When you think about ways to pay - and get paid - for an app, it's natural for subscriptions to spring to mind. It's the norm; it's standard - it's what most people do. And it's predictable - so why wouldn't you want that, right?
But what if you feel like the value of your app doesn't quite match your pricing model? Even though you're receiving recurring revenue, you're adding new features or functionality all the time…so you could feel like you're undercharging a bit, especially if you've been making these enhancements for a while.
And what is the cost of these enhancements? Does the cost (or investment) of your app now mean you're not making money? Nobody wants that. And we know you're probably thinking that if you charge more - for whatever reason - you could lose your customers or drive away potential ones…
Striking the right balance between providing value to customers and being properly compensated for that value is crucial for the long-term success of your SaaS business. To help you get the most value from your SaaS product, we've looked at seven SaaS commercial models and come up with the benefits and drawbacks of each. This will help by showing there's more than one way to commercialise your app. You don't have to do what most people do.
1. Freemium Model
The freemium pricing strategy is widely used by SaaS businesses, inspired by the successful examples of Slack, Evernote, and Dropbox. You provide your customers with a free product with the option to upgrade to paid packages for additional features and benefits.
This pricing model basically incorporates tiered pricing, where the paid packages are complemented by a free tier aimed at entry-level users. However, the free tier is limited in certain aspects, encouraging users to upgrade once they reach a certain usage level.
Low barrier to adoption - an easy entry point for customers, addressing the initial adoption challenges SaaS businesses face. It allows customers to get started with the product as effortlessly as possible.
Viral marketing potential - with a freemium model, there is substantial viral potential due to the ease of use. Companies like Dropbox experienced rapid growth as existing users referred the product to friends and colleagues.
Revenue impact - free users do not generate any direct income for your business. The revenue from paid users would need to cover the costs of acquiring and serving all paid and free users.
Higher churn rate - while this model can help you kickstart your business, free packages often lead to a higher churn rate. When users invest financially, they may place less value on the product, making it easier for them to abandon it or switch to alternatives.
Time-limited free version.
2. Flat rate pricing
The simplest way to sell a SaaS solution. You offer a single product with a set of features at a fixed price. It kind of resembles traditional software licensing models but with the advantage of monthly billing.
Easy to sell - by focusing on a single, well-defined offer, you can simplify your sales and marketing efforts.
Clear communication - it's straightforward for customers to understand.
Easy to manage, and the traditional approach.
Can be challenging to gain value from different users, i.e. if you target small businesses and set your price accordingly, you could miss out on revenue by charging more or providing large volume discounts, and if an enterprise business decides to use your product.
Limited customisation - there needs to be more flexibility to tailor the pricing to individual customer needs.
3. Usage-based pricing
Think of it as a pay-as-you-go service; usage-based pricing ties the price of your SaaS product directly to its usage. Your customers pay based on the amount of service they consume, which can include factors like API requests, data usage, or transactions processed.
Scalable pricing - customer demands can be volatile, so they will naturally feel better knowing they don't have to pay more during a month when they use less of your service.
Proportional pricing for heavy users - so the flipside to the above (and unlike the fixed price model ) you can ensure heavy users contribute proportionally to the amount they consume.
Lower barriers to entry - your customers can start with minimal costs, which is attractive to startups and allows for incremental growth.
Revenue (and maybe cost) unpredictability - Monthly billing variations can make forecasting your business revenue fairly challenging. And similarly, for your customers, if their usage is pretty volatile, they can end up facing fluctuating costs, leading to unexpected monthly bills.
4. Tiered pricing
A fairly popular and common model in the SaaS industry. With tiered pricing, you can offer multiple packages with different features at varying price points.
Appeals to different types of customers - you can enable targeting and customisation based on various customer needs and buyer personas.
Maximises revenue potential - if you offer packages at different price levels, you capture value from customers willing to pay different amounts.
Clear upgrade path - customers can quickly move to a higher-priced tier when they outgrow their current package.
Tried-and-tested marketing technique; offer the lower price, then upsell to the next.
Potential for confusion - offering too many choices could overwhelm customers and lead to no decision.
Trying to please everyone - while tempting, catering to every possible need can decrease your product's value proposition.
Risk of heavy user costs - your top-tier users may need additional compensation, which can affect service quality.
5. Per-feature pricing
Per-feature pricing involves categorising pricing tiers based on the functionality offered, where higher-priced packages include a larger set of features.
Strong upgrade incentive - It provides a clear and tangible motivation for upgrading as customers unlock additional functionality, encouraging them to move to higher-priced packages.
Remuneration for resource-intensive features - some features may require a significant allocation of resources to deliver. With per-feature pricing, you can appropriately compensate for these resource-heavy features by placing them in top-tier packages.
Finding the right balance is crucial - it's challenging to determine valued features. If not done correctly, adoption may suffer. Key features in expensive tiers or limited benefits in the cheapest package can result in an unsatisfactory pricing structure.
Potential dissatisfaction - per-feature pricing can sometimes leave users feeling dissatisfied because despite paying a monthly fee, they may still miss out on certain functionalities, which can lead to a sense of frustration.
6. Per user pricing
Also known as per-seat pricing, it’s a straightforward model where customers pay a fixed monthly price for each user. Looks and is a bit like tiered pricing.
Simplicity - it's straightforward to understand.
Revenue scales with adoption - as the number of users increases, so does the revenue potential.
Predictable revenue generation - you can calculate and forecast your monthly revenue more accurately using this model.
Limits adoption - charging per user may discourage customers from adding more users to their subscriptions, which could hinder organic growth.
Increases churn potential - by discouraging user expansion (point above), it can make it easier for customers to ditch the service.
Value misalignment - the number of individual users may not necessarily reflect the value provided to your customer.
7. Per active user pricing
A slight variation of per-user pricing that addresses the challenge of billing all employees in an enterprise setting, where some may not use the software regularly. With this model, only actively engaged users are billed.
Cost efficiency - customers are only charged for active users, eliminating wasted spending on unused seats.
Encourages widespread adoption with less risk - with this model you can reduce your financial risk when rolling out the software to the entire organisation yet still encourage widespread adoption.
Limited appeal to SMBs - with this model, you're more likely to attract larger organisations as it may not provide sufficient incentive for small businesses with tighter budgets and smaller team sizes.
Despite having access, some customers may never use the product, i.e. they aren’t actually active.
Your revenue flow could suffer if you use many logins through one account to cut costs.
Now that we’ve made pricing models more clear/simple/interesting, you've got what you need to choose a pricing model that fits your SaaS product and business.
And we know there's lots to consider, but the good news is that you don't have to get your pricing perfect the first time you put out an app. Because your business will naturally evolve, so will the needs of your customers; so your pricing kind of needs to change too.
Finally, did we mention we're an all-in-one SaaS platform? Salable provides the tools that SaaS and application developers need to build delightful, engaging, and lucrative products and customer experiences.
We help you easily sell your app to your customers with features like integrating payment systems and setting up multiple pricing plans to suit your customers’ needs.
And we’re not platform-specific, so you can use Salable regardless of the type of app you have or where it operates. That’s the beauty of Salable...we enable any digitally enabled business. To find out more, reach out to us.