Let’s first walkthrough the different SAAS pricing models that are the most popular right now.
Pricing models
Flat-Rate Pricing: This is the simplest pricing model. It's a single, flat rate for a single product offering, with no tiers, add-ons, or anything else to complicate the matter. While this pricing model is the easiest to understand, it might not be ideal for every SaaS business, especially those that offer a range of services or whose customers have very different needs and usage levels.
Cons: With flat-rate pricing you may lose customers that would pay less for your software. There is also no way to upsell on your existing customers because you only have one possible tier. Meaning each customers bring the same amount of % when you can resell to existing customers.
Usage-Based Pricing: With this model, customers pay based on their usage levels of the product. This is common in industries like cloud services where the amount of server space or bandwidth used can vary greatly among customers. The advantage of usage-based pricing is that customers feel they're paying for what they're actually using, but it can also make costs unpredictable, which some customers may not like.
Tiered Pricing: This is one of the most common pricing models in SaaS. It offers different levels of service or packages at varying price points. The lowest tier usually offers the most basic functionality, while each higher-priced tier adds more features or services. This can cater to a wide range of customer needs and budget points.
Per-User Pricing: Also known as "per-seat" pricing, this model charges customers based on the number of users they have using the software. While it's a simple model to understand, it may discourage adoption across an organization if they are trying to limit the number of seats to save costs.
Per-User pricing can seem to be the way to scale but it really depends on how your customers uses the platform. For example, if only one or two people use the platform, often times people with do password sharing to reduce their costs or because customers don’t expect to pay for additional users which seems like the pricing is unfair. On a emotional level, customers who feel like the pricing is unfair might bypass the per-user pricing.
Freemium: Under this model, a basic version of the service is available for free, while more advanced features or add-ons come at a cost. The idea is to get as many users hooked on the free version as possible and then convert some of them to the paid version.
This may be an excellent strategy because it might become possible to upsell these kind of customers into paid tiered.
Feature-Based Pricing: In this model, customers are charged based on the number or type of features they need. For example, a project management tool might charge more for users who need Gantt chart capabilities and less for those who just need a simple task list.
Hybrid Model: Some SaaS companies use a combination of the above pricing models. For example, a company might use a tiered pricing structure but also offer add-ons for an additional fee, or it might have a base per-user price but also charge extra based on usage.
The 10-5-20 rule
I first came by this rule by Dan Martell from SAASAcademy which he briefly explains a way to find your saas price starting point.
The 10 rule: Your software should bring 10x value. For example, if you sell a monthly subscription for 100$, your software should bring a ROI of 1000$/month. This rule is self-explantory and customers may find it easy to discover the value into your software if this is explicitly explained.
The 5 rule: Each demo increase your price by 5%. Keep going until you feel customers seem you are overpriced. This will give you the opportunity of testing your price limits.
The 20 rule: You should have about 20% of customer pushback when you present pricing in a demo. If 80% of customers buy-in and 20% refuse because of pricing, you might be at a good price ratio.
Price the the customer, not the product. Each customer is willing to pay differently so you should test your market to find the right price your customer is willing to pay.
Fencing vs Laddering
Fencing
Fencing is the act of clearly separating markets into different price schemes. For example, having a different pricing pages for corporate and institutions. Fencing can be really useful when your software works with different markets.
Peergrade pricing page
For example, Peergrade will have different pricing pages for corporation, instructor and insitutions which can be easier for them to price each kind of user and market.
Laddering
Laddering arranging the pricing tiers in a sequence that solves one problem at a time to allow customer to expand their use as they move from one job to another.
Fence if obviously possible, always ladder. Laddering will give the opportunity to customers to grow into your product and you will be able to upsell on your current customers.
Establish your customer value chain
Your pricing model is an interface between product and customers. It is an interface because it will affect how your customers will use your product and discover the value of the product.
For example, if to see the full value of your software the value chain is a long process but you establish pricing on the number of users, then a company might only buy your software for one user and that user might never see the value in your software resulting in a churn.
In this case for example, you might want many users to use your platform so that they can test out more of your product and place pricing instead on the number of models. This way, many users might test your platform, reach the number of model limit, and you are confident that if they reach the model limit they probably have already seen the full value of the software and will pay.
For this reason and in this case example, it is preferable to place your pricing limits on deployed AI models instead.
By mapping on a chart every of your feature by expection-to-pay for the customer to the value they bring. You will find some features where expectation to pay is high and value is high and so these are the kind of features you want to play pricing on since expectation to pay higher is possible.
Key takeaways
Don't price the product, price the customer
Fence if obviously possible, always ladder. Laddering will give the opportunity to customers to grow into your product.