Key points in SAAS pricing ...

Today we are talking about the SAAS pricing or revenue models. My objective is to explain what the revenue models are. It's targeted towards business leaders as well as for anyone and everyone who understands the SAAS space in a deeper manner. 

My thought process is aligned mostly towards enterprise SAAS as that is my area of expertise. Some of the points in here also apply to other models such as one time development, on-premise or PLG in some cases. 

Some key pointers - 

• Most of the SAAS partners focus on long term contracts with customers as it helps them build predictability and serve the customers better. 

• For Buyers, long term contracts such as three years plus help in negotiating for a better price from the SAAS partners. 

• Some of the consumer SAAS products also ask for yearly commitment or give attractive prices for annual plans … 👍 

The three most common pricing models are freemium to premium, subscription based and usage based. Let's look at all these one by one. 

1 - Freemium to Premium - 

In this case the software is given to the users for free or some of the functionality is given for free. The users use the software for free for some of the use cases. Advanced use cases or functionality is usually charged. However, the free offering builds the brand and loyal customer base. It also helps in usage of the product which produces data which can be used for improving the product. Because for consumer products to have network effects, a critical mass is needed which is usually in millions of users … 🎉 

And a paid user base is needed to pay the bills, keep the lights on and fund the future innovation. So this model is called freemium to premium. It is expected that 4-20% of the free users will eventually convert to paid users. Freemium to premium is available for both b2c as well as b2b products. 

Examples are YouTube and YouTube family/ premium plans. 

B2B examples are Zoom and slack. 

2 - Subscription and module based pricing - 

Subscription pricing means the company pays the software partner per month or per year. This is very similar to that in a way we pay our utility bills assuming the utility is fixed. 

Subscription can also be based on the modules the customer wants to use. As an example, lets say a Bank purchases software and uses it only for Loans which is a module. If additional modules such as Deposits, Wealth Management, Equity are needed then those will be charged additionally … 💯 

Most of the software partners allow customers to enable and disable the modules. In subscription based pricing licenses are also considered. For example, 100 bank employees will use the software. If 120 bank employees use the software then the price will be higher. The number of modules selected, number of users/ licenses and some other variables decide the final price which customer pays to the software partner. 

Example - Most of the sales and marketing platforms (Hubspot) are sold in this way. 

3 - Usage based pricing - 

You only pay what you use. Some of the companies charge a lower ceiling which is mandatory and after that usage based pricing kicks in. Most of the Ai models are priced in this way. They give specific tokens in the starting package and then based on the usage of tokens additional money is charged. If you do not use it, you will only pay the minimum charge. 

Most of the API companies also charge based on these which is the number of API calls made either per month or per year on a rolling basis. 

The minimum charge can and may also include the implementation/ services/ onboarding fee if applicable … 🚢  

Usage based pricing is very helpful for those customers who have seasonal demands. So in season months higher pricing will be there as the business will be more. One of the benefits of the usage based pricing is that you can always stop using the product if your usage is exceeding. It is easier to scale up or scale down the usage using this method. 

So, there you go. 3 very commonly used pricing models … 🍓 

Pipeline, negotiation, quarter/ annual closing, state of the industry, macro factors, product maturity, product perception in the market, etc. also matter in pricing. We will talk about these in the coming posts. 

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Swagat Irsale is a Growth and Scale Advocate. He works with start ups and scale ups and helps them grow revenue and build enterprise products which users use.

You can connect with him on Linkedin.

https://www.groadv.com/post/grow-revenue-the-journey-zero-to-one-billion-swagat-irsale

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Can you guess what country this is? It is very interesting how tea is priced in different countries.