The boom in software as a service (SaaS) offerings has created phenomenal opportunities. Software is more accessible, incremental costs to support a new user are minuscule, and maintenance and upgrades are simple to deploy.
Pricing a SaaS product often is a challenging strategic decision that can have a dramatic impact on a product’s user growth and profitability.
Typically, four pricing models are most frequently used in the SaaS market. You might be able to use a number of these models either separately or in combination to spur awesome growth in volume and profit for your company.
Subscriptions charge a recurring amount until cancelation. Google Apps, for example, charges businesses a monthly or yearly fee per user for services like email, integrated calendar, and storage. Subscriptions work well when the user becomes a long-term, frequent user. This way the price point doesn’t seem high, but is paid regularly so the revenue adds up over time. Given that subscriptions often allow for a high or unlimited level of usage, they are best used when the incremental cost of additional usage is small.
Volume based pricing allows the price to change with usage. Typically the per unit price declines as volume increases, although sometimes a free offer for low volume is available to encourage trials. The volume model is good for situations where switching costs are high or operating costs grow with usage. As an example, the email marketing system offered by MailChimp is easy to get started with a free service for accounts with less than 2,000 email addresses. However, once MailChimp starts charging users they typically have their email marketing setup with templates, segmented lists, and autoresponders established, making switching painful. As a user’s email list at MailChimp grows, so does the monthly cost, although the cost per email address declines. If operating costs grow with usage, volume based pricing helps companies keep large volume users profitable.
Freemium offerings allow customers to use the basic service for free and them pay for premium services. Companies like LinkedIn use the freemium model to encourage a volume of customers--which creates its network value--while still charging for advanced functionality to power networkers and recruiters. The freemium model usually is only suitable when a huge number of users are expected because the share of those who upgrade to the paid services is often small (4% is best practice). And, the value of the premium, paid for services needs to be high for a segment of customers, while at the same time the free services need to valuable enough to attract many customers.
Packages allow users to pay for groups of services based on their needs. QuickBooks, for example, has core accounting packages, plus an additional package to support payroll. It is suitable to offer packages when different customer segments have different needs. Packages work well when a customer’s needs develop overtime, encouraging them to upgrade when they can see the value.
Are there opportunities to increase profitability from the pricing of your SaaS products?
Pricing is one of the most powerful drivers of profitability. You might find ways to leverage pricing to grow usage, profit margin, and customer retention.
- Who your target customer segments are
- How each customer segment perceives the value you offer
- How you can create a win-win situation with pricing
I have led numerous pricing projects where profits increased 25% to >100%. Look for ways to unleash this growth at your company.