If your company is contemplating implementing pricing modifications in the upcoming year, it is important to note that you are not alone in this endeavor. A significant proportion of SaaS companies are planning to adjust their prices in 2023 due to various macroeconomic factors, such as inflation and economic fluctuations resulting in workforce reductions within the technology industry. Additionally, budget constraints may be compelling B2B SaaS enterprises to seek out the most cost-effective solutions for their now downsized teams.
Prior to embarking on a pricing update in 2023, it is crucial to gain a comprehensive understanding of the diverse SaaS pricing models available and the advantages associated with each. This knowledge will enable you to strike an optimal balance between maximizing revenue and delivering value to your customers.
Among the array of monetization models, it is possible that one or a combination of several of these strategies could assist your team in generating revenue in 2023 and beyond.
1. Tiered Pricing
The tiered pricing model provides customers with a range of features based on specific product packages. These packages may begin with a basic or free option and progress to advanced, professional, and custom-made enterprise solutions, each with a higher price point and increased functionality. The value of product features is only truly valuable to customers if they meet their individual needs. Small businesses have different software-as-a-service (SaaS) needs compared to larger companies. By offering multiple tiered options, every customer within your target market can access the best pricing options that suit their requirements. This approach also allows customers to upgrade as their needs evolve and they become more familiar with your product. The tiered approach enables your customer base to select the level that aligns with each stage of their business. The extensive list of features and higher price of the enterprise option may not be suitable for startups. Therefore, dividing your product into tiers allows you to provide the maximum value for each buyer persona you are targeting. We have found that a tiered pricing structure is highly effective for UserVoice. This approach allows us to categorize our product features into sets that are most likely to offer long-term value to customers with varying customer feedback management needs.
2. Flat-Rate Pricing
Flat-rate products are considered to be the most straightforward to promote as they do not require tailored messaging to describe various offerings.
In a flat-rate pricing strategy, a single SaaS product is offered at a fixed price. There are no additional features or pricing tiers that complicate the decision-making process for customers. They simply decide whether or not to commit to an annual or monthly fee for the software license, granting them access to the complete suite of tools.
However, the drawback of this pricing plan is the lack of customization options for customers. Depending on the requirements of the target market, competitors that offer flexible options with adaptable (and often lower) pricing may gain an advantage.
The inflexibility of a flat-rate approach may not be suitable for complex products, but it could be a viable option for simple products without many additional features.
3. Feature-Based Pricing
Feature-based product pricing is most suitable for teams tasked with managing products that possess numerous unrelated features or a multitude of specific parts that may not be necessary for every customer. This pricing strategy is particularly advantageous for vertical SaaS products, although horizontal SaaS teams can still derive benefits from offering customization options to their clients.
Per-feature pricing entails establishing a base rate for the product and incorporating additional features that customers can purchase on an ad hoc basis. This approach empowers customers to truly personalize the product, tailoring the combination of features to align with their specific business requirements.
The feature pricing approach can streamline the process of introducing new features. Whenever a new feature is added to the product, it can simply be included in the list of available add-ons, eliminating the need to reassess the overall pricing strategy.
However, implementing this approach can also complicate the role of a product manager, as each customer essentially possesses their own unique version of the product. Consequently, the product manager must address customer feedback and develop updates that optimize the experience for each individual customer.
If a feature-based pricing model is chosen, it is crucial to ensure that the necessary resources are available to handle the increased volume of inquiries, updates, and feedback that will be received.
4. Active User Pricing
Pricing that is determined by the number of active users can provide cost-saving benefits to certain customers, particularly for teams that are uncertain about their required number of seats. The payment is typically made on a monthly basis, allowing the price to adjust accordingly as the number of active users fluctuates.
Through active user pricing, your customers have the ability to manage costs by adding or removing users. Additionally, as they become more familiar with your product and its features, adding a user becomes a simple and flexible process. Teams have the freedom to enroll as many users as they desire when purchasing the product, but they will only be charged for those who actively utilize it. This ensures that no funds are wasted on unused seats. The scaling process occurs naturally.
This pricing model shares similarities with user-based or per-seat pricing, but with one crucial distinction: it considers the number of users who are actively logged in and utilizing the product throughout the month, rather than charging based on a predetermined number of users or seats.
