The 3 types of volume pricing approaches that a SaaS company can use
Author: Bryan Belanger
Author: Bryan Belanger
We’ve been talking a lot about SaaS consumption in our recent posts. We’ve written about value, usage and pricing metrics, explored how outcome-based pricing is used (or not) across B2B SaaS, and analyzed how you get from value to setting a price.
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:
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.
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:
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||13||8%|
|21 to 30||2||1%|
|11 to 20||30||18%|
|5 to 10||54||32%|
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?
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):
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.
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