Pricing is the amount you charge based on the packaging.
Packaging is the way a company makes their products available to different people at different prices. Since we’re talking about SaaS, it’s usually broken down by some sort of time period (monthly/annually) by usage (API calls, features, revenue, data storage, etc.) and by users (number of seats, user permissions, sharing settings, etc.). Packaging is often shown in “plans” and usually in a tiered approach, where more of the product is available at a higher price.
Know that pricing, packaging, and plans are often used interchangeably, but know that there are differences. All you need to know is: pricing is specific to how a product is packaged, which is marketed through a plan.
Picking the right model for your pricing and packaging plans is paramount, and yes, it’s marketing.
Before we get into the specific strategies used for pricing and packaging plans, it’s important to first understand how you are going to decide on which would be best for your business.
And this goes back to the customer.
Despite what many think, what you price and package your product for is completely subjective. In SaaS, infrastructure and operation costs will be minimal compared to traditional models where you have to account for Cost of Goods Sold, which would comprise of materials used, labor, energy costs, etc.
Since essentially all SaaS today is cloud-based and ready to scale, pricing and packaging should not, at all, be based on how much it costs you to run and operate the products.
The pricing and packaging is also independent of what people think is “expensive” and “inexpensive.” Unlike with consumer goods and services, SaaS products are relatively inelastic where large changes in price cause small changes in demand. In other words, increasing your price $10, $100, or even $10,000 may not have any negative effects on your revenue.
SaaS buyers are not concerned about how much your product is or how much it costs to you to run, they’re concerned about how much value it benefits them and their business.
Now, keep in mind who your customer is and your target market.
How you price and package your products is going to be completely dependent on:
With that said, all the different combinations of customers and the ways you sell to them falls into two different sales models, the low-touch sales model and the high-touch sales model.
In a low-touch sales model your product is relatively self-serve online, requiring little human interaction. Your customers don’t want to be called or pitched to in person, they prefer interaction via email or your company's website.
In a high-touch sales model, your product requires someone to help explain, show, and prove the value of the product. Your customers don’t want to email back and forth or scroll through all your web pages, they just want hop on a video call or have you come into their office to demo it.
Some companies will have a mixture of both models, serving both low-touch products and high-touch products, but in general, a company will stick to one or the other.
Pricing in a low-touch sales model will reach a ceiling eventually. There comes a certain price at which your customer won’t feel comfortable purchasing it without talking to someone first.
Pricing in a high-touch sales model will have a floor and not be worth your time or man-power at a certain point.
The price point at which it switches from a low-touch sales model to a high-touch sales model usually comes in the mid-hundreds of dollars, like $299/month for example. However, it completely depends on your industry and customer.
They may be accustomed to purchasing four-figure products with no human interaction, while other customers in other industries may not be comfortable purchasing anything over $100/month without talking to someone first.
It’s all about your customers. If you’re selling into ecommerce stores doing millions in revenue, they’re going to want to talk to someone about the product that can make them hundreds of thousands of dollars. If you’re selling into a digital marketer at a small boutique agency, he’s going to want to just do everything online himself.
The important part is that you’re selling to your customers how THEY want to be sold to.
Here’s a list of the most common and effective pricing and packaging strategies for SaaS companies to employ. Remember, exact prices and packaging will depend on whether you are a low-touch or high-touch sales model.
The flat rate model is the simplest way to sell a product. In flat rate, there is only one package with one price. There may be a variance of price based on monthly or annual billing. In flat rate, the user gets access to all features and has a set policy on how many users there are on the account. Many flat rate plans are paired with a free trial.
The pros of using a flat rate model are that it will be much easier to communicate, and in turn, much easier to sell. Marketing one plan is a lot simpler and faster than marketing 3-4 plans. With one plan, you can focus everything you do on the one plan.
Using a flat rate model will make predicting revenue growth, churn, and lifetime value much easier. With every additional plan and rate, forecasting becomes twice as complex.
You don’t have to worry about which plan to talk about and when and for who. Communicating one plan to a customer will be a lot easier than explaining the differences between multiple plans.
The cons of using a flat rate model are that some customers may perceive your product as too expensive or too inexpensive to be a good fit for them. What I mean by this is simply that with a single rate and plan, it may be difficult to attract users who have very different opinions about price. Customers may tell you that they really don’t need certain features or parts of the plan and that they would buy it if you stripped away certain parts and offered it at a lower price.
