Flexible pricing in SaaS is becoming increasingly popular, and it’s clear to see why.
Let’s be honest, your pricing strategy can be the make or break of your business. Businesses spend hours upon hours deciding on the type of pricing model to use, and how much they can charge, only to have to adjust it a few months later.
It’s no surprise that subscription-based pricing has become increasingly popular over the years. In fact, the use of subscription models has grown by almost 500% in just 9 years! That’s because these models are a lot more flexible, and can adjust to many changes occurring both inside and outside the business.
So, how can you incorporate flexible pricing in your SaaS? And is dynamic pricing the most beneficial option for you? We’ll answer these questions and more, including:
- SaaS Pricing Models
- Benefits of dynamic pricing in SaaS
- Why you should use Flexible Pricing in SaaS
SaaS Pricing Models
Yes, we’re completely spoiled for choice when it comes to subscription-based pricing. With so many models to choose from, each flexible in its own way, it can be difficult to decide on the most effective option for your business.
Here is a list of the most popular subscription models in SaaS and their pros and cons.
1. Flat rate pricing
Although rare to see nowadays, there are some SaaS products out there that still use a flat rate as their pricing model. As you probably guessed, it’s when you offer a single package and pricing option for all your users.
Pros of flat rate:
- It’s simple. With just one pricing option, your customers don’t have to make a decision on which subscription option is the best for them. It’s super clear what they’re paying and what they’re getting.
Cons of flat rate:
- It’s not flexible. You’re restricting your scalability with flat pricing. If you come out with new updates and features, you may find you have to constantly adjust the pricing to match, which is not ideal for long-term customers and they’ll start to churn.
- Specific user groups are missing out. With just one package offer, you’re limiting yourself to fulfilling the needs of one type of user group. For example, your flat pricing package may be enough for startups, but SME’s or larger enterprises may consider your plan too basic.
2. Tiered pricing
Tiered pricing is perhaps the most popular pricing model used for subscription-based SaaS today, and that’s mainly because, unlike flat pricing, it gives your customers lots of options. With this model, you arrange different packages into ‘tiers’, ranging from low cost to high cost.
Pros of tiered pricing:
- You can target multiple user groups. With tiered pricing, you can offer multiple packages that appeal to different user groups – from basic packages for startups to complex packages at a much higher price for big enterprises. By appealing to a larger audience, you’re going to majorly boost your overall revenue.
- More opportunity to upsell. Tiered pricing is also a great way to upsell. Companies might start on a lower tier, realize your product value, and then want more from you. Thanks to your tiered pricing, they can upgrade to the next package option just like that.
Cons of tiered pricing:
- It’s likely users want what they can’t have. Yes, the tricky part about tiered pricing is deciding what you’ll offer in each package. Often, you may find that a customer is looking for one specific feature, but because it’s part of your high-cost tier, it’s not worth it for them to purchase.
3. Usage-based pricing
Usage-based pricing, also known as pay-as-you-go, determines pricing by how much a customer uses your product or service. In simple terms, the more a customer uses your product, the more they pay.
Pros of usage-based pricing:
- Flexibility for users. This type of pricing gives users the flexibility on using your product as much as they want while giving you fair pricing for it. It, therefore, works well for all business sizes, as they can align their usage with their budget.
Cons of usage-based pricing:
- Not a stable source of revenue. By giving customers complete control over how much they use, and therefore, pay, you have no real idea of your revenue. Companies may see how much they were charged last month and decide to reduce their usage dramatically, leaving you with a massive dent in your pocket.
4. Feature-based pricing
Feature-based pricing allows you to charge customers based on the number of features they use. Usually, feature-based pricing uses a tiered form.
Pros of feature-based pricing:
- Customizable for users. This is a great way for users to get that personalized solution they’re looking for. As they have the freedom to add and drop features when they need them, they’re more likely to increase that CSAT score.
Cons of add-on pricing:
- Users aren’t likely to opt for lots of features. By giving your users the freedom to pick what they want, the reality is that they’ll pick the minimum, especially if they don’t yet see the value in your features. That’s why having a great demo or onboarding process is super essential.
5. Add-on pricing
Add-on pricing is where you offer a basic package with the opportunity for customers to add specific add-ons at an extra charge. These don’t have to be featured, it can also be specific services or settings too.
Pros of add-on pricing:
- Extremely customizable. This pricing model is one step more customizable than feature-based pricing, so users feel like they have an even more unique, personal solution. As a result, you may find users become serious advocates of your brand.
Cons of add-on pricing:
- Difficult to show the value of each add-on. With so many add-ons to choose from, it’s hard to show the value of each element so early in the customer journey. As a result, they’re less likely to pay for a bunch of extras.
6. Customized pricing (“contact us”)
Customized pricing is slowly becoming the pricing model of choice for SaaS companies. This model provides no set pricing options and instead encourages customers to get in contact with the sales team to create their own customized solution at their own unique price.
Recently, big SaaS companies like HubSpot have incorporated this model into their pricing strategy, giving users a ballpark estimate of the cost, but primarily encouraging them to get in touch with their sales team.
Pros of customized pricing
- Total flexibility for users. More than the feature-based or add-on pricing models, this option allows your customers to totally customize their SaaS solution on another level. What’s more, you’ll have the opportunity to ensure they see the value in all the features and services you have to offer.
- Total flexibility for the company. This pricing option is the only option that’s fully scalable for changes both inside and outside your business. You can easily introduce new features without needing to update your pricing page. You can also adjust your prices depending on inflation, demand, or perceived value, so you’re always maintaining a high ROI.
Cons of customized pricing
- Requires a lot of support from your sales team. With such a personalized service comes the need for a lot of dedicated time for your customers. Your sales team may spend hours talking with potential customers, and you may need to invest more resources into your team to deal with the demand.
Benefits of dynamic pricing in SaaS
Most of the above pricing models are examples of dynamic pricing in SaaS. The nature of SaaS itself and its growth in popularity means that things are constantly changing, and your pricing needs to adapt to this.
According to financing lender Lighter Capital, most large-scale SaaS companies increase their prices by 5-7% each year. So dynamic pricing really is the way to go.
By implementing a dynamic pricing structure like the ones listed above, you’ll see a marked improvement in the following KPIs of your business:
- Higher monthly recurring revenue (MRR): If a customer sees flexibility in your pricing, they’re more likely to opt for your product. Although there can be fluctuations in your regular revenue, dynamic subscription-based pricing overall sees a huge boost in your MRR.
- Higher customer lifetime value (CLV): By giving your users the opportunity to adjust their subscriptions based on their changing needs, the longer they’ll stay, leaving you with a higher CLV.
- Higher customer satisfaction (CSAT): Customization is the golden ticket for a happy customer. By offering a range of packages or personalized solutions, you’ll grow that all-important CSAT score.
- Lower churn rate: With all these options and flexibility, your customers are less likely to jump ship and simply adjust their subscription to their needs. And as we know, a low churn rate is a huge win for any SaaS company.
Why you should use Flexible Pricing in SaaS
Flexible pricing and SaaS almost go hand-in-hand. The beauty of SaaS products is that they offer so much to different users, introducing new features and updates on a regular basis is part of its nature.
Dynamic pricing, therefore, makes so much sense for SaaS; not only does it retain customers and keep them happy, but it also ensures your business maintains a high ROI. Although your pricing model is one of the most vital elements to attract and retain customers, it’s still important to recognize that it’s just one element of your overall retention strategy.
To keep customers engaged throughout the entire lifecycle of your product and encourage subscription upgrades, book a demo with FROGED!