It is important to note that this model may not be suitable for products sold on annual plans, as it is specifically designed to accommodate usage that varies on a monthly basis. Furthermore, active user pricing options can present challenges in maintaining a predictable monthly recurring revenue (MRR), as the costs for your customers may fluctuate unexpectedly.
5. Usage-based Pricing
Usage-based pricing is a pricing strategy that enables companies to maintain a low cost by restricting their team’s activity. This approach establishes rates based on the number of logins a customer is permitted with a product, also known as pay-as-you-go pricing. Customers can secure a low price, but their access is limited by the number of team members logged in at any given time. This level of control is advantageous for businesses, such as Slack and Elastic, that aim to offer competitive pricing while limiting access to maintain high net profits. Usage-based pricing can result in highly satisfied customers and a loyal customer base, as lower pricing often leads to increased customer satisfaction and advocacy.
However, usage-based pricing may not be suitable for every SaaS offering. At UserVoice, we have previously attempted to implement usage-based pricing, but the metric was not ideal. While usage-based pricing theoretically links the price customers pay directly to the value of the product, in practice, customers may focus on their ability to access the system or log in. In other words, if they cannot log in, they may not perceive the product as useful. In such cases, it may be more effective to emphasize the value provided by the product, which can be achieved through feature-based pricing.
6. Freemium Pricing
The freemium pricing option holds great appeal for B2B purchasers who wish to evaluate your product without the need for direct sales interaction or scheduling a demonstration. An example of a company that employs freemium pricing is HubSpot.
The freemium pricing model provides users with the opportunity to sign up for a limited version of the product at no cost, with the expectation that they will eventually choose to purchase a subscription for the full range of features. This business model is increasingly prevalent in the software-as-a-service (SaaS) industry, as it allows customers to test your product with minimal commitment before making a purchasing decision.
Users can easily sign up for a trial period through a streamlined and low-contact process. This allows them to experience your product firsthand before making a purchase, while also mitigating the potential drawbacks associated with long-term free plans, such as customers remaining on the free plan indefinitely.
Despite the advantages of this approach in terms of reducing barriers to entry for the average customer, it is important to acknowledge that a freemium strategy can have its downsides. Providing free access to your product can place a strain on resources without a guaranteed return on investment. Additionally, it may result in dissatisfied customers if the freemium plan does not grant them access to essential company resources, such as bug fixes, technical assistance, and customer support.
To strike a balance, offering a free trial for the complete suite of tools, as we do with UserVoice Discovery, can serve as a viable middle-ground option.
7. Monthly or Quarterly vs. Annual Pricing
The Impact of Billing Frequency on Customer Retention: A Comparison of Monthly/Quarterly and Annual Pricing Plans
The frequency of billing has a significant impact on customer churn and retention, and as such, it is an important consideration for businesses when determining their pricing strategy. Typically, customers who are billed on a monthly or quarterly basis exhibit a higher churn rate, while those on an annual billing plan provide businesses with upfront revenue and healthy profit margins, while also promoting customer retention.
According to ProfitWell, annual plans are the most advantageous pricing option. However, it is often beneficial to offer customers the option of a shorter billing period, such as a month-to-month plan, to allow them to try the product for a few months before making a final decision. When presenting the various pricing options, it is recommended to showcase any discounts in tangible dollar amounts, rather than just as a percentage.
At UserVoice, we have implemented quarterly and annual billing plans, which are easily comparable through a toggle on our pricing page. This allows prospective customers to quickly assess the savings associated with each option.
Reassess and Update Your SAAS Pricing Strategy Regularly
Even after the selection of the pricing structure for the year 2023, it is imperative to periodically reassess your strategy. The act of undercharging can have detrimental effects on your business, thus it is crucial to regularly evaluate your price points to ensure that potential revenue is not missed out on.
ProfitWell suggests updating your pricing every three months, as this process has been shown to result in an average revenue per user (ARPU) that is 2-4 times higher.
As the marketplace undergoes shifts and your goals evolve, it may be necessary to periodically alter your tactics. At UserVoice, we advocate for periodic change, as our products aid in tracking customer feedback and updating your product to meet their needs. We understand the transformative power of positive change!