It’s also difficult to extract value from all the different kinds of customers on the plan. Some customers could generate a lot more revenue for you if you changed the pricing on certain seemingly insignificant variables. Getting that price right the first time can be tough. You have to test and iterate fast to nail down that magic number (price).
The usage based model is essentially a “pay as you go” model where a customer will be charged more the more they use the product. Some common ways SaaS businesses use usage based pricing is by charging per action (like per post, email, API call, etc), charging a percentage of revenue made, charging a percentage of a transaction processed, or charging for storage used.
The pros of the usage based model is that the pricing scales with the customer. As the customer grows or uses the product more, the price increases. This is also a good way to attract multiple types of customers who may greatly vary in their price sensitivity. A user who doesn’t want to use the product much only gets charged for what they use, and a superuser generates a lot of revenue for you.
The cons of the usage based model are that it may disconnect the value from the product. Maybe a small customer makes a large amount of API calls and a large customer makes a small amount of API calls.
Customers may also be discouraged from using the product since they will be charged more for using it more. Customers may adopt a frugal mindset and not use the product as much as they would with a different pricing model. It also makes it much harder to predict revenue in the future since you have no control over your customers’ usage of the product. You may experience slumps or erratic spikes in revenue that make managing your cash flow difficult.
The tier based model essentially creates different versions of the product to use at different price points. This is the most common pricing model used in SaaS today. Usually, companies will create 2-4 tiers for customers to choose from.
The pros of the tiered based model is that you can appeal to multiple types of customers without basing the price on usage. Multiple tiers allow you to appeal to multiple types of customers, thus expanding your market and increasing revenue potential. Each tier can tailor to a different kind of buyer.
Tiers also have a unique advantage to be able to upsell to customers. A company could attract many customers with the lowest tier, and then work to graduate them and upset them to a higher tier.
The cons of the tiered based model is that the tiers could potentially be confusing to customers. Tiers would have to be very carefully constructed and communicated to avoid as much confusion as possible.
I would highly discourage anyone from creating more than four tiers, as this creates too much complexity for the customer to choose from. Every tier increases the complexity of the decision for the customer, so more tiers mean more complexity for the customer, which creates a harder decision for the customer.
If you do use a tier based model, it’s very important to get the names for each tier right. It needs to be in alignment with how the tiers are created. If the tiers are largely separated by the number of users, you’ll want to name the tiers according to user size.
For example: Individual (one user), Team (10 users), Enterprise (10-100 users). If your tiers are based on a number of factors, you’ll want to name it based on the type of buyer that would best that tier. For example: Hobbyist (lowest tier), Professional (middle tier), Superuser (highest tier).
The user based model is also a very popular choice for SaaS companies due to its simplicity. In a user based model, companies charge “per seat.” In other words, if you want to add a colleague to your account, the price increases. Every extra user on the account is charged.
The pros of the user based model is that it is very simple. Similar to the flat rate model, the user based model usually gives customers full access to the product. It’s very easy for customers to calculate what they would pay depending on how many people they want to add to the account.
It’s also advantageous because the revenue will scale along with the adoption of the product in the company. As the company grows or the use of the product increases across the company, revenue grows with it.
The cons of the user based model is that it may limit the adoption of the product. Similar to the usage based model, customers may be discouraged to further use and adopt the product because it will cost them more.
One of the other major cons is that it may not reflect the value of the product. If you are just granting access to the product, users will probably just use a shared login. The amount of users needs to be tightly aligned with the value and actual use of the product. Some customers may be off-put by charging per user because they don’t want to have to worry about how many seats to buy the team.
The feature based model is essentially a specific version of a tier based model which incentivizes users to unlock more features in the product by paying more. For example, maybe the base version of the product only has 4 features, and you can upgrade to get the full 20 features at a higher cost.
The pros of the feature based featured based model is that there is a very clear incentive for the customer. Want more features? Pay more money. Customers know exactly what they’re paying for. This also allows SaaS companies to get pretty strategic about which features they include or exclude from different versions of the product. You can put your favorite, or most valuable, features in the top-tier version of the product to clearly incentivize one version over the other.
The cons of the feature based model are that it can be very difficult to select the winning combination of features. There is no guess-work here, everything needs to be extremely informed by the data. But there’s also another underlying flaw with the feature based model and that is that it doesn’t serve the customer very well.
