Saas Pricing – Which Model Is Right For You
So you’ve made the decision to start with or move to a SaaS based pricing model for your software business. It’s pretty much a done deal these days that your business and enterprise clients will expect some sort of subscription plan for pricing. There are a few different models you can use – and you can certainly offer more than one or change as you learn more about what works best for your customers and you.
So how do you decide on the best subscription plan? It comes down to two business fundamentals:
- how your pricing structure and model impacts the value of your services as perceived by your customers; and
- how your pricing model impacts your cash flow and what that means for managing your business
The good news is that by enabling subscription prepayment funding products, such as Multipli – you can worry less about the impact different SaaS pricing models have on your cash flow and revenue. Since you receive the full agreed value of the contract up front – you can readily predict your cash flow and effectively “de-risk” those future payments. This then means you are clear to focus on using whichever SaaS pricing model which is most appropriate for your customers and you.
Let’s take a look at the most common SaaS pricing models and some of their value and cashflow characteristics.
Subscription prepayment funding like Multipli means you can use whichever SaaS pricing model is most appropriate for your customers and you
Usage based pricing
This SaaS pricing model offers different prices based on some repeatable or measureable activity or service offered. Common ones include the number of transactions processed, gigabytes used or API requests. But it can be anything that represents some unit of value to the customer – the number of documents generated, the number social channels used, If more or less of something is used in a given period then the price changes accordingly. Its essentially “Pay-as-you-go”.
If you offer a product whose usage fluctuates heavily from one period to another this model can make sense for customers who don’t want to pay the same for the service in a quiet versus busy period. It can also seem “fairier” since heavy users pay more than those who only use the service lightly. If your target includes small companies just starting out or growing quickly, they avoid any big upfront costs and can invest as demand grows for their own business.
On the downside, it’s harder for customers to plan for the expenditure as actual future usage is unknown. Equally – it’s more difficult for you to predict your cashflows. You might also have more problems with customers questioning value and asking you to justify the per unit usage costs.
Usage based pricing can make revenue and cashflow forecasting tricky and customers may ask you to justify the per unit usage costs.
A great majority of SaaS companies today use tiered pricing. Most will offer 3 tiers – a low, a mid and a high end solution – each with a different combination of features. Each tier usually offers more features or and/or increases in usage or access points.
The lower end tier tends to be targeted at smaller companies or startups and offers only a very limited set of features and perhaps holding back on a key product feature. Usually the idea is to have customers quickly move on from this tier as there can be little margin here for the required effort. Offering a “freemium” tier is also pretty common and can be a good way to let potential customers “try before they buy”.
The high end tier is most often targeted at enterprise level customers. It’s therefore not unusual for there to be a level of customization with price on application only because the price will be dependent on what a particular enterprise requires.
The clear advantage of tiered pricing is that it you can present different levels of value to different customers based on what’s important to them in terms of their investment and what features they prefer. It also provides a clear “upselling journey” for the customer to follow as they grow. Be careful with “freemium” and low priced tiers. They can encourage higher churn as customers don’t necessarily feel as committed to a service when its very cheap or free. To make sure you don’t lose out on revenue, also make sure your higher tiers cover large volume users or you have upper limits in place, after which they will need to negotiate further.
Per user pricing
As the name on this SaaS pricing model suggests, it assigns a cost to each individual user of the product or service. It’s one of the most popular models in use because its simple. Everyone gets the same bundle of features and services for a single cost. Add one more user and the price increases accordingly.
This makes it very simple for the customer to understand what they are getting and how that is valued. Your business enjoys straightforward cashflow management and a predictable revenue base. The business can see how many users are signed up in a period and will know what the revenue is for that time. Forecasting for future user growth within a customer account is also easier.
On the flipside, if buyers don’t see the value in adding new users they may be tempted to cheat the system by sharing logins and not adding new users. From a churn perspective, if a per user approach tempts buyers to limit their uptake of seats – they are less committed. Alternatively if you allowed unlimited users under a different pricing model you may get more users. The more people using a product – the harder it is for a company to abandon it.
Pick the pricing model that maxmizes value
Understanding what drives and motivates your customers is key in figuring out what kind of pricing model will be most attractive and represent the most value to them. From a revenue perspective, selecting a model that helps you maximize potential cashflow is obviously critical. These two things may not always be compatible.
However, with Multipli’s prepayment subscription financing in place, since you receive cash up front – the SaaS pricing model you choose has much less impact on revenue and cashflow. Multi year contracts allow SaaS organizations to offer a deeper discount and also provide certainty to the end user that no price rises will occur during the contract term. Major benefit for the SaaS company is that they will receive more cash up front than under a 1 year term.
Talk to us today and learn how Multipli can work with whichever pricing model you use.