Insight: SaaS (18) Common pricing model for SaaS (part 1)

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In my previous article ‘Insight: SaaS (17) Low Code or No Code is not the future’, I discussed my thoughts on Low Code and No Code platforms. Today, we’ll talk about the SaaS pricing model and the characteristics of adaptable products.

Many publications discuss the SaaS pricing model, and many of them mix up the terms pricing model and pricing strategy. A pricing strategy is a way of determining the price of a product. The pricing strategy determines whether your product sells for $10 per month or $10,000 per month. The pricing model is a set of pricing principles that include your company’s goals and charging reasoning. Customers can also see your pricing model clearly, that is, “What would I get if I pay? Will I get more if I pay more?” A smart pricing model can effectively persuade the clients. Answer. When compared to traditional software firms, SaaS is more reliant on attracting clients in batches, therefore a sensible pricing list is more conducive to the SaaS company’s overall control. A reasonable pricing table is a decent pricing model. SaaS needs to charge more reasonably.

Let’s analyze some of the most common price models:

1. Usage-based

The more certain functions or resources are used, the higher the customer’s price per customer. This is an awesome pricing model. As customers use SaaS more frequently, the higher the pay. This will result in an ideal cycle.

More money is paid as more resources are used, and the more loyal, the more resources are used. Customers will organically expand as they use the product more frequently. You can increase the ACV if your product and the customer’s business are more intimately intertwined, or if the customer’s size grows. All SaaS companies need to do is convince their existing customers to stick with their products, renew their subscriptions, and even pay more. Usage-based pricing models are born with genes that allow customers to pay more. Since the charging rules have been agreed upon in advance, users may simply pay more money when using more. You do not have to sell more sophisticated plans to clients. Think of a technique to encourage clients to use Upsell more often when you need it. When you need Upsell, just think of a way to encourage clients to use the SaaS more.

The Usage-based barrier is relatively low, and the client can get a taste of the product’s worth at a very cheap cost in the beginning. When the expected cost is minimal, the customer is more likely to try first. In other words, acquiring clients is easier with a usage-based model. Freemium will be used in conjunction by many usage-based businesses. You can enjoy usage within a quota, and when you exceed this range, you will be charged. This pricing model is used by Mailchimp.

Customers can save some email addresses(contacts) within the quota, and more money will be required if the quota is exceeded. Usage-based functions include SMS, Email sending, API calls, payment, among others.

So, what are the drawbacks of a usage-based pricing model?

First, even for enterprise clients, the ACV of new buyers is modest. It is difficult to raise a substantial amount of ACV at once for large enterprise clients who have never used the product before. There is no reason for huge corporations to buy a large amount of ‘usage’ in advance without recognizing it. The chances of receiving a one-time exceptionally big order are slim. Corporate customers frequently have a multi-month sales cycle, but the order size you can acquire isn’t extremely high. Basically, designing an appealing bonus for a large company’s account manager is tough since the first time you charge huge clients will not be very high, and there will be little income for sales. It is not reasonable to pay for sales until customers increase with usage. As a result, selling to large enterprises using simply usage-based SaaS is extremely challenging in practice.

Because of the requirements of usage unit gross margin, you can still make a lot of money. Customers will contemplate self-built to save money if they use a significant amount. You need to negotiate a price with clients at this moment. When compared to self-developed, the cost of adopting SaaS will be significantly higher. If the difficulty of self-developed isn’t too great, the client will figure it out on its own, and if the usage is too high, the customer will develop it by itself.

As a consequence of the advantages and limitations of Usage-based, the following SaaS kinds are appropriate:

1. The usage of resources and functions is well-defined, and purchasers can quickly grasp the product’s unit value.
2. It is suitable for products that are difficult for customers to develop themselves, and SaaS consumption has a moderate unit price.
3. The product with the controllable cost for resource usage.

2. Flat Rate

Flat Rate is a single pricing model in which clients have only one fixed-price plan option. This pricing method is particularly easy for customers to comprehend. The customer just has one question: should I buy or not? Customers can quickly understand the product and avoid comparing many plans, and this price model is the simplest to develop and apply. However, this pricing model is more of a stopgap measure.

The lack of an Upsell path is one of Flat Rate’s biggest flaws. The customer has paid the maximum plan, and increasing the transaction is impossible, thus the NDR of a SaaS company that uses a Flat Rate for a long time is <100%.

Expansion here is 0, and Churned must exist, so NDR <1. The NDR will eventually represent the value of SaaS companies, and only those with an NDR greater than 100% are healthy. In a nutshell, this single-price model will not be sustainable in the long run.

As a transitional solution, it’s appropriate for early SaaS products or small-scale SaaS. The small-scale SaaS doesn’t need any financing or fast-growing requirements.

This article is the first article about the SaaS Pricing model, and the second article ‘Insight: SaaS (19) Common pricing model for SaaS (part 2)’ about the SaaS pricing model has released.

The next article ‘Insight: SaaS (19) Common pricing model for SaaS (part 2)’ is published. Simply send me some claps and feedback if you enjoyed my article.