining different packages. You can divide your pricing according to:
- product features – more functions of the product offered at higher price
- number of users – amount of people that can use the product under one license
- depth of usage – e.g. how much data storage is used
If the cost of the service you offer does not grow with use, this is the right model to choose because you can get a higher revenue with the same or just slightly higher expenses, for example when you need to use more servers to provide your service because you have more customers.
There are two options to choose from.
The Monthly Subscription Model
In this model, customers pay on a monthly basis. Customers can usually cancel the subscription at any time without any fee or penalty. This model is not that popular because you have no guarantee of your customers renewing their subscription, but at the same time your customers will prefer it as they can unsubscribe anytime. A good example of a monthly subscription model is Netflix. You can cancel anytime, but if you do not, Netflix automatically charges your credit card and renews your subscription every month. However, the Term Subscription Model is usually better for businesses.
The Term Subscription Model
In this model, customers have a contract agreeing to a subscription for a certain period of time. We can take HubSpot as an example. Payment frequency can be flexible with 3 or 6 month options, but the main goal is to sell the annual subscription. There is also a possibility of offering monthly payments on all long term subscription options as it might be better for some customers to finance instead of paying a large amount of money at once. They will still pay the same amount, it will just be more spread out over time. This model also brings you revenue either in advance or recurring revenue from month to month. The disadvantage is mainly for customers – some of them might not be willing to sign up for a long period of time even if they pay on a monthly basis.
3. Alternative SaaS Payment Models
Pay-Per-Use model is recommendable when you have a service that is not intended to be used constantly. It also allows users to better control their costs and it contributes to make your customers satisfied because they pay only for what they use. If cost increases with use of the service, this is the right way to go. You can see an example of this model on Onfleet.
Customers don’t get charged unless they start using the service. This model is popular with cloud services as users only pay per different services they use throughout the month. Often, customers pay for time they spent using the service. There might also be a minimum fee included in this. An example of this model is Amazon Web Services.
Both the Pay-Per-Use model and Pay-As-You-Go model can be used in combination with subscription models. There is a clear advantage of these two models for the users, but it turns into disadvantage for the provider of the service – you can never know how much are your customers going to use the service every month, therefore your income might vary a lot.
How To Choose The Right SaaS Pricing Model
There is not a definite answer and you will most likely need to test a couple models to figure out what works the best for your business. Subscriptions are generally the best way to go, but as you could read above, it really depends on the service you offer. You can combine subscription model with other models as well. If you decide on a subscription model, try to run a test – show customers only annual fees by default and then show monthly fees by default and see how many people you can get signed up. In order to do so, you can use A/B testing or e-mail funnel testing. Also, consider giving your customers a slight discount if they decide for the annual option (e.g. one month free or certain percentage off) as for example Lead Pages do.
If you can sell annual subscriptions to your customers, it is generally better as you get paid in advance. On the other hand, signing up for a year can be an obstacle for certain customers as it is a long period of time. When choosing the right pricing model, you should also consider if your product is tailored more towards business or customers. With B2B products you can expect selling long term memberships easier, because companies are more likely to use a service long term, rather than spending time switching between products every month. As far as B2C services go, monthly subscription is a better option as your customers will feel free to decide anytime if they like or dislike your product and they can unsubscribe. The lower price entry point is also more encouraging for individuals and small teams. Annual subscription plans might not be affordable for some of your target users.
Whichever plan you choose, it needs to fit your target personas and reflect your business model. Pricing your service too cheap or too expensively will create obstacles for your business in time.