SaaS pricing is a tricky affair. Price your product too low, and you risk positioning your brand as a low-cost (arguably subpar) alternative. Price it too high, and you will have a hard time converting new customers to pay. And unless you find the perfect pricing 'sweet spot', the profit margin and unit economics will take a hit.
Most companies peg their pricing based on their competition—either to outsmart the existing incumbents with a cheaper offering or to establish themselves as a premium alternative with a premium pricing. And while it's a valid strategy to price your product based on competition, that shouldn't be the only criteria.
SaaS pricing is way too dynamic to be categorized into the bucket of competitor analysis. With more than 4 years into building Avoma as a key SaaS incumbent in the conversation intelligence space —we have our share of learnings regarding SaaS pricing.
We will talk about the different dynamics of SaaS pricing and how we went about our pricing model through this post.
The nuances of SaaS pricing
At the outset, it can feel like the idea of SaaS pricing is pretty self-explanatory—i.e., the price that customers would be happy to pay to stay subscribed to your product or service.
But on a closer look, SaaS pricing is more nuanced than just attaching a price tag to your software product. For instance, your product pricing should also reflect the value that your product offers through its features.
In other words, the cost has to justify the ROI (return on investment) that it offers in solving the users' pain points and problems. It also means that your SaaS pricing model needs to consider the perception of the value your product delivers, according to your customers.
If you look at pricing from a business perspective, setting up the right price point for your product can increase your profits by up to 11%—even if you only increase your prices by a mere 1%. That's a finding from Invesp—a conversion rate optimization agency—which also reports a few other interesting survey stats about SaaS pricing strategy:
- About 4 out of 5 SaaS businesses are known to change their pricing at least once per year, while many others change their pricing multiple times a year.
- 98% of SaaS companies in the survey earned positive results from making core changes to their pricing policy.
- And yet, the average SaaS company spends just 6 hours determining their pricing strategy.
Frequently used SaaS pricing models
The SaaS pricing model you choose for your product is at the heart of your business goals. For instance, if your main goal is to grow your user base—your pricing model might differ from someone trying to optimize for profitability. Every pricing model offers unique advantages depending on your goal and stage of growth you are at.
Let's first understand the types of SaaS pricing models available out there so that you can identify the best fit for your brand.
1. Flat rate pricing
Pretty obvious—right? Flat rate SaaS pricing is the same as the flat rate pricing concept you would find in other domains—you offer one product or a fixed set of features at a single price point.
Of course, you will have to pay the same recurring amount monthly or annually, but there's no fluidity in terms of the product, features, or pricing based on the usage, users, or other variables. Flat rate pricing is perhaps the simplest to understand because it's just like going into a grocery store and buying a pack of gum at which it is priced. That's it.
2. Usage-based pricing
If you host your servers in platform-based software companies like Amazon Web Services (AWS) or Google Cloud, you probably pay for usage-based pricing. This SaaS pricing model bills users based on the number of features or storage capacity they are using—just like paying for your postpaid mobile connection.
In it—the usage of the product is directly proportional to its cost, which is why usage-based pricing also goes by the name of the pay-as-you-go model.
3. Tiered pricing
Tiered pricing is a combination between flat rate pricing and usage-based pricing. A SaaS company offering tiered pricing often has multiple flat-rate pricing packages to choose from based on a company's size, budget, or need.
Here's an example of tiered pricing from Ahrefs:
Ahrefs pricing tells you what you can do with the features in each pricing tier.
A variation in tiered Saas pricing is the Freemium model. Allowing SaaS users to use a functional version and get a taste until they get to a certain email volume or database contacts. Much different than free trial, the period isn’t time limited. Pioneer in this model is email software Mailchimp, but there are many competitors that now offer free email software as a first step to gain critical mass of user growth and more trials.
4. Per-user pricing
Per-user pricing is the most popular pricing model used by many SaaS brands because of its simplicity to scale up or down. Per-user pricing—a.k.a per seat pricing—gives businesses clear predictability into how much they will have to pay if they buy a SaaS license for one user versus buying 15 licenses.
It is a popular choice among businesses of all shapes and sizes. A five-person garage startup can start with just two licenses and scale up to 30 licenses once they grow big.
5. Feature-based pricing
This model is in many ways similar to Tier-based pricing. The difference is —all the above four models have users as the common denominator. In contrast, Feature-based pricing differentiates its tiers completely based on the number of features regardless of the number of users.
Think of it more like a site license with a specific set of features—where your CSM plays a very important role in keeping tabs on your customer's product usage and recommending the right upgrades as the usage grows.
Choosing the right SaaS pricing model for your business
The question is—analyzing and understanding which pricing model would make more sense for your business. That said, you need not strictly stick to one of the above SaaS pricing models. The above models are mere examples of how some companies go about their pricing.
You can have your own SaaS pricing model or go with a combination of some of the above models. But, to make the right choice, you need to think from your customer's shoes and base your decision at the intersection of what would make the most sense for them and align with your goals.
Here are some key factors that will help you build your pricing model:
- Always know key business metrics: Know your Customer Acquisition Cost (CAC), Customer Lifetime Value (LTV), and the potential payback period. Awareness of these metrics helps you ensure that the pricing model you choose will keep your business in good health.
- Know your initial buyers: For example, in Avoma's case—our platform is used by customer-facing teams (like sales reps, Account Executives, CSMs) and internal teams such as product managers, engineers, etc. So, a user from the customer-facing side might start using our product, and eventually, the internal teams may adopt our platform, or sometimes it's the other way around. Understanding the types of users helped us understand the different use cases—so that we could price it in a way that made sense for the different types of users.
