How To Price A SaaS Product

The right software-as-a-service (SaaS) pricing model will help you attract more customers and sell more subscriptions, increasing monthly recurring revenue.

However, figuring out how to accurately price a SaaS product can be difficult. In this article, we’ll take a look at several different SaaS pricing strategies so you can find one that suits your unique business needs.

Software as a Service, or SaaS, is a type of software hosted online and distributed to customers with a subscription model. Sales Hub is SaaS, and so is Google Analytics.

So much about a SaaS products’ success hinges on a smart pricing model. Given this, developing a well-thought-out pricing plan is extremely important.

Why is SaaS pricing important?

Ultimately, an accurately priced SaaS does two things: provides value to customers and gives companies a competitive market advantage. Customers might opt-out of re-subscribing if they feel your prices are too high, but you also need to charge enough to keep your company afloat.

In terms of providing value to customers, it’s simple. When someone buys a new car, their goal is to ensure that they’re paying for something that will be worth the cost. Businesses looking to purchase SaaS software think the same way. They don’t want to subscribe to your service and feel like they’re not getting what they’re paying for. You want them to reflect on their decision and say that it was worth it. This is known as the cost-to-value ratio.

If you pick a pricing model that provides the best cost-to-value ratio, you’ll be viable market competition.

Before you decide on the actual price tag that you’ll place on your SaaS product, you first need to choose a general pricing strategy. Then you can set SaaS fees for different subscriptions and tiers.

Will you calculate your monthly or yearly business expenditures, then add a markup to generate a certain profit (cost-based pricing)? Or will you look at your competition and base your price based on theirs (competitor-based pricing)?

The results of a good SaaS pricing strategy are cut-and-dried, but arriving at these prices can come from various pricing strategies and models. Let’s take a look at them below.

SaaS Pricing Strategies

1. Cost-Based Pricing

Cost-based pricing is a basic pricing strategy. Companies will evaluate costs that they’ll incur from providing a service, like product development and employee salary, and raise that number by a certain percentage point to ensure that they generate a return on their investments.

For example, if it costs $100 to design your software, you may sell it for $125 to ensure that you’ll always get a 20% profit.

Should you implement a cost-based SaaS pricing strategy?

Possibly. It’s a safe choice, and it’s simple to understand and calculate. There isn’t much heavy lifting involved.

However, this strategy comes with downsides. Costs can’t always be predicted ahead of time, and there’s no way to know if your revenue will end up covering all of your expenses. Issues could arise along the way that can derail your initial estimations, and you may lose revenue. Cost-based pricing also doesn’t take into account competitor pricing.

Learn how much revenue you could generate with this cost-based pricing calculator.

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2. Competitor-Based Pricing

Competitor-based pricing involves using competitors’ pricing as a benchmark. Your product or service is priced above, the same, or below the competition.

This model is a valuable strategy for companies marketing new SaaS software. Since your service hasn’t been on the market long enough for customers to vouch for its value, you’ll need another way to capture market share. The software may also be so new that you may not know all of the costs you’ll incur from providing the service.

In this case, using a competitor’s price points can paint a picture of what your prices should be, as you won’t want to start too high and scare customers away or go too low and have customers questioning the value of your product.

Streaming services often use competitor-based pricing. For instance, look at Netflix’s pricing plans:

Hulu’s pricing is quite close — only a dollar off in some instances.

Should you implement a competitor-based SaaS pricing strategy?

Possibly. Competitor-based pricing is straightforward. Go to a competitor’s website, and their pricing should be easy to find. If you price your product somewhere between your competitors, you’ll likely get customers. But, at what cost?

Basing prices off of competitors means that you’re using their strategy and not yours. Companies come out with new software because they believe theirs is the best on the market and more valuable than competitors’ offerings. If you’re using them as your benchmark, you may be selling yourself short.

Learn how much revenue you could generate with this competitor-based pricing calculator.

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3. Penetration Pricing

Penetration pricing is a type of promotional pricing strategy where a company temporarily reduces its prices to generate demand quickly. It is typically marked by a designated time frame, which you may or may not disclose to customers. For example, you might offer the product at the introductory price of $79 for six months, then quietly raise the price.

In another example, you might lower your product’s fees by 50% to start, but only for the first 100 customers. The limited time frame might make customers feel like they need to make quick decisions, which can work in your favor, especially if your price rivals competitors’ prices.

Should you implement a penetration SaaS pricing strategy?

Yes, but only if your SaaS product is new and untested. This pricing model can be valuable for generating immediate action. But, in the long run, you’ll need other pricing strategies. A continuous penetration pricing model might make consumers think that your service is struggling to obtain users, thus prompting them to question its value.

