There’s one common truth that ties all of these topics together: Usage is really important to building a successful and sustainable SaaS product.
Wow, super insightful, right? Bet you never would have thought of that on your own! You’re probably saying, “Hey look at this guy! He’s saying that if you have a SaaS product, it should be used by customers! Can you believe he’s only been analyzing monetization for 10 years?”
It’s an oversimplification to illustrate an important point. Increased customer consumption of a SaaS product over time, as measured by an expected and agreed-upon cadence (usually monthly or yearly), is a signal that the customer is getting more value from the product. There are a bunch of important SaaS metrics — net dollar retention, expansion revenue, net churn rate — that exist to measure this specifically because performing well on these metrics indicates to your company, investors and/or the market that your SaaS is effective at driving increased consumption and engagement with customers.
With increased usage comes a pricing challenge: Customers that use more inevitably want to pay advantaged prices for their increased usage. So how do you account for increased usage of your SaaS with a volume pricing strategy?
Unfortunately, volume pricing is one of those pricing concepts where SEO content fodder litters Google and makes understanding the concept difficult (let’s be real, that happens with most pricing concepts). Here’s a great example of an article that muddies the waters. This piece pits volume pricing against tiered pricing as if they are mutually exclusive choices. They are not. The article literally asks, “volume pricing versus tiered pricing: which one is for you?”
This particular article cites HubSpot Marketing Hub as an example of tiered pricing, not volume pricing, when in fact, HubSpot uses both. Just look at the pricing page screenshot in the above-referenced post. HubSpot has tiered packages of Marketing Hub (Starter, Professional, Enterprise), and then different levels of volume (measured in number of marketing contacts) that the customer may select for these packages, all with different prices..
At XaaS Pricing, we think of “tiering” as a packaging strategy. A volume pricing strategy can complement a tiering approach, as with the HubSpot example. We concede that tiered packaging models usually factor usage into packaging, which is an element of volume that should be considered in monetization. For example, Airtable’s pricing plans set limits on the number of “records per base,” and this allotment increases with each plan. This approach allocates a certain volume of product usage to each plan, and thus, volume is considered in the packaging strategy. Customers must migrate to more expensive plans to access more volume (records, in Airtable’s case). However, Airtable doesn’t price based on records, it prices based on a per seat, per month pricing model. Airtable offers tiered packages of its product and may also offer volume pricing based on the total number of seats a customer chooses to purchase.
In our nomenclature, volume pricing refers to any strategy in which different prices are charged for different levels of consumption of a given product and tier/edition of that product, where consumption is measured based on the pricing metric used for the product.
There are essentially three types of volume pricing approaches that a SaaS company can use:
Cumulative volume pricing (often called tiered discounting): Let’s assume a hypothetical SaaS product has pricing of $5 per user, per month for 1 to 10 users, and $3 per user, per month for 11 to 25 users. With cumulative pricing, a customer that has 15 users would pay $5 per user, per month for the first 10 users, and $3 per user, per month for the other five users. Each incremental user added has an applied charge based on the volume tier reached for that user.
Single-level volume pricing: Let’s take the same example above. With single-level volume pricing, a customer with 15 users would pay $3 per user, per month for each user. If that customer needs more users, they would either add users at the same price within that volume tier, or graduate to a higher-volume tier with more users and gain more favorable volume pricing. For example, if the customer that is paying $3 per user, per month for 15 users seeks to add another 15 users, they would pay a new price for their 30 users based on the vendor’s volume tier pricing. This can get further complicated with co-terminus agreements and upgrade policies but is essentially the model that is used.
Package/block pricing: With a package pricing approach, a vendor might price 10 users at $30 per month, or an effective price of $3 per user. If a customer needs 12 users, they may have the option to purchase the additional two users at $5 per user, buy another block of users in increments of 10 or another interval, or upgrade to the next plan of the product to access an additional allotment of users.
The above can get a bit confusing, because in practice, vendors draw from these different models when designing pricing. As noted previously, vendors bake volume into packaging and establish pricing and upgrade requirements based on volume, creating multiple flywheels for upgrading customers.
A few volume pricing case studies
To illustrate volume pricing in practice, we find it helpful to look at examples. Here are a few good examples of the predominant approaches that SaaS leaders use today:
ClickUp offers five plans for its product, ranging from a free plan to enterprise plans for large teams.
ClickUp prices per member, per month, with monthly and annual term subscription options. For all intents and purposes, a member is effectively a ClickUp user.
ClickUp builds many usage limits into its plans, particularly for its self-service plans for smaller businesses. There are too many to provide a comprehensive list here, but some of the usage limits include spaces, lists per space, folders per space, file storage and “number of uses” of different types of views and reporting features.
