It’s a brave new world for pricing software-as-a-service products. Gone are the days of simply setting a per-seat fee and launching. How can you choose the best SaaS pricing model for your product?

In this SaaS pricing series I review lessons I’ve learned from helping set pricing for several successful SaaS products. In my first article I reviewed why pricing based on customer value is so important.

This second article reviews why SaaS gives product and marketing managers unprecedented flexibility to choose unique pricing models. Models that can differentiate your product in the marketplace. Models that ideally align with your customers’ goals.

One of the exciting advantages of SaaS is that you can think differently about pricing models. Unlike traditional software, customers licensing SaaS products pay for your product on a recurring basis. Your product is no longer tied to a one-time purchase. And because the product is centrally hosted, you have additional flexibility for offering your product in unique packages.

SaaS Pricing Models: a Short List

SaaS gives you the ability to consider revenue models that weren’t previously possible. Here’s a short (and by no means exhaustive) list of SaaS pricing models used today. Many products use a combination of these models:

  • Per-user (many SaaS products)
  • Per-user with free participants (GoToMeeting, ProductPlan)
  • Storage (Dropbox)
  • Features (plans based on feature tiers)
  • Project (Basecamp)
  • Freemium (LinkedIn)
  • Per item/contact (AppFolio, Hubspot)
  • Per Node/Server (Hadoop)
  • Per Visitor/Traffic (AdRoll)
  • Processor time/Data transferred (Amazon Web Services)
  • Open Source (free with paid services)
  • Advertising (Facebook)
  • Broker fee (AirBnB)

Feel free to add to this list in comments. My point is that with so many options, you now have the ability to discover a pricing model that aligns with your customers’ goals.

Success-Based SaaS Pricing Model Example

For AppFolio’s property-management software, we developed a unique pricing model based on the number of rental units managed by a property manager. Because we charged a flat $1 per rental unit per month, the pricing was simple and easy to understand.

This SaaS pricing model resonated with customers because it aligned with their business goals. They paid more for our product only if they grew their business by adding rental units to their portfolio. If they were more successful, we were more successful.

Don’t be Tempted by Competitive Pricing

When pricing a new product, there is a temptation to set your pricing relative to the competition. It’s common for new products to price using the same model as competitors, but slightly lower. Sure, you can price the same way as your competitors, and perhaps that’s what your customers expect.

But with SaaS, there are so many ways to price the product that you have the ability to stand out in the market by thinking differently. Capitalize on the approaches that your competitors haven’t considered. In my previous article I described how we launched GoToMeeting with innovative pricing that disrupted the competitors.

Keep it Simple

Don’t overly-complicate pricing. With so much flexibility in SaaS pricing model options, there is a temptation to offer various flavors and packages.

Sometimes there are legitimate reasons for doing so. For example, it’s common to have three packages based on features. Studies show that this approach anchors customers, and can be an effective technique for driving customers to your best-performing package. That’s fine if this is your goal.

However, creating an overly complicated pricing scheme has the potential to confuse customers and create a nightmare for your finance team. Keeping it simple reduces headaches and may even provide more revenue over the long term.

For example, at ProductPlan (product roadmap software), we saw that products in our space had complicated licensing options. Many required a paid license for every software user. Several offered complicated pricing tiers based on packages.

We took a different approach to simplify pricing. We charged only for editors of roadmap data and offered free licenses to other collaborators. Rather than offering complicated pricing tiers based on features, we offered unlimited use of all features for one price.

Because the product managers want to widely distribute the product roadmap to stakeholders, this SaaS pricing model benefits the customer. It’s aligned with their goals. In addition, this model gives our product more exposure within the organization, so ultimately we sell more licenses when other departments ask to use the software.

In the next article I’ll review several tips for successful pricing, including estimating lifetime value.