Pricing models for software products

Saas Pricing Models. To make things clearer, here are some of the most common software pricing models examples : Flat Rate Pricing Flat rate pricing makes SaaS pricing simple. Tiered Pricing Model The tiered pricing model is often confused with volume pricing and is where SaaS pricing models begin to get complicated. For example, SaaS Inc. Per Active User Pricing Model If your customer is a large enterprise, there might be some reluctance to buy licenses for software that not everyone will use.

The Bottom Line No matter which of the many software pricing models you opt for, remember that for optimum revenue and return, pricing cannot be a static entity. Read More. Geocap Enforced Licensing - Case Study. Maximize the value of your software. Contact a Sales Specialist. Looking for partners? Looking for resources?

The freemium business model is typically used as part of a tiered pricing strategy: the regular paid packages are supplemented with a free, entry-level tier. That tier is then limited across certain dimensions in order to encourage users to upgrade at a certain level of usage, typically employing feature-based if you want X feature, you need a paid package , capacity-based if you exceed your allowance, you'll need a paid package or use-case you can use the free package internally, but not for managing customers limitations.

Live chat SaaS Drift use freemium pricing to great effect. Their "Free" package allows small companies to talk to their first contacts for free: when demand for the service increases beyond that point most likely correlating with company and revenue growth , it becomes necessary to upgrade to their paid packages. Your pricing model is at the heart of your SaaS business: it's the foundation that allows you to build out repeatable sales processes and generate recurring revenue.

But, within the framework of your pricing model, there are all-manner of different goals you'll need to hit on the way to your over-arching objective of "growth". That's where SaaS pricing strategies come into play.

Each of these strategies is suited to a different objective: whether that's rapidly expanding into a new market, or attracting particularly high-value customers. Penetration pricing is the strategy of reducing prices to rapidly gain adoption in a target market, and secure the "first mover" advantage: claiming market share before your competitors can beat you to the punch.

In order to do so, companies often lower their prices to unsustainably low levels in the short- to medium-term, but aim to compensate in the longer-term, when they'll be able to upsell and cross-sell their large customer base onto a more profitable package. This "land and expand" strategy has been used to great effect by companies like Slack and New Relic, using penetration pricing to grab the lion's share of the market before their competitors.

Captive pricing also known as captive product pricing is the practice of offering a "core" product for a lower-than-expected price, but charging extra for additional products that are required to get the most from the core product. One classic example is the printer: most modern printers are sold for extremely low prices, but as soon as your ink runs out, you're forced into shelling-out for expensive, own-brand ink cartridges the captive product , which are usually far more expensive than the printer itself.

For equivalent examples in software, imagine offering graphic design software at a nominal price, but requiring users to download stock imagery from the company's own stock photo service. Or for a real-world example, the case of Adobe, offering older versions of their software for free, but gradually eliminating backwards-compatibility, forcing users to upgrade to an expensive paid version if they want to collaborate.

Skimming pricing also known as promotional pricing is the strategy of setting a high initial price for a new product, before slowly lowering the price over time. Skimming pricing is sometimes referred to as "riding down the demand curve": as the product's price is lowered over time, it appeals to different sub-sections of the marketplace, and customers with different price sensitivities.

The best examples of skimming pricing can be found in tech: Apple products are famous for heavy discounting just a few months after launch, and in video gaming, prices steadily decline from release. In SaaS, this strategy works because of the Technology Adoption Lifecycle : early adopters gain utility from the bragging rights of first access to new technology, and they'll often pay more for access to new products. As the product matures and prices are reduced, it begins to appeal to the later market.

Prestige pricing also referred to as premium pricing is the strategy of maintaining high prices, in order to convey a sense of quality, exclusivity or luxury. In doing so, companies can maintain a relatively small customer base of high-value customers; customers that would likely abandon the brand if prices were to decrease.

There are a few ways to leverage prestige pricing in SaaS. If you're a well-known brand, or your product is used by high profile companies, you may be able to differentiate yourself by reputation, allowing you to charge a higher price in the process. The first thing you have to understand is the selling price is a function of your ability to sell and nothing else. Free trials are a staple of SaaS pricing strategies, and with good reason: by offering the product for free, for a limited time, you provide a quick foot-in-the-door.

Customers can start using your product without any financial expense, and as long as they're able to benefit from the product during the trial, there's a strong incentive to upgrade when the trial ends. Free trials are typically time-limited the most common length is 30 days , but it's also possible to restrict it by usage with the trial expiring after 5 invoices, 1 video file, etc. Crucially, half of all free trial signups occur after the trial has ended , so it's important to have a well-defined follow-up sequence.

Cost plus pricing also referred to as cost based pricing serves as a starting point for many SaaS companies. Cost plus pricing doesn't take into account competitor pricing, the perceived value of the product, the price sensitivity of their customers, or any of the other inputs that should influence pricing.

But pricing discussions have to start somewhere, often with limited information - and in these instances, cost plus pricing can be a useful framework for kick-starting your thought process. Cost plus pricing is very company-centric: it's an exercise in choosing the profit the company wants, with little regard for the customer that supplies that profit.

Value based pricing works in stark contrast, using the perceived value of the product as the benchmark for price setting, instead of costs, competitors or target margins. At its heart, value based pricing encourages SaaS companies to view their pricing strategy as a product of the value they provide. Instead of fixating on cost-cutting to improve profit, companies focus on improving the service and value they provide, using extensive research to understand how customers actually value a product.

Value based pricing isn't a quick-win - it's a long-term change to how prices are fundamentally viewed - but if you're looking for a good starting point to transition to value based pricing, check out the 10x Rule.

In simple terms, it's the idea that the value your product provides should be ten times its price, providing a simple heuristic for framing your pricing decisions. Even after you've decided on your SaaS startup's pricing model, and settled on your strategy, there's still room to dramatically improve your price.

