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The SaaS industry is laden with products, from martech to accounting software to ecommerce platforms, and surviving in this hectic industry is no easy feat.

Products with a healthy product-market fit have a good chance, but outside of their core features, there’s one key to success — and simultaneously, to failure — that every SaaS company should be concerned with; Price.

Thus, the cost of the SaaS membership, as well as the design and presentation of the pricing page itself, is paramount. So much so, that a 1% improvement in price optimization can result in 11.1% more profit.

In this article, CMSWire leans on the expertise of SaaS professionals to find out why.

Related Article: Enterprise SaaS Churn Rates: What's Acceptable?

Common SaaS Pricing Models

Before we get into specific pricing strategies and tactics, let’s understand what the pricing models are. The most common SaaS pricing models fall under the following three categories, and many companies use more than one in their overall pricing strategy.

1. Tiered Pricing

Matthew White, CEO of Qebot, believes the pricing models most "common these days are subscription based models using month-to-month billing with a typical option to pay for a year at a time up front for a discount." Tiered pricing allows SaaS companies to offer multiple packages at price points that make sense for their potential customers.

If SaaS companies keep tier offerings simple, they can appeal to many types of potential customers. It may also be easier to upsell, as customers may perceive greater value from a higher tier than the one they initially intended to get.

Related Article: The Goals and Benefits of a SaaS Marketing Strategy

2. Usage-based Pricing

Manan Shah, co-founder and CEO of Recruiterflow, considers the most common pricing model to be usage-based. He says this category "covers almost half of all the pricing models seen in [the] SaaS universe." This category, he explains, "is also generally divided [into] two axis — Features/Storage or Users."

  • Features/Storage: This pricing model is useful for SaaS companies with a quantifiable product because it lets SaaS companies closely correlate their prices with the customer’s revenue. SaaS companies can make sure they’re charging for the increased value they provide as their customers grow. White says this "would be like an email marketing company charging on how many [emails] you send per month, or a hosting company charging by how much space and computing power is being used."
  • Users: With a user-based pricing model, SaaS companies charge by the number of licenses, or user accounts, that a customer purchases. The simplicity of the pricing model makes it easy for sales teams to explain to potential customers, and it’s also more straightforward to forecast recurring revenue. The ability to increase revenue is only limited to the adoption rate of the SaaS product itself.

Shaw explained that most SaaS software can be broadly categorized as productivity enhancing software, so many SaaS companies assume their customers will grow. This pricing model helps ensure the service remains affordable for the customer and profitable for the SaaS company.

Usage-based pricing also makes it easier for potential customers to project the costs they will incur and see the benefits they will derive from the software or service. Transparency of ROI is highly beneficial when selling to potential customers, and there is a reduced barrier to entry for smaller startups with little usage needs because there are no upfront costs.

3. Freemium

Damien Martin, marketing executive at Shufti Pro, describes the freemium model as offering “a certain portion of a SaaS product for free while additional features of the product can be availed by paying.” He states the model “can be used as an extension of the tiered pricing model where different packages include different features.” The freemium model generally includes some constraints that users will need to pay to surpass whether it’s feature-based, use-case limited, time-limited or capacity-based.

“Some notable examples,” Shah shares, “are Evernote, Google Drive, Dropbox, Buffer.” These companies use the freemium model to grow their user bases, offer value, and eventually convert the free users into paying customers.

The Pros and Cons of the Freemium Model

The freemium model is prevalent in the SaaS world as an acquisition tool. In fact, over the past few years, the cost of acquisition has gone up by 50% for brands overall, but only by 25-30% for freemium brands. With that in mind, let’s dive a little deeper into the pros and cons of the freemium model.

Pro: Customer Acquisition

For start-ups, Suresh Sambandam, CEO of Kissflow says, having a "freemium model removes entry barriers when new users want to try out your product and is a great way to beta-test your product." He continues, it could “in fact be your cheapest acquisition channel.” Shah agrees, suggesting, “[user acquisition] is generally about 50% of a SaaS company's cashflow.”

Martin also sees the potential, suggesting that people like to refer free products to each other, so freemium could be a good driver for word-of-mouth marketing. He says, “Dropbox rose exponentially due to many referrals [the freemium model] generated.” The freemium model could provide a SaaS company with a steady flow of prospects.

Pro: Potential Upsells

Once you acquire a freemium user, there’s an excellent opportunity for ongoing communication and potential upsells to a paid subscription. Shah explains, for example, that if you start using a service like Google Drive and keep saving files until you’ve exhausted the free tier, you’ve already become loyal to the service and are more likely to buy a subscription.

Martin adds, the freemium model “offers customers a glimpse of the product and invites them to purchase it for a longer period or add more features to it.” Depending on your conversion rate, the freemium model could be a great revenue booster.

