By Matt Ream, Director of Product Marketing at BillingPlatform. BillingPlatform were finalists in the ‘Best SaaS Product for Financial Services‘ category at The 2024 SaaS Awards.

With the rise in cloud services, artificial intelligence (AI) and other technological innovations underpinning today’s digital businesses, increasingly complex SaaS business models are a key engine driving the economy.

And with McKinsey projecting the SaaS market to be worth $10 trillion by 2030, SaaS companies need to find ways to differentiate in an increasingly crowded market. One way to do that is through the right pricing strategy to attract and retain customers and maximize their lifetime value.

Discovering SaaS Pricing Models

There are many pricing models to consider and each one has its pros and cons. Choosing the right pricing strategy is essential to organizations when it comes to attracting and retaining customers and maximizing their lifetime value. But how do you decide which one works best for your organization’s business needs?

First, let’s start by outlining the eight different pricing models that exist today.

1. Flat-rate Subscription

This pricing model enables SaaS businesses to charge customers fixed, recurring fees for access to products and services. This is most helpful for businesses looking for a predictable revenue stream.

2. Usage-based

SaaS businesses that need more advanced billing capabilities are gravitating towards usage-based (pay-as-you-go) pricing that scales with utilization. This strategy offers customers the flexibility they may be looking for in a crowded SaaS market and allows organizations to directly tie revenue to usage.

3. Tiered

A popular and flexible pricing model, SaaS companies can offer multiple packages at different price points depending on the features, widgets or activity thresholds they include. This pricing model gives businesses the ability to target their offering to different buyer personas and works great for larger enterprises with multiple product offerings.

4. Per-user

This pricing strategy allows customers to pay a fixed monthly or annual fee for access to a predetermined set of features and functionality based on the number of users or seats they need, making revenue more predictable.

5. Per-storage

The cloud storage market continues to grow as companies migrate off on-prem storage, and per-storage SaaS pricing models are a direct result of this trend. SaaS companies in this sector charge individuals or businesses based on how much digital space they need. Many times, companies are able to offer a certain amount of storage space for free, enticing customers to test the offering before buying.

6. A La Carte

Some SaaS providers allow customers to choose the features and functionality they want and need. Accomplished through eCommerce-style shopping interfaces, users add individually priced features to their carts and are charged on a recurring basis. You might also recognize this pricing strategy from Liberty Mutual’s “You Only Pay for What You Need” commercials, but this is highly popular among consumers and gives organizations insight into what their customers truly value.

7. Freemium

To attract customers to an unfamiliar brand, some SaaS companies offer free access to a limited set of features and functionality. Companies can put various restrictions on free usage or entitlements, such as limits on core activities, charging for certain features or charging for support. Another option is to provide free access to the software but incorporate watermarks or advertisements. As more customers onboard, companies gain a captive audience for upselling initiatives.

8. Hybrid

Increasingly, SaaS companies are deploying hybrid pricing models that combine multiple tactics. A strong combination is a pricing model that has a fixed rate and charges based on usage. This model provides users with flexibility in both cost and features. Alternatively, some SaaS companies offer the subscription/usage combination within different pricing tiers and add a la carte options for add-ons.

Just as SaaS has grown to be about more than just software – encompassing customer needs, buying patterns and industry and market trends – so too have the pricing models that support SaaS businesses. As an article from Thoma Bravo explains, companies across industries are rethinking the customer-provider relationship to build pricing models that meet customer needs while still achieving business objectives. The article highlights real examples of organizations in infrastructure to technology identifying unique pricing models that drive value for both parties.

Finding the Right Pricing Model for SaaS Business Models

The SaaS industry will grow even more over the next few years – not only in innovation but in extending the boundaries to include industries that previously weren’t able to profit from this business model. Incumbent providers will find themselves facing new and innovative competition, so to keep pace, organizations will need to stay on top of trends, push the limits when it comes to innovation and pricing strategies and deliver exceptional customer service.

Below are five tips that organizations and finance teams can consider when weighing the costs and benefits of implementing a pricing model:

1. Understand Your Customer Segments

Make sure you’ve done proper research to understand your customers’ unique needs, pain points and willingness to pay. There may be different segments that value different features or that have price sensitivity.

2. Align Pricing with Value Proposition

It’s critical to ensure that the pricing model reflects the value that customers derive from your product or service. It should be clear to customers why they’re paying the price they are and what value they’ll receive in return.

3. Analyze Competitor Pricing

Similar to your customer research, make sure you’ve done research on your industry and specifically, your competitors, to understand what similar products and services are being priced at. This can help you position your pricing appropriately.

4. Avoid Complexity and Embrace Flexibility

No matter the pricing strategy you choose, customers must easily be able to understand the structure. Complex or confusing pricing can lead to frustration and lost sales, so it’s important to be simple in your pricing models and communication. Similarly, offering flexible pricing options can be a strong selling point for customers.

5. Evaluate Cost Structure

Make sure that your pricing provides a healthy profit margin and doesn’t hurt your organization’s revenue streams. Consider factors such as customer acquisition costs, infrastructure expenses and ongoing support costs.

Strategic finance teams will need to look carefully at their offering to determine what pricing strategies will drive the best outcomes. Finance and accounting teams will need to assess their ecosystem and make sure it is in a place to provide the organization the agility and freedom to innovate and accelerate ideas into revenue.

Lastly, in the same article referenced earlier by Thoma Bravo, the author advises organizations to use data to provide insights into what customers are using and find most valuable about the product. This information could be crucial in identifying the right pricing model for the business.

And once the right pricing strategy has been chosen, remember to regularly review and adapt. Monitor trends and changing consumer habits to make sure that your pricing strategy remains competitive and relevant. Flexibility in pricing strategy is crucial in a dynamic market environment.