That's where psychological pricing strategies come in. Think of these like the icing on the cake: smaller experiments that can be used to fine-tune and optimise your pricing. There's a degree of stigma associated with pricing psychology, perhaps rightly so: I've seen companies use the power of psychology to exploit and mislead customers. Thankfully, the strategies deployed here aren't designed to coerce unwitting customers into buying more than they want: we're simply working alongside the brain's innate processes to reduce friction, and make the sales process as effective and efficient as possible.

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 jewellery, and we'd turn to similar pieces in the jewellery shop next door.

Price anchoring is a way to leverage this heuristic to increase your customer's willingness to spend. It's suggested that this psychological pricing strategy works because of the "Left Digit Effect". Our brains process numbers extremely quickly, making snap judgments about prices and values without any conscious awareness. Odd-even pricing works on a similar principle to charm pricing: prices are reduced by a few dollars to bring them just under the nearest "rounded" price point. Zapier take this approach to extremes, with their seemingly random pricing strategy:.

Like odd pricing, even pricing applies the same principle with even numbers, as demonstrated by virtual assistant SaaS Zirtual :. Typically, the bundle price would offer each component product for less than its individual price assuming it's even possible to buy the products individually , but because the bundle encourages the sale of products that might not otherwise be bought, can still represent an increase in overall profit.

Product bundle pricing is great for simplifying complex sales process, especially when a multitude of apps and add-ons are available. It's also great for drawing focus away from the individual product prices, and encouraging outcome-oriented thinking: customers are encouraged to think about the value of a "productivity suite" or "design studio", instead of individual SaaS products.

For an example of product bundle pricing, look no further than Microsoft's Office suite. Office products are now available exclusive through a monthly subscription service, and there's no way to pick-and-choose which products you want to pay for, and which you don't. I use Word, Excel and Powerpoint on a daily basis, and would gladly pay for each application - but I wouldn't touch Access, Outlook or Publisher with a barge pole. But because the products are bundled together, I pay a flat monthly fee, and I have all a whole host of Office products installed on my desktop.

High-low pricing is most commonly used in the retail industry, but it does have some application in SaaS. In essence, high-low pricing is the act of alternating between a "high" price and a "low" price: a product is marketed at a premium price, before eventually being reduced to a lower, discounted price. High-low pricing uses price anchoring to encourage sales: the product's value is associated with the original "premium" price, so when a discount is applied, customers view the reduced price as a particularly great deal.

But a word of warning: high-low pricing will drive-up demand in the short-term, but long-term discounting is dangerous. If you regularly discount your product, you risk anchoring the product's perceived value to that lower price, and create a culture of bargain hunting where customers will wait for a deal before ever purchasing your product.

Black Friday is the most blatant example of high-low pricing used in SaaS, with all-manner of typically restrained SaaS companies deciding to slash their prices in an attempt to capitalise on the consumer frenzy:. Trial pricing is the tactic of offering your SaaS product at a reduced price for a limited time, usually as part of an introductory offer. Whereas the industry-standard free trial is, as the name suggests, free, trial pricing still charges the customer a lower-than-normal fee.

Trial pricing reduces the barriers to actually starting with your product, with the idea being that once a customer has seen how useful your product is, they'll be more than happy to pay the increased rate after the trial expires. Most of the companies I've seen using trial pricing fall toward the shadier end of the business spectrum, often using the approach in combination with other less-than-savoury tactics, like auto-renewing for a higher price as demonstrated by Digital Marketer.

The psychological pricing strategies covered here are designed to work alongside the brain's decision-making framework. Analysis paralysis also know as the paradox of choice is an example of a heuristic your pricing strategy needs to avoid triggering. If a decision requires the assessment of a greater number of choices say 10 , it becomes much harder to remember the choices on offer, and accurately decide between them.

This means that, past a certain point, there's an inverse relationship between number of choices and decisions made. Intercom offer a range of products, and a whole host of variables which can alter pricing: features, teammates, messages, people reached Though they've done an admirable job at bundling the packages together, there's still a huge amount of choice available.

What's the Educate package? Decoy pricing is the use of a seemingly redundant pricing option something that's obviously less desirable than the other products on offer , in order to influence how customers choose between the remaining products.

Crucially, the print option isn't designed to sell subscriptions: it's designed to make the combined subscription more appealing in comparison.

Here's a relevant example from a subscription-based company, Shutterstock. Consider adding a special offer to those who do renew before the trial ends to make it easy for customers to say "yes" and buy the full subscription package. Psychological pricing refers to a method of pricing items to make them appear like a bargain. Shop in a high-end store and you'll see that the items end in zero; shop at Wal-Mart or any typical discount store and note that prices end in "7" or "9.

Everyone loves a free gift with a purchase. If you do offer an added bonus, be sure it adds substantial value to your core offering.

Money-back guarantees take away the last objection to purchasing a digital subscription by removing the risk in the transaction. Customers leery of buying from an unknown or independent digital provider may be less cautious if they are certain their money is not at risk.

If you offer a quality product, you should see few, if any, returns. Pricing is important, but so too are the elements around the price on your website. The offer and creative elements work with pricing to attract customers to the page and convert browsers into buyers.

Test different price points, new creative methods to showcase features and benefits of your products, new calls to action and added value or bonus products to see which combination converts the most leads to sales.

Pricing is an important element of your digital product strategy. Single Grain has worked with companies such as Amazon, Uber and Salesforce to help them acquire more customers.

He also hosts two podcasts: Marketing School with Neil Patel and Growth Everywhere, an entrepreneurial podcast where he dissects growth levers that help businesses scale. Willow Kaii. Andrea Albright. Marilisa Barbieri. Sweta Jaiswal, FRM.