Separating pricing models from other elements of SaaS monetization strategy
Here’s a good example of a typical SaaS pricing model guide. This one is from Binary Stream, and it details eight key SaaS pricing models as follows:
- Usage-based or pay as you go
- Flat rate
- Bundling or roll your own
- Freemium or ad-supported
XaaS Pricing’s analysts have been building pricing strategies for over two decades. And now’s your chance to get a slice of the action — for free!
This is a representative set of generally important SaaS pricing strategy topics, but it is not really a list of pricing models.
The strategies enumerated by this list are also rarely mutually exclusive. This point is made in Binary Stream’s SaaS pricing blog, as well as in the ISV’s writeup of the “hybrid” model type. It reads: “You may have noticed that there’s a lot of cross-over between the different pricing models, and you may be struggling to understand the difference between tiered and bundling or usage and per user. That’s normal. The truth is that most SaaS companies will try a combination of these approaches.”
Our XaaS Pricing data fully supports this sentiment. In fact, we believe it is the key point of Binary Stream’s SaaS pricing blog since it’s the overarching bow that ties the different SaaS pricing models and strategies the ISV discusses together. Posts like this would do well to lead with these tactical considerations.
Secondly, we’d parse out the concepts that this post and others like it cover into different categories that collectively comprise a SaaS pricing strategy. This is critical to clarity and understanding, which in turn supports effective pricing strategy execution.
This is how we approached building our analytical and data taxonomies for XaaS Pricing.
We have broken out the topics the Binary Stream article covers into four categories (note that these aren’t the only things we cover in XaaS Pricing, just those that apply to this article):
- Acquisition Model: A go-to-market mechanism by which a SaaS vendor attracts and acquires customers. In the above Binary Stream example, “freemium” is an acquisition model, not a pricing model. An acquisition model such as freemium creates downstream pricing implications.
- Packaging Model: The approach that a vendor uses to assemble its product features and/or consumption criteria for one or more types of customers. In the Binary Stream example, “tiered,” “flat rate,” “feature-based” and “bundling or roll your own” are all packaging model strategies, not pricing strategies. For example, the article cites Canva, a graphic design SaaS provider, as an example of a feature-based pricing model, indicating that “for software that comes jam-packed with impressive features, it may be best to build tiers based on those features.” This descriptor indicates that Canva packages its product based on a tiered strategy, where tiers are defined by features. An evaluation of Canva’s actual pricing model and pricing metrics indicates that Canva charges a fixed subscription fee for “up to X people.” This suggests Canva’s pricing model is based on a minimum number of users.
- Pricing Model: The mechanism by which pricing is charged to the customer. In our taxonomy, the most common pricing models are per-user, flat-fee and usage-based. A pricing model is typically anchored directly or indirectly to a primary pricing metric (often called a value metric), which is the fundamental unit by which the product scales and creates value for the customer. Pricing models and metrics are explored further in the next section below. The Binary Stream example covers per-user pricing but also lumps in usage-based pricing with pay-as-you-go metering, which is a conflation of a pricing model and a metering model.
- Metering Model: The licensing terms by which a customer is granted access to a given product. The most traditional metering model in software is perpetual licensing, and the most common current model for SaaS offerings is subscriptions. In both these models, customer use of a given product is subject to a defined length of time. The last major category within the Metering Model is pay-as-you-go billing, which is a model where the customer pays in arrears based on actual usage in a given period and where there is no contractual commitment to a length of time for product use. Pay-as-you-go models are often a component of usage-based pricing, but this is not a requirement. Many products will be priced “per something,” but with minimum and maximum subscription requirements for a given tier and an instituted monthly or annual term. Hybrid metering models can also exist, where elements of perpetual, subscription and pay-as-you-go models are combined for different aspects of the product.
When designing a SaaS pricing model strategy, we recommend using the above framework. Determining the right pricing model is a key element of SaaS pricing. But it’s not the only decision, and it’s not as simple as picking from a list of the top 10 pricing models. It is part of a broader set of choices that includes how to package the offering, how to acquire customers and how to set up terms for the offering. Understanding this and approaching it with an “everything is hybrid” mindset will position vendors for SaaS pricing strategy success.
The four key SaaS pricing models
As noted above, at XaaS Pricing we aim to simplify analysis of pricing models by separating them from other pricing strategy elements and bucketing them into three predominant models. We also acknowledge that many players employ hybrid models, which consist of a combination of the SaaS pricing models we define and provide an illustrative example of in our taxonomy below.
Refers to a type of pricing model in which the pricing is based on the number of users of the product. This category includes all permutations of user-based models, such as active users, concurrent users and users based on permissions (for example, “power” users versus “viewer” users), as well as variants based on the specific terminology used by a given vendor (for example, “members,” “contributors” or “teammates”). Not all users are the same, and users are often subject to very specific vendor terms. For example, some vendors will require that all users be on the same plan level and/or that all company employees be counted as users.
