What SaaS Pricing Models are The Best for Your Business?

saas pricing model

SaaS pricing models are many and varied, with new ones and hybridized ones popping up all the time. It seems like every day, some new model or proposed strategy for pricing and marketing SaaS comes and then fades back into obscurity. But, some stick around, which means there must be something to them, right? Well, that still leaves a plethora of choices when the time comes to set up your optimal pricing model.

So which of the SaaS pricing models is right for you? Choosing unwisely can result in irrecoverable failures or at least costly setbacks that can alienate the customer base and set you behind by fiscal years minimal. So, this is something where you really need to stop and think about what the best choice might be.

Choosing the right model isn’t something that has a de facto set of parameters, there’s no set of rules of thumb for this. In the past, most have kind of made informed gambles when it came to this decision, with mixed results. This needs to stop being the case. While we can’t claim to be clairvoyant nor omniscient about everyone’s situation or scenario, we think perhaps we can provide at least some general analysis of the big models out there, and explain the basic situations they most fit. With some luck and careful reading, perhaps one of these, through our waxing analytical thereto can provide you with a lead in making your decision less painful.

The most popular and polarizing of the lot is the freemium pricing model. This is a model in which there is a free uninhibited trial or more often a slightly gimped free version of the service, and a more powerful, feature-rich service that functions as advertised. In freemium, a user will most of the time sign up for the weaker free service, and experience this for a long period of time. With luck, they will convert to the paid service if they feel the price justifies what they gain, and what they gain justifies the cost.

The problem with freemium is that it’s still a gamble. To garner the proper amount of conversion to paid customers, you must walk a very fine line of feature disparity and incentives that many fail to successfully manage. There’s a lot of overhead due to free customers and either your profits take a hit for this, or the paid customers get a heftier price point to cover it, one or the other.

While freemium is theoretically sound, it’s actually best avoided unless you hybridize it with another model, ad-powered SaaS, which we will cover after the next one. Freemiums’ a great idea, but it has some hurdles to overcome. You can try it, but you better be a risk taker, or have a really good strategy to motivate conversions!

The staple model is subscription based SaaS pricing. This is a monthly, biannual or annual fee for access to the software. There is nothing free beyond maybe a limited trial, to incentivize the customers to subscribe. Now, the problem this has is that the trials can be an issue. They may fraudulently sign up with many email addresses to get repeated free service. The only way to prevent this is with credit card validation, which will chase away a lot of potential samplers who could become customers.

If you can handle the fraud or the slightly limited outreach that tighter demo security results in, then this is the most sound if slow-paced model for pricing SaaS. This is more than likely right for you, if you’re an old hand at SaaS launching a new service.

Finally, we come to ad-powered SaaS. This is completely free service that uses advertising via web ads of various sorts in order to make incremental profits off of the views and clicks the user conducts. This can make for some annoying interface if the ads are too overt, and requires a model where the pages are redrawn quite a bit, for it to be significantly profitable.

This is however the best model for you if you’re new at SaaS and launching a new product to boot.

So which fo the SaaS pricing models is right for you? It’s more about whether or not you’re a risk taker, and how experienced (therefore how much of a reputation you have) within the industry. Nothing’s a get rich quick scheme after all, and slow and steady, as the cliché would put it, won the race.

Omri Erel
Omri is the Head of Demand Generation, as well as the Lead Author & Editor of the SaaSAddict Blog. Omri established the SaaSAddict blog to create a source for news and discussion about some of the issues, challenges, news, and ideas relating to SaaS and cloud migration.
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