It’s a little cunning for a company to tease a customer with features they want in the more expensive versions. Many customers are off-put by previous experiences with feature based models and still have a bad taste in their mouth when they see yours.
The freemium model is also a tier based model in disguise, but with one major difference: offering one of the tiers completely for free, forever. Freemium, or often seen as the “Free Forever” plan, is offering a version of the product for free with the ability to upgrade into paid plans for additional features, users, usage, etc.
The pros of the freemium model is that it makes it incredibly easy for your customers to experience the product. Even better than a free trial, the freemium model makes a version of the product free so as to attract a mass amount of users and then work to upgrade them into a paid plan.
You will have a huge advantage in marketing when you can use a phrase like “Get started right now, completely free forever.” The freemium model is a great way to gain mass adoption and even some vitality.
The cons of the freemium model is that it may actually cost you a decent amount of money to support free users. While you shouldn’t price your product based on how much it costs you, you should consider it, especially when providing a free plan.
There will be a hurdle that you have to push your customers through which is to give a compelling answer to their question, “why should I pay for your product if I’m using it for free right now?” Freemium also makes it very easy and common for customers to churn. If it’s free, there’s no cost to stop using the product.
Freemium may also devalue your product and anchor your customers to always look at your products as subpar to other paid competitors.
The enterprise model is usually hidden from the public behind a “Contact Us” or “Request A Demo” CTA and could be a custom combination of features, services, users, and usage. Some companies will make this their highest tier on their pricing and plans page.
The pros of the enterprise model are that you can milk every ounce of value from your customers and create a plan that is very equally advantageous for both you and your customer.
Hiding the pricing structure behind a form forces only the most interested buyers in getting in contact with you. Especially for high-touch sales models that need human interaction, getting someone’s contact information is a huge asset. Not only that, but when someone requests a quote, a demo, or contacts you about pricing, you can easily set up a meeting and get valuable face time with them.
The cons of the enterprise model are that you are going to turn away a lot of customers just because they can’t see your pricing. Many buyers have a bad taste in their mouth with the enterprise sales model because of a bad experience or being pitched too many times.
This model also doesn’t do very many favors for you as a marketer because your only CTA is “request a demo” which is not very appealing.
Any one of these models can mixed and matched for a custom combination.
The pros of the hybrid approach is that you can differentiate your pricing and plans from your competitors and offer a new package that may serve your customers better.
The cons of the hybrid approach is that it can very easily get too complicated. Mixing features, users, usage, tiers, freemium, and enterprise models will make it too complex for customers to understand how to pick the right package for themselves.
Here are some additional strategies to employ for certain models.
Any package can be given a free trial in which the user gets access to the product without being billed for a certain amount of time.
Many companies wisely offer a discounted rate if a user chooses annual billing. Any package can be augmented with an annual billing option.
Price is a relative concept, and when we assess the price of something, we use a reference point to work out its value. If we were buying a car, we'd compare its price to the price of other cars on the lot, or on eBay; an item of jewelry, and we'd turn to similar pieces in the jewelry shop next door. You can even use the price of your other tiers as a reference point to help communicate value.
For example, you could use one of your tiers to act as a reference point of value. Maybe someone is prepared to pay $50/month for a product like yours, and then they see your product tiers and notice that the highest tier is $1000/month, the middle tier is $500/month, and the lowest tier is $100/month. $100/month doesn’t look like so much compared to $500-1000/month.
Similarly, you could tier your products with $100/month as the highest, $25/month in the middle, and $10/month at the bottom. Upgrading to $25/month won’t seem like very much more money when comparing a $15 increase to a $90 increase.
Simple, but effective as a best practice — end every price in a round 9. Avoid the use of cents in SaaS. Ending in the number 9 is still an effective strategy for boosting sales and making the product seem less expensive than it is.
No, a customer probably won’t choose your product over a competitors just because yours is priced $19 and there’s is priced $20, but it’s subtle things like this that will add up and compound for a better long-term effect.
The center stage effect refers to the psychological preference people have for the middle item in a selection of three choices. The main theory behind the preference is that "Consumers believe that options placed in the center of a simultaneously presented array are the most popular".
Many companies structure their packages so that the middle tier is the most attractive paid plan, and then use the center stage effect to make it look the most popular plan, even ahead of a free version.
