Choosing the Right SaaS Pricing Model

Selecting the right pricing strategy is one of the most critical decisions for any SaaS business. A well-designed pricing model aligns the value delivered to customers with revenue generation for the company, ensuring both customer satisfaction and business sustainability. It needs to be flexible enough to accommodate customer growth and clear enough to be easily understood.

Different SaaS products lend themselves to different pricing approaches. For instance, a team collaboration tool might naturally fit a per-user model, scaling as client teams grow. In contrast, a data processing platform might benefit from usage-based pricing tied to the volume of data handled. Many businesses use tiered pricing, offering packages designed for different customer segments.

This article explores most common SaaS pricing models to help you understand the options and identify potential strategies for your business.

Exploring Pricing Models

Flat-Rate Pricing

Concept: A single, fixed price for the entire product or service, regardless of usage volume or the number of users. Think of a simple monthly subscription.

Example: A fitness tracking app charges $10 per month for full access, whether the user logs workouts daily or weekly. Website builders like Wix or Squarespace often offer flat-rate plans for specific tiers of service.

Tracking: Relatively simple. Primarily involves tracking the number of active subscriptions and managing recurring payments. Basic accounting software or spreadsheets can suffice for startups.

Best For: Simple products with a uniform user base where usage doesn’t significantly impact costs. Subscription boxes or services with consistent value delivery.

Pros: Simple to understand and communicate; predictable revenue.

Cons: May not capture value from high-usage customers; potential users might find it expensive if they only need minimal features.

Usage-Based Pricing (Pay-As-You-Go)

Concept: Customers are charged based on their consumption of the service (e.g., data stored, API calls made, hours used). Costs scale directly with usage.

Example: Cloud infrastructure providers like AWS charge based on computing power, storage, and data transfer consumed. Communication platforms like Twilio bill based on the number of messages sent or minutes used.

Tracking: Requires robust metering systems to accurately monitor each customer’s consumption. Billing systems need to handle variable invoicing based on tracked usage. This can be complex to implement and manage.

Best For: Services where costs are directly tied to usage, like infrastructure, APIs, or data processing. Businesses whose customers have variable needs.

Pros: Fair to customers (pay for what you use); can capture full value from heavy users.

Cons: Less predictable revenue; can be complex to track and bill; customers may fear unpredictable costs.

Freemium Pricing

Concept: Offer a basic tier of the service for free indefinitely, with the option to upgrade to paid premium tiers for advanced features, higher limits, or better support.

Example: Project management tools like Trello offer a free version with core functionality, while paid plans unlock advanced features like integrations and automation. Cloud storage services like Dropbox offer a free starter amount of storage.

Tracking: Requires tracking both free and paid users, monitoring conversion rates from free to paid, and managing upgrades/downgrades. Analytics tools are essential to understand user behavior and conversion triggers.

Best For: Products with a potentially large user base where the free version can drive adoption and act as a marketing tool. Services where network effects are important (more users = more value).

Pros: Lowers barrier to entry; potential for rapid user acquisition; free users can become advocates.

Cons: High cost of supporting free users; conversion rates can be low; requires clear value differentiation between free and paid tiers.

Tiered Pricing

Concept: Offer multiple packages (tiers) at different price points, with each tier including a different set of features, usage limits, or levels of support.

Example: Google Drive offers tiers based on storage amount (Free, Basic, Standard, Premium). CRM platforms like HubSpot offer different tiers (Free, Starter, Professional, Enterprise) catering to different business sizes and needs.

Tracking: Need to manage subscriptions across different tiers, handle upgrades/downgrades, and track feature usage relevant to each tier. Billing systems must accommodate multiple price points and package definitions.

Best For: Products serving diverse customer segments with varying needs and budgets. Allows businesses to capture different levels of value.

Pros: Caters to a wide range of customers; clear upgrade paths; allows for value segmentation.

Cons: Can become confusing if too many tiers are offered; customers might feel forced into higher tiers for one needed feature.

Per-User Pricing

Concept: Price is based on the total number of individual users who have access to the software.

Example: Collaboration tools like Slack or project management software like Asana often charge a fixed fee per user per month. A team of 10 pays ten times the individual user price.

Tracking: Requires accurately counting the number of registered users per account. Billing adjusts as teams add or remove users. Relatively straightforward to manage with appropriate subscription management tools.

Best For: Products where value scales directly with the number of users, typically collaboration or productivity tools.

Pros: Simple to understand; revenue scales directly with adoption within a company.

Cons: Can become expensive for large teams; may discourage company-wide adoption if cost is a barrier; doesn’t account for varying usage levels among users.

