Pricing Models for Software – How to Choose the Right One

Having an effective monetisation strategy and pricing models for software is key to driving revenue and growth for any business. Depending on your business goals, there are many different pricing models available. This article will explore the pros and cons of various consumer and enterprise SaaS pricing models and monetisation strategies with a focus on B2C and B2B SaaS businesses.

GrowthLead B2B SaaS Pricing Models

Table of Contents

Introduction to Pricing Models for Software

SaaS monetisation or SaaS pricing is the process of setting up pricing plans for customers to use a software-as-a-service products. It is an essential mean to generate revenue and determine how much revenue they can expect from their customers.

The pricing model also determines how many customers will be willing to purchase the product or service and how much value it provides to them. Properly setting up a SaaS monetisation strategy is key for any company to ensure that they are able to generate the revenue and growth they need to sustain the business.

To decide on a pricing model, research and financial business case planning are needed to determine the value of the product and the target customer base. The research should include understanding the features of the product, the customer needs, and the competition.

Financial business case planning should include calculating the costs of the product, the expected revenue, and the profitability of the product. Typically, the people involved in defining the pricing strategy for a SaaS company include executives such as the CEO and CFO, the revenue team, and the product team.

Pricing Strategy vs. Pricing Models

A pricing strategy is an approach to pricing that a company uses, while a pricing model is the specific type of pricing structure used by the company. To arrive there, you should research the competition, understanding the customer needs and their willingness to pay, the value of the product, and then define a pricing model that fits the company’s goals best.

A pricing model on the other hand is the specific type of pricing structure used, such as tier-based, usage-based, subscription, pay-per-use, or freemium. We’ll go into more detail on those in a moment.

Overview of Pricing Strategies

Value-based Pricing

This is a pricing model based on the perceived value of the product to the customer. It is popular because it allows companies to charge customers based on the value the customer receives from the product instead of the costs associated with producing it.

This allows companies to charge higher prices for products that provide more value, which can help them generate more revenue.

Cost-plus Pricing

Cost-plus pricing is a pricing strategy in which the price of a product is determined by adding a markup to the cost of production. This strategy is used to ensure that a business will make a profit on the sale of a product.

Penetration Pricing

Next up we have penetration pricing. This is a pricing strategy in which prices are initially set low in order to quickly attract customers and gain market share. This strategy is used to increase sales volume and gain a foothold in the market.

Competitive Pricing

Competitive pricing is a pricing strategy in which prices are set in relation to the prices of competitors. This strategy is used by businesses to maintain a competitive edge by setting prices that are lower than the competition.

Premium Pricing

You have probably heard of this one – premium pricing. This is pricing strategy in which a product is priced higher than the competition in order to convey a sense of quality and exclusivity. This strategy is used to attract customers who are willing to pay a premium for the product.

Volume Pricing

Volume pricing is a pricing strategy in which businesses offer discounted prices for customers who purchase large quantities of a product or service. This strategy encourages customers to purchase in bulk, which can result in increased revenue for the business.

Dynamic Pricing

Dynamic pricing is a pricing strategy in which prices are adjusted in response to market conditions and customer demand. It allows businesses to adjust prices in real-time based on factors such as competitor prices, customer segmentation, and supply and demand.

Psychological Pricing

Psychological pricing is a pricing strategy in which prices are set at specific levels to evoke a certain response from customers. You can use this strategy to influence customer behavior and increase sales by making the product appear more attractive to customers.

Overview of Pricing Models for Software

In this section, we’ll introduce the most common pricing models for SaaS companies, their benefits as well as their downsides:

Tiered Pricing Models

This model involves charging customers based on the number of features or levels of access they need.

It allows customers to choose the features and levels of access they need, making it easier to offer customised packagesIt can be difficult to configure and can be confusing for customers

Usage-based Pricing Models

This model charges customers based on how much they use the service or product (e.g. transactions per month).

It allows customers to pay only for what they use, which can help businesses save on costsIt can be difficult to track usage and ensure that customers are only charged for what they’ve used. It’s also harder for businesses to forecast revenue as the usage can fluctuate

Freemium Pricing Models

This model gives customers access to the basic features of the service for free and then charges them for premium features.

It allows businesses to entice customers with free features, while still offering premium features that customers can pay for. It’s a great model for product-led growth because users can experience the value of the product first without payingIt can be difficult to convert free customers into paying customers and monetise them

Free Trial Pricing Models

This is a type of pricing model in which customers are given a predetermined amount of time to try out the software for free. This allows potential customers to test out the product before committing to a purchase.

It allows customers to get familiar with the product and its features before committing to a purchase, which increases the likelihood of a purchase if the product provides enough valueIt can hurt revenue if customers don’t get value out of the product and find it worth purchasing

Subscription Pricing Models

SaaS subscription pricing models charge customers a flat rate for a set period of time to access the product or service. Companies oftentimes offer a yearly subscription that comes with a discount compared to a monthly subscription in order to lock in the revenue for one year.

It is easy to set up and can help businesses to predict their revenueIt can be difficult to retain customers if the service does not provide enough value

A-La-Carte Pricing Model

This model charges customers for individual features or services they might need.

It allows customers to choose exactly what they need, and only pay for those features or servicesIt can be difficult to set up the pricing and for potential customers to understand how the pricing works as it can get confusing

How to Choose the Right Pricing Models for Software

Consider These Factors When Choosing

Now that we’ve introduced the different consumer and b2b pricing strategies and models, the question is how to monetise SaaS for your company. There are several factors to be considered when making this important decision.

Willingness to pay is one of the most important factors to consider when deciding on a pricing model. It is important to understand the value the customer will get from the product and how much they are willing to pay for it.

You should also understand how the pricing compares to the competition and how it will be received by your (potential) customers.

Other factors that play a role when deciding on the best pricing model fit include

  • The company’s goals
  • The target customer profile
  • Your customer’s needs
  • The competition’s offering
  • Product features you’re providing
  • The cost of developing and maintaining the product

Consider those factors when thinking about your pricing model and decide which one is the best fit for your company. It’s important to then review the pricing model regularly and make adjustments if necessary.

How to Measure Performance

The key metrics to track to see if a pricing model delivers on its promise include

  • Acquisition and conversion rate
  • Revenue
  • Customer retention
  • Customer churn
  • Customer lifetime value
  • Average revenue per user (ARPU)
  • Customer satisfaction or NPS

Make sure to check out our article on metrics to dive deeper into the most relevant growth KPIs for any business.

Avoid These Mistakes

Making wrong choices when it comes to pricing can really hurt a business. Therefore, make sure to avoid the following mistakes that we’ve seen happen:

  1. Not considering the customer’s needs
    • When choosing a SaaS pricing model, make sure to consider your customer’s needs, budget, and usage patterns
  2. Not understanding your competitive landscape
    • Make sure to research competitors and understand what types of pricing models they are offering
  3. Not testing and monitoring pricing
    • Make sure to test different pricing models and monitor how (potential) customers respond
  4. Not aligning pricing with value
    • Make sure to price your products and services based on the value they provide to customers
  5. Not optimising pricing over time
    • Make sure to regularly review your pricing and adjust it if needed to stay competitive.

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