If you offer three pricing packages, use visual callouts to highlight the most popular package, or alternatively, to highlight the package you'd like to be most popular.
This is a little used but very effective strategy to incentivize your customers to upgrade to annual billing for the same tier or an upgraded tier. At the end of the year, usually December or close to the end of your customers’ fiscal year, make an offer to upgrade to annual billing so that they can write off the expense for the end of the year and get a tax deduction.
The most effective channel for this will be through email, to all your existing customers or users on a free trial.
One of my favorite strategies is to only offer annual pricing to existing customers and users in a free trial. This can be very effective because your users will already be anchored to the monthly price and have already made a decision to purchase.
This can be especially effective during a free trial because you can let them know through an automated email that you will offer them a discounted annual price if they purchase by the end of the free trial.
This creates some urgency, is exclusive to those in a free trial, and helps to convert many more free trial users into paying customers. AND you get the benefit of annual billing, which will decrease churn in the long run.
It’s also most effective for current customers on a monthly plan in month two or three after they’ve signed up with you. If they are still active by that point, they’re probably going to be a long-term user. So you know they have long-term intentions for your product, and you can then make them an offer that will seem magically timely for them to gladly accept.
Another very effective strategy for converting leads on a webinar is to make a time-sensitive offer for either a discounted monthly price or a discounted annual price only offered on that webinar.
This puts you at a great advantage because you don’t have to offer discounts to the masses, only to webinar attendees. Many SaaS companies will ONLY offer annual pricing in their webinar funnel. This is a great opportunity to convert customers because on a webinar you have face time, rapport, urgency, and a limited group you’re selling to.
The reality is that you may not have enough data to really make a well-informed decision.
I would encourage you to avoid analysis paralysis of all the crazy ways to price your product and just pick something. Yes, just pick something.
When the founders of Intercom came to Jason Fried for advice about how to price their new product, he said “Put a price on it, and see what happens.”
While it may seem ridiculous and foolish, it’s actually very wise. Do your best to come up with what you feel is a fair price, in a fair package, and just see what happens.
Here a couple principles to keep in mind when choosing a pricing and packaging structure:
Running a formal or informal survey to ask your customers what they feel would be fair is another great way to figure out your pricing model.
“Here’s where it gets fun. This is the most important question in your value metric survey.
In the first survey you ask three relative preference questions.
Once you know where to focus, brainstorm different pricing metrics that aligned with what our market valued the most. Then send another survey to further align what your value metrics are to base your price on.
Here are a few:
There are many apps that allow you to use the app within certain data usage or storage limits. An analytics tool may only show you a couple months back. A storage tool may only allow you to store something for a period of time. For example, Heap Analytics provides users with 3 months of data retention on the free plan.
For example, Dropbox differentiates their standard and advanced plans based on various additional features and functionality, including advanced admin tools, tiered admin controls, and file event tracking.
For example, customers might get a certain number of integrations on one plan, and unlimited integrations on another. Zapier is a company that uses number of integrations as a value metric. On their free plan, you can “Connect the tools you use most” and on their “for work” paid plan, you can “Access all of our 1,000+ apps.”
For example, Wistia uses number of videos as a value metric. On their free plan, customers have a 3 video limit, which moves up to 10 on their paid Pro plan and then customers can “add as many videos as you need for 25¢ each per month.” This is a great metric for video software. But for a product that searches through documents, we didn’t think it would work.
Pricing per user is a key indicator of how the app will be used, and if team functionality is valuable.
If the per user value metric falls in the middle and people are largely indifferent about it, that’s great. It means that there are other metrics people find valuable in addition to per user pricing, which would enable you to charge for multiple tiers of features, each with a different per user price.
If it’s the top metric people prefer, that tells you people are very focused on paying per user and don’t care as much about other value metrics. For example, the CRM market, per user tends to be the top value metric.
And if it’s the one they prefer the least, then you would want to rethink the idea of using it as a value metric for your product. It’s not likely to be the right value metric in your market.
Finding the right model is going to seem like a dire, impossible task. But don’t get discouraged. The key is to remember that it’s always going to evolve as your product offering evolves. Hopefully this is helpful to you knowing all the options and being able to test and iterate to find the right model.
Now that we’ve covered pricing and packaging, it’s time to talk about content strategy, which will be the driving force for how you push people to your product and create a brand!