Per-Active User Pricing

Concept: Similar to Per-User, but charges only for users who actively use the software within a given billing period (e.g., logged in, performed an action).

Example: An internal communication platform might charge only for employees who logged in and participated in chats during the month, rather than all employees with an account.

Tracking: More complex than standard per-user pricing. Requires systems to define and monitor “active usage” accurately for each user and link this to billing.

Best For: Situations where many users might need occasional access, but only a subset are frequently active. Can seem fairer to customers with variable user engagement.

Pros: Seen as fair by customers as they only pay for usage; can encourage wider initial adoption.

Cons: Less predictable revenue; complex to track activity accurately; definition of “active” can be debated.

Per-Feature Pricing

Concept: Customers start with a base plan and pay additional fees for access to specific features, modules, or add-ons.

Example: Email marketing software might offer a core platform, with add-on costs for advanced automation features, landing page builders, or premium integrations. Adobe Creative Cloud allows users to subscribe to individual apps or the full suite.

Tracking: Requires tracking which features or modules are enabled for each customer account and billing accordingly. Needs a flexible billing system that can handle varied feature combinations.

Best For: Products with distinct modules or features that offer significant value independently. Allows customers to tailor the product to their specific needs.

Pros: High degree of customization for customers; clear value proposition for each feature add-on.

Cons: Can become complex and potentially expensive if many features are needed; may feel like “nickel-and-diming”.

Custom/Enterprise Pricing

Concept: Pricing is negotiated individually for each large customer (enterprise), often involving custom packages, volume discounts, dedicated support, and specific Service Level Agreements (SLAs). Typically involves a sales process rather than self-serve signup.

Example: Large SaaS platforms like NetLicensing, Salesforce or Oracle often use custom pricing for enterprise clients whose needs (volume, features, support, security) go beyond standard tiers.

Tracking: Each contract is unique. Requires careful contract management and billing systems capable of handling bespoke pricing structures and terms.

Best For: Businesses targeting large organizations with complex requirements and significant budgets.

Pros: Maximum flexibility to meet specific customer needs; potential for very high contract values.

Cons: Lacks transparency; requires a dedicated sales team; long sales cycles; complex contract management.

Value-Based Pricing

Concept: Price is based on the perceived or measurable value (e.g., ROI, cost savings, revenue generated) the product delivers to the customer, rather than cost or competitor pricing.

Example: A marketing automation tool that demonstrably increases lead generation might charge based on the number of leads generated or link its fee to the resulting sales increase. Data analytics platforms like Tableau position their pricing around the value of insights gained.

Tracking: Difficult to implement perfectly. Requires understanding and ideally quantifying the value delivered to each customer segment, which can be subjective and hard to track consistently. Often involves aligning pricing tiers or metrics closely with key value drivers.

Best For: Products that deliver clear, measurable ROI or strategic value that significantly outweighs the cost. Differentiated products in niche markets.

Pros: Captures the highest possible value; aligns price directly with customer benefit.

Cons: Difficult to quantify value consistently; requires strong communication of value; can be hard for customers to predict costs.

Freemium-to-Usage-Based

Concept: A hybrid approach combining Freemium and Usage-Based models. Users get a certain amount of usage or basic features for free, but once they exceed those limits, they start paying based on consumption.

Example: A cloud function provider might offer a free tier of X thousand invocations per month, after which users pay per invocation. Design tools like Canva offer free access, but charge for premium assets or features, sometimes on a per-use basis or via subscription unlocking higher usage.

Tracking: Combines the challenges of both Freemium (tracking free vs. paid, conversion) and Usage-Based (metering consumption accurately) models. Requires sophisticated tracking and billing systems.

Best For: Services where basic usage can attract users, but costs scale significantly with consumption, making a pure free model unsustainable beyond a certain point.

Pros: Lowers barrier to entry; automatically monetizes users as they grow and find value.

Cons: Complexity in tracking and billing; potential for unexpected costs for users crossing the free threshold.

Outcome-Based Pricing

Concept: A form of value-based pricing where fees are directly tied to specific, measurable business outcomes achieved by the customer using the product (e.g., sales increase, cost reduction, candidates hired).

Example: An advertising platform might charge a percentage of the revenue generated from the ads it manages. A recruitment software might charge per successful hire made through the platform.

Tracking: Requires robust tracking of the agreed-upon outcomes and a clear, trusted attribution model linking the product’s use to those results. Needs strong partnership and data sharing with the client.

Best For: Services where the impact on specific business KPIs is direct, measurable, and easily attributable. Requires high customer trust.

Pros: Strongest alignment between vendor and customer success; highly attractive proposition if outcomes are guaranteed or likely.

Cons: Very complex to implement and track; requires agreement on metrics and attribution; risk is shifted significantly to the vendor.

