Executive Summary
- There are 5 main types of SaaS pricing models used in the industry.
- The first type is the usage-based model, in which you pay a certain amount for every minute or hour that you’ve used the SaaS software, or for the amount of storage that you’re using. This differs from the second type, the flat rate model, where you’re charged the same monthly amount.
- With a per-user or seat-based SaaS model, you’re charged a fixed rate for every user logging into the SaaS software. You can also choose a per-feature model in which you only pay for the features that you’re actually using – nothing less, nothing more. Finally, there’s the tiered subscription SaaS model, where the SaaS vendor offers different predetermined packages.
- There are other forms of SaaS pricing models, such as hybrid models where seat-based packages are combined with usage-based packages. This is becoming increasingly common.
Introduction
SaaS (software as a service) purchasing is a tricky art to master. Because many SaaS tools are relatively new, many companies don’t really know how much they should be paying for them. In fact, some companies don’t even know how to pay for them – and the wide variety of SaaS pricing models doesn’t make things any easier.
In the worst-case scenario, companiesend up flushing thousands of dollars down the drain every single month paying for SaaS tools they don’t even use that often. So, how do you make sure that your SaaS subscription prices are fair? And what are the best pricing models for SaaS tools out there?
The fact is that learning how to accurately pay for SaaS tools has become an essential skill for any CEO or finance manager working for a tech start-up. Unfortunately, this isn’t something you’re just born knowing – in fact, it’s the complete opposite. Most companies have no idea much they should be paying for their SaaS software, which prices are fair and which are too high or too good to be true. But why? Well, it’s complicated.
The fact also is that pricing models for software are constantly in a state of flux. And we’re not talking just about SaaS prices going up and down. The different types of pricing strategies keep changing and evolving, so companies looking to buy SaaS tools are always playing catch-up with new strategies launched by providers.
So to help you understand the complicated world of SaaS buying a bit better, we have put together this short guide with the 5 main SaaS pricing models.
Usage-based SaaS model
This type of SaaS pricing model is one of the most common on the market. The usage-based SaaS pricing model allows customers to pay only for the resources they’re using. Think, for example, of when your phone bills used to include only the calls you made and the texts you sent. Well, usage-based SaaS pricing is exactly the same.
But how do companies decide how much to charge you? The answer is data collection and analysis. Some SaaS tools track the amount of time you’ve spent using them and charge you by the minute, whereas others follow a tiered approach by which you only pay extra once you surpass a certain usage limit. In other cases (such as with ERPs), the SaaS tool includes many different functions and you only pay for the ones that you want to use.
Pros of the usage-based SaaS pricing model
The pros of the usage-based pricing model for software are evident. It’s a straightforward and fair way to go about purchasing SaaS technology. It also allows you to try a SaaS tool first before fully committing to a yearly subscription or a license purchase. This is a particularly valuable option for start-ups that are just dipping their toes in the waters of a certain sector.
Cons of the usage-based SaaS pricing model
So, what are the cons of usage-based software pricing models then? By far, the biggest downside is that this kind of pricing model often doesn’t have a spending cap. For example, tools like AWS or Datadog can end up being extremely costly. If your project suddenly takes off, you’ll be facing a bill that far surpasses what you would’ve paid with a one-time license purchase. On top of that, usage-based SaaS pricing models can make a company’s monthly software expense fluctuate more than if they stuck to a SaaS subscription model. Finance teams in particular often have challenges with predictability and projections for these models.
Flat-rate SaaS model
The flat-rate pricing model for SaaS used to be the norm in the past when companies charged all their customers the same amount regardless of the features they used. In essence, this is a subscription model without a scalable structure or the option to throw in additional features. Although their heyday has clearly passed, flat-rate SaaS models are still valuable in certain sectors.
For instance, the popular project management software Basecamp has found success with its flat-rate model. The business currently boast 120,000 customers – a number that speaks volumes about the company’s achievements with this model.
Pros of the flat-rate SaaS pricing model
Without a doubt, the main benefit of the flat-rate SaaS pricing model is that it is as straightforward as it gets. Customers who want a no-hassle SaaS solution will instantly be attracted to this kind of pricing model, as they’ll know exactly how much they’re paying every month and what they are paying for.
This makes effective long-term forecasting a lot easier. It allows you to create accurate spending models and predict future developments in your business based on more realistic data.
Cons of the flat-rate SaaS pricing model
Without a doubt, the biggest con of this pricing model is that you might be paying a lot of money for features that you’re not even using. This can be fatal for companies on a limited budget for their SaaS software
Per-user SaaS model
This kind of pricing model does what it says on the tin. Companies are charged depending on the number of people using the SaaS tool. Normally, companies pay a flat rate for each user and the number of users who have access to the SaaS tool is fully scalable. With examples ranging from the work management tool Asana to issue-tracking software Jira, this is one of the most popular types of pricing strategies you can find in the SaaS world.
Pros of the per-user SaaS pricing model
On the one hand, the per-user pricing model for SaaS is extremely convenient for small teams where duties are evenly split and each person uses a certain SaaS tool. The per-user SaaS subscription model is cost-effective and straightforward, which makes it perfect for small start-ups with definite SaaS requirements.
Cons of the per-user SaaS pricing model
On the other hand, bigger start-ups (with more than 50 employees) might find per-user SaaS pricing models ineffective and wasteful. Basically, this kind of model sometimes means that companies are charged for users who aren’t actually using the software. For instance, it is quite common for companies to purchase Salesforce licenses in 1,000-packs – even if only 800 employees are actually logging in on a daily basis.