Using the penetration pricing model can be valuable, but it should be looked to as a precursor to a stronger and more established pricing strategy.

Learn how much revenue you could generate with this penetration pricing calculator.

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4. Value-Based Pricing

Value-based pricing is when products and services are priced based on how much value they’ll provide to their target audience and how much they’ll think it’s worth. This strategy is not focused on a company's costs or competitors' prices, but what the target audience wants from the software or product.

If customers are willing to pay for your service because they understand its value, you can price your service higher than your competitors and generate more revenue. This model also allows for price re-evaluation, should you need to make changes or updates to your service.

Adobe uses a value-based pricing model. Its apps are much more highly priced than alternatives such as Affinity Photo and GIMP. But because it knows the value it provides for its customers, it prices its services accordingly:

Should you implement a value-based SaaS pricing strategy?

Yes, but it’s a harder SaaS pricing strategy to adopt. Value-based pricing takes a considerable amount of time and commitment — it requires understanding who your customers are, what they want, and how much they’re willing to pay. Despite this, different subgroups may find different value in your service, making it challenging to settle on a price.

The upside is that spending time understanding your customers and speaking with them directly can also help you cultivate relationships with your intended audience. If they feel that you care about their experience with your service, they may factor their experience into their assessment of your product's value.

Learn how much revenue you could generate with this value-based pricing calculator.

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5. Freemium Pricing

Freemium pricing is a common SaaS pricing strategy where businesses offer a free and limited version of their product to increase sign-ups. While the free version can be used for an extended amount of time, companies typically restrict advanced features unless the user upgrades to a paid subscription.

HubSpot operates on a freemium pricing model for its CRM platform:

Should you implement a freemium SaaS pricing strategy?

Yes — freemium pricing is easily one of the simplest and most straightforward choices in this list. First, it’s commonly used. The world’s biggest SaaS companies, such as Google and Spotify, use freemium pricing. That shows it’s an effective way to acquire more customers and grow your SaaS business.

It’s also a much better alternative to a penetration pricing strategy, where you undervalue your product for a short time to win more customers. Instead, you offer a version of the product at an irresistible price — free. And when users are ready to upgrade, they turn into paid subscribers.

However, a freemium strategy comes with downsides. If you offer a strong free product, a user may stay on a free subscription forever. That’s why it’s important to restrict useful features without frustrating the user. If you gate too many features behind a paid subscription, you might annoy users off your platform. So striking the right balance is key.

Learn how much revenue you could generate with this freemium pricing calculator.

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SaaS Pricing Models

Once you know how you’ll price your SaaS, you’ll need to determine how you bill users. Will you charge a flat-rate for all features? Will you have options for smaller businesses with 25 employees and enterprise companies with 1,000?

These are all questions to consider when putting together pricing packages. Let’s go over some standard SaaS subscription models.

Usage Pricing

A usage-based package is a the-more-you-use-the-more-you-pay concept, like cellphone data. You may have a monthly 2GB plan, and you’ll get charged more if you go over.

This model’s value is that its advertised prices will always be lower than monthly billed costs. An initially low price point can be attractive to users, enticing them to select your service. Smaller businesses know that they won’t pay the same price as enterprise companies, so they’ll feel like they’re getting their pennies’ worth.

One example of usage-based SaaS pricing is found in Oracle’s data integration platform:

In Oracle’s example, you pay for the amount of data your business is processing per hour.

Usage Pricing Pros

• Lower bar of entry. Small businesses can subscribe knowing they’ll only be charged for what they use.
• Attractive to freelance-to-enterprise businesses. Very few pricing strategies can attract as wide a range of an audience as usage pricing.

Usage Pricing Cons

• Easy to back out of. With this model, it’s essential to keep in mind that usage doesn’t equal value. Customers may back out if they incur high costs that don’t make their business objectives any easier.

While an enterprise business may pay a higher bill, that’s only because they’re a larger company with more significant day-to-day needs, not because your service is precious to them. It’ll thus be easy for them to churn.

User-Count Pricing

This model involves charging customers based on the number of seats, or users, they have on their account. Many SaaS companies use this model.

Customers are charged a base rate per month for each user account. For example, you might charge $6 for personal accounts, $25 for ten users, and $45 for 100 users, regardless of how much they use your service in any given month.

This package makes it easy for companies and their users to know what their bills will look like each month. However, customers may shy away from this pricing if they’re looking to grow. If they know hiring more employees means higher software costs, they might elect a service that allows them to grow, regardless of price.

Some companies attempt to avoid this issue by also instilling a per-active-user price. This means that companies can have all of their employees sign up with the service, but will only be charged for those who use it.