- Differentiate your tiers based on your user profile: Once you know how the different personas use your product, you can develop pricing tiers based on a combination of user profiles and their use cases.
- Understand your customers' Jobs To Be Done: Arrive at your SaaS pricing model from your existing and prospective customers' data inputs. While there are many user research methodologies, one of our favorites is the Jobs To Be Done (JTBD) technique. JTBD ignores all the unnecessary noise during the research process and lets you focus on one single "job" that your users are trying to accomplish with your product.
Case study: How we at Avoma went about our pricing model
One of the key realizations we had early in our journey was that our pricing page could act as an open conversation between our brand and your customers to decide if there's a match between the two. With that in the backdrop, we went through many experiments and self-discovery processes to develop a pricing strategy that worked for us.
Here are a few methods that helped us arrive at our current pricing model.
1. Our research, realization and pricing model
When we launched Avoma in the conversation intelligence category, the first thing we noticed was that pretty much every player in the category was focused only on the sales coaching use case and not on use cases for customer success, hiring, product management, etc.
The most common comparison was Gong Vs. Chorus, often done by sales leaders from mid-market companies. And also, they don't have a clearly defined pricing on their website.
At Avoma drank our champagne by using our platform to do extensive user research interviews with our prospects and early adopters to understand their requirements. We had several customers ask us for a conversation intelligence platform that their product or marketing team could use to record their conversation, get transcripts, and one-pager AI-generated summary, analyze trends, and more.
Based on our persona analysis — we divided our pricing tiers into two categories — Sales & Customer Success (Customer-facing persona) and Product, Design, Recruitment, etc. (Internal users)
If you map it to the pricing models discussed above, it would be a combination of Tier-based, Usage-based, and persona-based pricing.
To explain it further—the customer-facing users might need integration with CRM, Dialers, Conference platforms, etc. On the contrary, the internal users might want to use the platform to listen to the conversations merely.
So, if you think about it from the customer's perspective, it doesn't make sense for everyone to pay the full price. Our understanding of the Jobs To Be Done for each role helped us develop a meaningful pricing structure that made sense for us economically and for the different user personas in the customers' organization.
2. Transparency in our pricing tiers
Compared to other players in our niche, we took a contrarian pricing strategy that looked risky at first. We went the opposite route and decided to make our pricing transparent and include a free forever plan for new users to test Avoma for their use cases. We believe that having an upfront pricing page with all the information that prospects need to evaluate our platform shortens the decision-making process and keeps out poor customer fit away from our brand.
And this has worked wonders for us! Not only does our freemium plan drive a lot of sign-ups for Avoma, but it also builds the customer's confidence in our product once they try it, and they end up becoming paying customers without much of a push from our side.
3. We asked ourselves a few fundamental questions
Here are a few questions we asked ourselves in the initial stages and again after we acquired our first few hundred customers:
- What is our north star metric?
- What are our sales and revenue goals?
- What's a worthwhile customer acquisition cost for us?
- What's the perceived value we want to give to Avoma users?
- What other goals and metrics do we want to achieve as a brand?
We crunched the numbers down and figured out the answers for each of these questions, which helped us arrive at our existing pricing model. As a company that drinks its champagne, we heavily leveraged our conversation intelligence capabilities to understand better the gap in their customer experience with other (or similar) products and religiously devoted ourselves to building and pricing a product that they would love to use every day.
The result is that our customers enjoy Avoma's offerings across all team use cases, and they make sure we know this even when they are contacting us for a support issue.
Have a clear SaaS pricing model? Validate and analyze it periodically
What if you already have a SaaS pricing model? That's great—it's time for you to know how well your customers receive your pricing model.
Here are the methods on how to analyze your pricing model:
While many players might say that it makes more sense to measure the payback period rather than LTV: CAV, I would say that the CAC to LTV ratio is fundamental. Why? Because it tells whether you are losing money on every customer or being profitable. While in some cases, it might be agreed upon that it's ok to lose in the current run for a long term win. Nevertheless, measuring it helps you know where you stand. Ideally, a CAC/LTV ratio of 1:3 is recommended, which means:
If you are at 1:1 or 1:3 —> it means you can tweak your pricing to improve your margins.
If you are at 1:4 or above —> it means you are very profitable but aren't spending enough to grow faster.
Gross MRR churn rate:
Another key metric that you might want to account for is the monthly churn rate (i.e., the rate at which you are losing revenue due to customers cancelling or downgrading your product subscription)
Here's how you calculate the Gross MRR Churn rate:
Gross MRR churn = total MRR churn/ total MRR x 100
Most healthy SaaS companies tend to have a churn rate of 1-2%. If your churn rate is higher than 5%, you need to figure out what's going wrong (look into multiple aspects ranging from pricing model to ideal customer profiles to product issues and more.)
If you are doing well on both the above metrics—you can start setting yourself up for growth metrics such as Expansion and Upgrade MRRs (i.e., New recurring revenue you can generate from your existing customers by upselling/upgrading and cross-selling).
Pricing is never going to be a one-time project. Going back to the Invesp data, remember that every 4 out of 5 SaaS businesses change their pricing at least once per year. SaaS is a highly dynamic space, and the rules of the game keep changing every few years.
Your pricing strategy should keep up the pace to meet the changing customer expectations. Leverage conversation intelligence to keep a tab on your customers' pulse and offer them a pricing strategy that's a win-win for both them and your brand. Also, revise your pricing strategy to match your company's scale and product's maturity to be in lockstep with your brand's growth.