Best for: Products where all employees and/or team members benefit from using the product and/or where all users get differentiated value from using the product.
How it’s used: We often see per-user models being deployed in subscription offerings with usage-based tiering packaging model strategies. This means the product is packaged into typically three to five tiers, where each tier is targeting a different ideal customer profile. Customers pay for a monthly, annual or multiyear subscription to the product. Tiers are defined with specific limits on usage (for example, “up to 5GB of storage”). When customers exceed usage, they must either pay an overage fee (this would be a hybrid pricing model) or upgrade to the next available tier.
ClickUp uses a per-user pricing model with usage-based tiers.
Refers to a type of pricing model in which there is no metering factor; a single flat fee is offered for the product and/or edition. A flat-fee model is often structured similarly to a usage-based model but varies in that it is often a “use it or lose it” structure. For example, a flat-fee model might price at “$400 per month for up to 20 application tests,” whereas a usage-based pricing model for the same offering would price at “$25 per application test.” The flat-fee model is typically structured as a subscription with monthly and/or annual plans.
Best for: Many different types of products in different SaaS categories use flat-fee models. It’s typically a good model for products where usage scales by a clear, singular value metric (for example, application tests in the paragraph above), but where customers also benefit from subscription access to a minimum level of services. It is a good model for vendors that are experimenting with usage-based pricing but want the certainty of subscription revenue.
How it’s used: Like per-user models, flat-fee models are often deployed in subscription offerings with three to five tiers. Usage is defined within product tiers with clear caps, and pricing scales by a primary value metric associated with usage. Flat-fee models are often fronted by a freemium acquisition strategy with limited usage, which encourages customers to migrate to paid plans. Many companies that charge based on a flat fee will use hybrid pricing models that charge a fee for usage that exceeds the tiered plan limits.
Zapier prices with a flat-fee model, where the customer subscribes to a plan and volume of “up to X” usage that is based on the number of tasks per month.
Refers to a type of pricing model in which the price metering is tied to the actual usage of the product. If a product is used more, a customer pays more based on the usage factor and vice versa. A usage-based pricing model uses per-unit pricing, where the unit priced is the primary metric that defines customer usage of the software and, ideally, the value captured from the software. Usage-based models were initially popularized by hyperscale cloud IaaS vendors, which price most compute and storage services with usage-based models. Usage-based pricing is now broadening in popularity across other SaaS categories.
Best for: We wrote a bit about this in a recent XaaS Pricing blog. A true usage-based pricing model, where the entirety of the product is based on a usage-based pricing model, still works best for compute-centric offerings and other solutions that scale very clearly by a singular usage factor. For most, usage-based pricing models are being incorporated as part of a hybrid pricing strategy that includes per-user or flat-fee pricing, plus usage-based pricing as a secondary charging factor and/or usage-based pricing for overage metering.
How it’s used: There are several notable examples of successful implementations of pure usage-based pricing models. Those that are using this type of model typically offer pay-as-you-go billing as well as committed-use options (subscriptions), and often offer a single product instead of a tiered strategy. Product scaling is addressed via usage, not features. Most companies deploy a hybrid model to address usage in their software monetization strategy. Many provide subscription plans with limits on usage, encouraging customers to migrate to more expensive plans as usage grows. Others use hybrid pricing model strategies where some elements are priced per user or as a flat fee with subscription terms, while others are priced based on usage.
CockroachDB is priced purely based on usage, which includes charges per compute instance, per gigabyte and per IOPS depending on product; there are no tiers, just products that scale based on usage.
Hybrid pricing models combine at least two of the above pricing models. Hybrid models are a good approach for many SaaS companies. A hybrid approach can help a vendor strike a balance between the predictable recurring revenue of a subscription and the positive upside of a usage-based pricing strategy. The most common hybrid strategies that we’ve seen in practice include:
- Dual-pricing Models: A model in which a product carries a primary price based on users and/or a flat fee and a secondary price (or multiple additional prices) that is based on usage and applies to all customers. For example, a company might charge $5 per user for a product, plus $1 per gigabyte of file storage for each user.
- Subscription Plus Overage: A model in which a product carries a primary price based on users and/or a flat fee and a secondary price (or multiple additional prices) that is based on usage and applies to customers who exceed certain usage limits for their plan. For example, a company might price “Product A – Team Tier” at $5 per user per month, where the Team Tier includes 5GB of team file storage. Then that company might charge $1 per gigabyte per month for team file storage that exceeds the allotted plan level of 5GB.
Cypress.io uses a hybrid model; there are four plans that each carry an initial flat-fee subscription for a defined amount of usage (test results and users). Customers who need more test results than their plan allows pay a usage-based fee of $5 to $6 per 1,000 test results. Additional users can be added only by upgrading to the next subscription plan.