Con: Higher Churn Rate

According to Sambandam, “the downside is, a large percentage of users who signed up for free are likely to drop off due to lack of stickiness.” Martin agrees, the model will “have a higher churn rate as users may not value the product or service as they don't pay for it.”

Shah suggests, the freemium model generally has a  “very low free to paid conversion. Famously, Evernote's free to paid conversion ratio is near 1%.” White agrees, it can “be hard to get someone to pay for something they are used to getting for free.” Even if a SaaS company has no problem growing its free user base, failure to convert users to paid subscriptions could eventually result in an overall drop in users.

Con: Operation Costs

The potential for acquiring new customers with a freemium model is excellent, but it could cost a lot of money to provide services to free users. White explains, “Users can typically continue to find ways to keep working on your free version, and never pay you while still being a cost to your business.” So, White asserts, “you may not make money.” Your paid services need to have enough additional features to incentivize free customers to convert.

Martin argues, “a freemium model is a potential revenue bust as free users do not generate any revenue.” He continues, “you have to earn enough from your paid users to support services for both the free and paid users.” This can be challenging if conversion rates are low and free users outnumber paying users by too much. For this reason, Sanmbandam believes, “in the long run, it is not a great revenue booster.”

Pricing Models That Work

Charging for Customer Success

Ashwin SL, head of marketing at MoEngage, says what works for them is a pricing strategy based on customer success. He further explains, “Being a customer engagement platform, we want to make money only when our customers observe measurable improvement in their engagement — as a result of using our platform.” Their pricing strategy falls under the usage model, where they charge based on monthly active users.

Free Trials Attract Customers

Shufti Pro initially had a tiered pricing model, with each tier including different features. The company found, however, that a usage-based model fit their product better. What mainly attracts customers is the free trial feature, which Martin describes as “a form of the freemium strategy” because they offer a 15-day free trial. Shufti Pro is an excellent example of shifting strategies to better align with the needs of customers.

With that said it's not for everyone. Qebot had a freemium model in the early days for its website builder application, but White says it was a tremendous failure. Being that the site builder was free, he explains, “people had a preconception that it was of poor quality.” Customers didn’t want to risk using a poor quality tool to build their business website. Moving to a model that’s priced similar to its competitors, White says, “we actually started to grow quite quickly.” Freemium may work for some SaaS companies, but it’s important to recognize when it’s not and make adjustments to your pricing model.

Pricing Page Tactics

We’ve asked the experts to reveal their favorite tactics when designing a pricing page, all focused on simplicity, trust and action.

Simplicity

It’s essential to keep it simple when you’re designing a pricing page. Ashwan SL says, “a few key points to keep in mind is to make the design simple and easy to understand, avoid complicated pricing mechanisms, refrain from offering too many choices and measure page metrics to make any tweaks.” You don’t want to overwhelm buyers or give them decision fatigue.

Sambandam agrees with the need for simple pricing pages. “I have seen many SMB SaaS products totally missing the pricing page or having a complex pricing page with so many plans to choose from. The worst are the ones,” he joked, “that have a price calculator!”

Trust

During the buying experience, trust is essential. Shah says, “Have social proof on your pricing page.” Encourage customers to leave reviews, or ask clients for testimonials. “We experimented with this,” Shah reveals, “and increased our conversions by 60%.” Shah also believes in proactively answering questions by having a FAQs section on the pricing page. You could offer the option to contact your sales team or even experiment with adding a basic live chat feature. Transparency is the key to gaining a potential customer’s trust.

Action

You should make it super easy to take action, says Shah, “whatever your call to action is.” In most cases, it’s to schedule a demo or sign up for a trial. It’s often best not to make the call to action ‘buy now’ specifically, but something that clearly shows the customer that they’re moving to the next step in the purchase process. Along with this, you could offer a money-back guarantee or no hassle refunds to further entice users to take action.

Another interesting approach is negative action. By offering a free trial tied to a credit card, users will be required to take action to stop using the service. This approach is often used with magazines and other publications.

Time to Evaluate Your SaaS Pricing Strategy

You’ll want to develop your own pricing strategy by looking at the competition and using customer feedback. White explains, “If you have competition that has a very similar product and is successful, their price point is likely about where you should be.” You could price higher and market yourself as premium, or price lower and undercut the market, “but if they are having success,” White believes, “it's likely they've priced it right.”

The second thing he suggests is actually talking to customers. He believes if you “simply ask them what they would pay for a product like this,” most of the time, “people will be pretty honest with you.”

In the end, Shah concludes, “Keep on testing! There is no golden rule to [creating a] pricing page,” you must “discover your own truths.”