Insight: SaaS (19) Common pricing model for SaaS (part 2)

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The preceding article ‘Insight: SaaS (18) Common pricing model for SaaS (part 1)’ discussed the SaaS pricing model, as well as the usage-based and flat-rate pricing models. Other pricing models will be introduced and analyzed in this article.

3. User-based

Many SaaS companies charge based on the number of users they have. Subscription payments must be added every time a consumer adds a new user account. User-based pricing is also an excellent pick. Subscription fees will climb as the number of users grows. The user-based pricing model, which is a gene with Upsell traits, conceals this potential growth aspect. More staff will be hired and more seats will be purchased as long as customers keep increasing smoothly. The growth of the client’s company provides dividends to SaaS companies. The challenge of raising sales for existing customers for a SaaS company is accomplished by purchasing more seats rather than developing a lot of new features.

If the ‘User’ is considered a specific ‘Usage’, the user-based pricing model can be considered a special instance of the usage-based pricing model, inheriting the usage-based pricing model’s benefits. You can read the preceding article ‘Insight: SaaS (18) Common pricing model for SaaS (part 1)’ for a more in-depth explanation of Usage-based. User-based pricing provides distinct advantages over usage-based pricing, such as being easier for customers to understand. Most people understand the meaning of purchasing a user account, and there is no need to make redundant explanations. Yet, in usage-based pricing, the definition of usage is more sophisticated and may differ from what the client understands. It is vital for SaaS organizations to eliminate this comprehension error. Explaining these usage definitions to consumers will take more time, resulting in additional friction in the sales process.

User-based is appropriate not only for businesses dealing with SMBs but also for enterprises. The number of potential employees for a big company may be more than ten thousand. A SaaS company can easily reach a big ACV within such a user base, indicating that it can adapt to small teams or serve large corporations. The target customer scale of the user-based pricing model is broad. Customers of usage-based SaaS services frequently need to renegotiate better pricing, or they will leave. Because SaaS provides a specific function, such as sending emails or creating a customer info database, the value of Usage-based is delivering a specific purpose. Customers will prefer self-built services when the cost considerably surpasses their expectations. Across all accounts, user-based gives the overall value of using SaaS. Customers that want to build their own system must invest the same amount as if they were developing their own SaaS. The cost of purchasing SaaS directly is lower from the customer’s perspective.

Customer loyalty is high with the user-based model. Because companies buy a lot of seats and many people use this SaaS, once the SaaS needs to be replaced, the replacement cost is very high. Employees have grown accustomed to utilizing it, making the implementation of new SaaS software extraordinarily difficult. Furthermore, SaaS software will keep a considerable amount of data over time, which symbolizes the enterprise’s history as well as employee usage trends. It’s also tough to duplicate this threshold. As a result, User-based has a high level of customer loyalty.

Microsoft Teams has a pricing model that is primarily depending on the number of users. Slack is likewise user-based.

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

The most evident problem is that the conditions for User-based SaaS applications are quite stringent. First, a single customer benefit is independent and evident, making it suitable for user-based. Mailchimp, for example, is not ideal for a user-based pricing model because it primarily addresses the issue of email marketing. You don’t need to set up an account to take care of the same email marketing campaigns. Why should a customer buy extra seats if they can fulfill all of their product expectations with one seat? SaaS that is suitable for user-based demands must have collaborative properties. The concept behind these SaaS is that they can only tackle the problem if many accounts work together. Slack, for example, is a form of internal communication solution that is ideal for User-based. Every additional account will get you a bonus.

Following that, firms will, as expected, purchase a large number of seats. Some clients are dealing with staff from a certain department rather than the entire organization. User-based pricing is not appropriate for this type of SaaS. HR recruiting management, for example, is a SaaS for HR employees. An organization’s Hr teams can only grow slowly. Old clients will not buy new seats no matter how excellent your SaaS is if there are no new HR staff. User-based restricts the amount of room for expansion.

4. Tiered-based

The most common pricing model is Tiered-based, and most SaaS applications can adopt it. Its benefits include a broad range of uses and very minimal dangers. If you’re not sure what type of pricing model your SaaS product fits within, start with Tiered-based. This pricing model contains the most fundamental aspect of the SaaS business model — — the possibility of customers increasing purchases. You simply need to analyze the product features, deciding which are in the standard versions and which Enterprise customers should have access to. If a consumer wants to use a feature that is only available on higher-level plans, he can buy premium.

The problem is that it may be unable to demonstrate the distinct benefits of SaaS products. Perhaps your SaaS solution would be better served by a usage-based or user-based pricing model. Applying the universal Tiered-based pricing model to your product will make it appear less appealing.

When it comes to upgrading, some consumers rely on sales and CSM. Clients can increase purchases spontaneously with either Usage-based or User-based, whereas Tiered-based requires sales or CSM to help customers. Customers who have not used the advanced versions rely on sales or CSM to introduce it. This implies that there is an additional step in the total transaction process, which raises both the cost and the friction.

Tiered-based is suitable for SaaS companies with a lot of features. You can divide the product into a regular version and a high-level class if you build enough functions. Tiered-based is appropriate for both large and small tools like CRM, HR, BPM, and so on.

5. Hybrid

Usage-based / User-based plus Tiered-based is a hybrid type. In general, all SaaS with User-based or Usage-based is hybrid. As an example, consider Slack:

The lower plan seat is cheaper and has fewer functions. Seats in the high-level plan are more expensive and offer additional features. This mixed pricing model includes both user-based and tiered-based price options. Due to functional updates or additional seats, customers might purchase more.

The next article ‘Insight: SaaS (20) How to Upsell?’ is published. Simply send me some claps and feedback if you enjoyed my article.