If customers within a particular ClickUp workspace need to exceed the usage limits of their plan, ClickUp requires that all members within that workspace be upgraded to the next plan.
ClickUp’s pricing page lists a single per member, per month fee for each plan. However, the page also has a “let’s make a deal” feature that prompts customers to seek discounts based on how much the customer is willing to pay and how many team members they are signing up. So, while not publicized, this suggests that ClickUp likely offers discounts based on volume as measured by the number of members the customer requires. It is unclear whether ClickUp has standard volume pricing for this purpose or if it is negotiated, but a single-level volume pricing strategy is used in practice in some form.
HubSpot Marketing Hub offers three plans: Starter, Professional and Enterprise.
Similar to ClickUp, each HubSpot plan sets usage limits on multiple features, such as the number of active and static lists, shared inboxes, email sends, dashboards, reports per dashboard, custom properties, number of blogs, custom reports, videos hosted, teams and many others.
HubSpot’s pricing metric is the number of marketing contacts that are managed within the HubSpot environment. A marketing contact is someone the customer specifically defines as a contact they will market to with email and/or ads.
HubSpot uses a cumulative volume pricing strategy to price Marketing Hub. For the Starter plan, for example, the customer is billed based on the following cumulative tiers:
First 1,000 marketing contacts: $0
Next 1,001 to 3,000 marketing contacts: $45 per month per 1,000 contacts
Next 3,001 to 5,000 marketing contacts: $40.50 per month per 1,000 contacts
Next 5,001-plus marketing contacts: $36 per month per 1,000 contacts
HubSpot’s pricing is cumulative in that the customer gets a graduated discount as they increase usage, but there are conditions placed on this approach. Pricing is based on increments, meaning that a customer who needs 3,500 marketing contacts must pay in an increment of 1,000 contacts to support their requirement. This “use it or lose it” structure means the customer does not benefit from using less than their allotment because they pay a recurring subscription fee for the established number of contacts either way.
Customers have the option to change marketing contacts to non-marketing contacts, which would impact their billing. However, this restricts the ability to use HubSpot Marketing Hub for its core functionality (to market to prospects).
HubSpot also notes that customers cannot downgrade their chosen volume tier until their contract renews, whether monthly or annually. If a customer chooses the Starter plan for 7,000 contacts and then determines that they only need 5,000 marketing contacts, they can shift contacts to a “non-marketing contact” designation to reduce their fee until they can downgrade.
HubSpot’s model checks all the boxes for effective monetization. It builds volume-based upgrade paths into packaging, establishes a clear cumulative volume pricing model aligned to a clear value metric, and structures pricing in a way that establishes customer subscription commitment floors.
Current state of volume pricing in SaaS
To analyze how volume pricing is currently being approached in SaaS, we looked at a cross-section of our XaaS Pricing database, focusing on 389 B2B SaaS vendors.
What did we find? Sixty-four of those 389, or approximately 16%, have volume pricing published on their pricing page. We don’t have the data to break this down into cumulative versus single-tier volume pricing, so this represents an overall figure for all types of volume pricing.
This doesn’t mean, by the way, that the other vendors don’t use volume pricing, in fact it’s possible that many of them do. They just don’t publish volume prices publicly.
The 64 companies that published volume pricing in our index represent a total of 169 distinct product editions. Across that set of product editions, the overall average number of volume tiers that companies used for their product(s) is 14.1. Here’s how that figure breaks down:
Number of Volume Tiers
Number of Products in Our Database
Percentage of Total Product Editions
31 to 50
21 to 30
11 to 20
5 to 10
It’s clear that the overall average is skewed a bit by companies such as Atlassian that use a large number of volume tiers (50-plus) to define pricing across all products. The majority of companies that use volume pricing limit published volume prices to a maximum of 10 tiers.
This data suggests that most SaaS companies don’t publish volume pricing on their pricing pages. Our qualitative assessment is that most of those companies will discount only by exception in very specific scenarios for self-service plans, and/or if they are running a promotion for self-service plans or offering deals through a third-party seller or marketplace. Many of these companies offer an enterprise plan in which they will price based on volume and negotiate based on the needs of the client. This is corroborated by the customer purchasing and negotiation experiences that many SaaS buyers share on sites like Reddit and Capiche.
The above are rules of thumb, but do not make a strategy. Which leads to the obvious next question you’re now asking: What should I do about this?
How should I apply volume pricing, if at all, for my SaaS pricing and packaging strategy?
Most blogs and guides on volume pricing for subscription products agree on the general pros and cons of using such a strategy. To paraphrase, the pros include incentivizing larger deal values, optimizing price positioning versus competitors, and aligning pricing to different customer segments and levels of willingness-to-pay. The cons include the risk of resetting customer expectations of your value and consequent pricing, as well as the impact of lower pricing to realized profit margin.