User count pricing is popular. Here’s a user count pricing example from Sales Hub:

Just like HubSpot, you can use a mixture of both tiered and user count pricing to help customize costs for each one of your customers.

User-Count Pricing Pros

• Easy to calculate. If a company only has two team members who will use the application, it knows it’ll only pay for those two logins.

User-Count Pricing Cons

• Shared logins. Users will know that more sign-ins equals higher costs, so they might share log-ins with employees, or between entire teams, to avoid additional monthly fees for separate accounts.
• Unattractive to growing businesses. A business that is hiring more employees might avoid doing business with you if they know they’ll be charged more per user.

Tiered Pricing

Tiered pricing involves offering multiple package options that vary by feature and price. Each tier can be customized for specific buyer personas — for example, single users versus medium-sized companies. Not all users will need the same features or the same amount of features, so this option allows them to select according to their needs.

Tiered pricing is likely one of the most popular SaaS pricing models out there. Here’s a tiered pricing example from Sales Hub:

Note that this only includes the Free and Starter plans. The Professional and Enterprise plans are on the next tab, making it easier for users to digest pricing information. If you plan to have more than three tiers, consider the design of the pricing page to improve the user experience.

Tiered Pricing Pros

• Straightforward and familiar. Because tiered pricing is so widespread, there will be no confusion. Your customers will simply choose the best package for them to get started.
• Personalized for different target markets. Because different packages typically target different types of businesses (e.g. small businesses versus enterprise firms), you can effectively address the needs of different customers with different packages.

Tiered Pricing Cons

• May cause confusion. For this model, the number of packages can vary, but the average is 3.5. Too many options might confuse customers, and they can move on to a competitor with fewer choices.

Flat-Rate Pricing

This pricing package is the opposite of tiered pricing. There’s one price that includes the product and all its features — all customers have access to the same tools.

It’s easy to attract users with this model because they won’t incur any additional monthly costs. However, using this pricing model may mean that some of your software’s unique features may go unused. Some users may never touch certain features, while others will use them every day.

One example of flat rate pricing is found in the IXACT Contact website:

The flat-rate method works for them because they target individual real estate agents instead of entire agencies or large real estate businesses.

Flat Rate Pricing Pros

• The most straightforward pricing model yet. The user pays one SaaS fee and is ready to go.

Flat Rate Pricing Cons

• Not personalized. Different customers have different needs. Some will need certain features, while others will leave them unused. That can lead to them feeling like they’re wasting their money on a subscription.
• Decreased profits. Because companies can share a single subscription, you miss out on potential revenue. Flat-rate pricing is a viable SaaS pricing strategy only if you target individuals or small businesses.

Per-Feature Pricing

This model is similar to tiered pricing, but customers pay per feature, like email automation, chatbot service, or ad management. It’s a solution for those who want to set a flat rate, but don’t want features to go unused. If customers don’t interact with all aspects of your service, it becomes harder to get enough data points to understand its value and troubleshoot when necessary.

Pricing packages differ by the number of features that come with each model, so higher-priced packages come with the most features. Typically, more expensive packages include all features from the lower-tiered packages as well.

Amazon AWS is priced on a per-feature basis. You can add the services you’ll need in the AWS pricing calculator, then figure out your yearly investment.

Per-Feature Pricing Pros

• Easy to scale. The user can add more services and tools as they need them — and never more than they need.
• Affordable. A small business may only pay for a few features, while enterprise businesses may pay for hundreds.

Per-Feature Pricing Cons

• Confusing. Customers may not even know what they need. You’ll need a team of product specialists who can help them choose the right features for their business without being overtly salesy.

Overall, while this is a valuable method, it can be difficult for the customer to discern which features should be grouped within each tier. Additionally, the customer may want to use a higher-priced tier feature, but their budget requirements may force them to move to another service to get the same feature at a lower cost.

Ready to ramp up your SaaS pricing strategy? Use the following templates.

SaaS Pricing Model Template

Regardless of the SaaS pricing strategy you choose, you’ll likely end up creating either a single package or multiple packages, which will be laid out in a pricing page for customers to peruse.

If you’re only offering a single package, your published SaaS fees can look as follows:

If you’re implementing a pricing model with multiple subscriptions, it could look as follows.

Nailing Your SaaS Pricing Strategy

Pricing a SaaS product or service is based on two key elements: charging for value and targeting the right audience. If you do proper research on these factors, your customers will reward you by purchasing your service.

It’s essential to keep in mind that prices can always be changed over time as you grow or roll out new software additions.

Ultimately, all SaaS companies will choose a pricing strategy and billing model that fits their individual needs. If you’re putting time into your plan, customers will appreciate your prices and subscribe to your service.

Editor's note: This post was originally published in September 2020 and has been updated for comprehensiveness.