At Quolum, we have even seen companies with upto 55% of their seats on tools with per-seat pricing being absolutely wasted! You can start identifying these, for free, today!
Some companies like Slack have tried their best to combat this, be offering refunds for unused seats. The Slack Fair Billing Policy details this. The catch? It applies predominantly to small businesses. So the issues you see with larger companies persist!
Per-feature SaaS model
This kind of SaaS subscription model works particularly well for SaaS tools that include a wide range of different features, such as an Enterprise Resource Planning (ERP) solution for business management. For instance, a certain company might only want to use the stock management and finance functions of an ERP. With this kind of SaaS subscription model, they can do that without paying a premium for services that they’re not using.
Pros of the per-feature SaaS pricing model
By far, the biggest advantage of this kind of pricing model is that it gives you access to custom software that is tailor-made for your company. It also means that you don’t have to pay any money for the features that you’re not actually using.
Cons of the per-feature SaaS pricing model
The biggest con of the per-feature SaaS technology pricing model is that it might confuse certain clients who don’t want to overthink their SaaS subscriptions. On top of that, this kind of model might also lead to companies paying for features they’re not actually using, as they can easily forget to cancel their subscription. If you use per-feature SaaS tools, it is highly recommended to use a SaaS management platform that tracks your usage and ensures that you’re not paying for features you’re not using.
Tiered subscription SaaS model
With this model, SaaS buyers can choose between a wide selection of different tiers, each including different features and available at different prices. Tiered subscriptions are by far the most popular type of pricing strategy at the moment. Why? It’s simple – this model combines the straightforwardness of the flat-rate model with the upscaling capabilities of the per-feature model.
Because most SaaS subscriptions are paid on a monthly basis, companies can easily upscale or rescale depending on their business needs. This model differs from the per-feature model in that, in the latter, SaaS buyers can pick and mix the features that they want. With a tiered model, the features they can choose from have been predetermined by the vendor.
More often than not, SaaS vendors offer between 3 and 5 tiers. The first tier includes basic features, while the last tiers offer premium advantages that only certain companies might need. You can think of a tiered SaaS subscription model as a riff on the typical film or music streaming service subscriptions.
Pros of the tiered SaaS pricing model
In our opinion, the biggest benefit of the tiered SaaS pricing model is that it allows SaaS vendors to work alongside their clients as they grow. On top of that, it also covers an incredibly wide range of company needs, which can help SaaS developers that want to eat up more market share.
The tiered SaaS pricing model is also very convenient for clients. Thanks to its enhanced flexibility, this kind of pricing model is equally perfect for new start-ups and large enterprises. It really is no wonder that this is one of the most popular pricing models for software you can find out there.
Cons of the tiered SaaS pricing model
As for the disadvantages, a recurrent criticism leveled at the tiered SaaS pricing model is that it can be too confusing for both buyers and vendors. At first, the vendor might not be sure of what features to include in each tier. There will definitely be some tweaking and swapping after the first few months of establishing a tiered SaaS subscription model, which might throw customers off.
How to ensure you get maximum value for the price
As you can see, the sheer variety of SaaS pricing strategies used by SaaS companies on the market makes things very confusing for businesses that use a lot of software.
For instance, one month, your company might need a SaaS subscription for a fully-fledged ERP solution. The next month, you might only need a couple of features of the same ERP solution. And if your company uses dozens or even hundreds of SaaS solutions, it can become incredibly difficult and time-consuming to track and manage all of them. So, how do you make sure that you’re not overpaying for your SaaS tools – or even paying for software you’re not even using?
If you ask us, there is only one right answer to this question – relying on a tried-and-tested SaaS management tool. And at Quolum, we’ve got just the thing. As experts on SaaS buying, we have developed a smart SaaS management tool that can help you save thousands of dollars every year.
With Quolum, you’ll get in-depth usage stats and expert advice on your SaaS tools – that way, you’ll learn which of your SaaS software is expendable and which is essential. And thanks to its high-level integration features, Quolum can fully manage all your SaaS solutions – from taking care of your renewal management and helping you negotiate better deals with vendors to sourcing usage data for per-user subscriptions.
When it comes to SaaS subscriptions, following your hunch or gut feeling is clearly not enough. What you need as a SaaS buyer is a holistic, researched-based strategy that ensures that you’re getting the best bang for your buck. And that is exactly what we offer at Quolum. If you’d like to find out more about what we do, talk to a savings expert today.
Frequently Asked Questions (FAQs)
What are the most successful SaaS pricing models?
The answer to this question depends completely on the needs of each company. Smaller start-ups might work better with a per-feature SaaS model, while larger enterprises might prefer a tiered SaaS subscription model.
What does SaaS stand for?
SaaS stands for Software as a Service. It is a model of software distribution where the provider hosts the software on the cloud – meaning users can easily access it online.
Is Netflix an example of SaaS?
Great question! Yes, it is – and a perfect example of a tiered SaaS subscription model at that. Netflix sells different licenses to use its online video-watching platform on demand, which makes it one of the biggest SaaS companies in the world.
How is SaaS pricing done?
SaaS pricing depends completely on the kind of subscription that you sign up for. There are usage-based models, flat-rate models, per-seat models, per-feature models and tiered subscription models with a predetermined package of features.