How do you weigh these pros and cons for your business and decide whether volume pricing is an appropriate strategy?
First, you should take a step back and consider options. There is an initial choice of whether or not to implement volume pricing. Then there is a subsequent choice of whether or not to publish volume pricing on your pricing page or leave volume pricing to negotiations with specific customers. These are interrelated decisions but should be weighed and considered separately.
Here’s our point of view on the key elements to get right in assessing a volume pricing strategy for your SaaS offering(s):
Deeply know your customers: Like all things pricing-related, it starts with understanding and segmenting your customers based on the value you create for them. You need to also deeply understand the jobs to be done for those customers and how they will use your product to complete those jobs. This will help you to understand how different customers might consume more or less of your product at the time of initial purchase as well as over the lifetime of using the product. This intelligence can inform how volume pricing is designed.
Understand your unit economics: Companies that are successful with volume pricing strategies (HubSpot, Atlassian) nail the unit economics of their product, create a monetization strategy that directly ties value to a pricing metric, and then scale that pricing metric for different levels of volume consumption. You must deeply understand the scaling factors associated with the unit economics of your value and consequently your price to design appropriate pricing and packaging, including for volume pricing. If you are confident in the unit economics of your product, and have created a pricing model that links to those economics, you can more confidently design volume pricing that makes sense for all customers.
Don’t confuse volume pricing with discounting: Volume pricing should be standard and based on the clear unit economics of your product and should apply to all your customers equally. This is different than sales discounting, in which the price of your product is being adjusted in negotiation to meet the needs of a specific customer.
Don’t be afraid to assess the practices of competitors and aspirational peers: It’s important to understand how competitors are approaching volume pricing. You shouldn’t just copy what they are doing, but you can certainly learn about their approaches and make determinations about what that means about the preferences of your target customers.
Assess cost and profit: You’re probably sensing a theme … all of our recommendations tie everything back to the four Cs of pricing: customer value, customer willingness-to-pay, costs and competition. There’s a clear point: You need to develop a data-driven value-based pricing strategy that considers all of these elements to effectively deploy a volume pricing strategy.
Align to your company’s goals and realities: Volume pricing strategy must tie to your company’s go-to-market motion and overall goals. Analyzing cost and profit are part of that equation, but it’s bigger than that. You must also consider how your company sells and supports customers, what your company’s goals are for growth, revenue and profitability, and where you expect growth to come from (Is it driven by retention? Acquisition? Both? Which customers?).
A case study in radical volume pricing
There’s a company that has radically embraced transparent volume pricing as part of an overall pricing approach that emphasizes clarity, consistency and openness for all customers. That company is Atlassian. Atlassian etched its pricing DNA in stone in this blog post. There are great tidbits throughout the post, but for our purposes, we want to highlight principle No. 4: “Give everyone the best price.”
This is definitely easier said than done, and requires doing the homework and having a confident pricing strategy, but all things being equal, if you can pull it off, we tend to agree with Atlassian’s point of view. In summary, if you are going to adjust prices based on volume, make those prices available, be confident in the economics of volume and price, and give all customers the same deal. Here is the full text from their write-up:
“Want to know how much Jira costs? Look right here. Confluence is here. In fact, all of our product pricing is available on our website.
This approach may not sound too revolutionary until you go visit any of the top enterprise software companies’ sites and try finding their pricing info. Even the few that divulge pricing will probably immediately guarantee a lower one if you get on the phone now and talk to a sales rep TODAY! While common practice, this ambiguity in pricing goes directly against one of Atlassian’s core values: ‘don’t f&$% the customer.’
The only way you can guarantee you’re treating your customers fairly is by treating them all the same. Thus, discounts and one-off pricing negotiations are absent within Atlassian’s business. Once you charge one customer less than the rest, you are f&$%ing your customer base.
Second, as soon as customers know they will get a better price if they call and negotiate, they will do exactly that. This introduces another unnecessary step in the purchase decision that requires headcount, is expensive, and slows down your business.
If you’re starting a company, it’s worth saying no to this whole world now by making pricing transparent and non-negotiable. If you’re an established company with a full-fledged sales team already used to negotiating on a daily basis, it will be more difficult to take that power away from them, but still worth it. Any dollar going towards pricing conversations is one less going towards building better products.”
Want to talk SaaS volume pricing, or have a question about how these concepts apply to your product? You can find me on Twitter at @bbelangerTBR or send your feedback directly to [email protected]. I read all replies. And be sure to subscribe to get our content sent to your inbox once it publishes.