Hybrid Pricing Models

Concept: Combines elements from two or more different pricing models to create a tailored strategy.

Example: Zoom offers free and tiered subscription plans (Tiered), but also has add-ons based on features like large meeting capacity or cloud storage (Per-Feature), and potentially usage elements for toll-free minutes (Usage-Based). Stripe combines per-transaction fees (Usage-Based) with optional subscriptions for premium features (Tiered/Per-Feature).

Tracking: Can be the most complex, as it requires systems capable of managing different billing logic (subscriptions, usage metering, feature entitlements) simultaneously for the same customer.

Best For: Businesses with diverse offerings or customer needs that cannot be adequately addressed by a single pricing structure. Allows for maximum flexibility.

Pros: Highly flexible; can cater precisely to different use cases and customer segments.

Cons: Can become very complex for both the business to manage and the customer to understand; requires sophisticated billing systems.

How to Choose the Right Pricing Model for Your Business?

There’s no single “best” pricing model; the optimal choice depends heavily on your specific product, target market, business goals, and operational capabilities. Consider these factors:

Customer Value Perception: How do your customers perceive value? Is it based on access, the number of users, the features they use, the volume they consume, or the results they achieve? Align your pricing model with this perceived value.
Business Goals: Are you prioritizing rapid user acquisition (Freemium might work), predictable revenue (Flat-Rate, Per-User, Tiered), or maximizing value capture from diverse users (Tiered, Usage-Based, Value-Based)?
Product Nature & Costs: Does your cost structure scale directly with usage (suggesting Usage-Based)? Is your product easily divisible into feature sets or tiers (suggesting Tiered or Per-Feature)?
Target Market: Are you selling to small businesses with tight budgets (simpler models might be better) or large enterprises needing custom solutions (Enterprise pricing)?
Operational Complexity: How sophisticated are your tracking and billing systems? Simpler models like Flat-Rate or Per-User are easier to manage initially than complex Usage-Based or Hybrid models.
Competitor Pricing: While you shouldn’t solely copy competitors, understanding their pricing models provides context for market expectations.
Willingness to Experiment: Pricing isn’t static. Be prepared to test different models or price points, gather customer feedback, and iterate based on performance data (conversion rates, churn, revenue growth).

Frequently Asked Questions

How do I determine the best pricing model for my SaaS product?

Analyze your product’s value proposition, target customer needs, cost structure, and business goals. Consider how customers derive value (per- user, usage, features, outcomes) and choose a model that aligns best. Often, analyzing competitor pricing and gathering early customer feedback is helpful.

Should I offer multiple pricing models or stick to one?

Sticking to one or a clearly tiered model is often simpler for customers to understand. Offering multiple distinct types of models (e.g., both subscription and pay-per-use) can sometimes work but risks confusing customers. Hybrid models intentionally combine elements, which can be effective if communicated clearly. Start simple and add complexity only if necessary.

Which pricing models scale best as my SaaS business grows?

Usage-Based, Tiered, and Per-User/Per-Active User models generally scale well because revenue naturally increases as customer usage or team size grows. Flat-rate scales poorly if value/usage increases significantly without price changes. Freemium scales user acquisition but requires effective conversion to paid plans for revenue scaling.

How do I ensure pricing aligns with long-term profitability goals?

Regularly review your pricing strategy against your costs, market position, and customer value perception. Track key metrics like Customer Acquisition Cost (CAC), Customer Lifetime Value (CLTV), Average Revenue Per User (ARPU), churn rate, and Monthly Recurring Revenue (MRR). Use this data to make informed adjustments to your pricing model and levels over time. Ensure your chosen model allows for price increases or upselling as your product delivers more value.

Can the NetLicensing team help me choose the right SaaS pricing model?

Yes. The NetLicensing team offers expert consultation to help you evaluate and select the best pricing strategy for your SaaS business. Based on your product, customer segments, and growth goals, we can guide you through model options like subscription, usage-based, tiered, freemium, or hybrid. Get tailored advice on how to structure, test, and optimize pricing to support both scalability and profitability.

Conclusion

Selecting and implementing a SaaS Pricing Model is a strategic undertaking. Each model — from simple Flat-Rate to complex Outcome-Based or Hybrid approaches — has its own strengths, weaknesses, and operational requirements. Understanding these options is the first step. The key is to choose a model that reflects the value your product delivers, resonates with your target customers, and supports your business objectives. Effectively tracking usage, managing subscriptions, and ensuring accurate billing are crucial, especially as your business scales. While challenging, investing in the right pricing strategy and the systems to support it is fundamental to long-term SaaS success.

Image Credits: NetLicensing