Choosing between the different pricing models is one of the many considerations when building an own SaaS platform. It may be a tough call – the difficulty stems mainly from the need to hit the sweet spot between the needs of your business and those of your users. But understanding the economical and psychological mechanisms behind credits, subscriptions and single payments, and properly leveraging them can result in maximizing the commercial potential of your SaaS platform.
In this post we take a quick look at the leading Saas pricing models, hopefully helping you to choose the right one (or a combination of a few of them) for your service.
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Single payment is the tried-and-tested usage-based model. The pay-per-use model has proven effective for many online businesses, especially if the product is expensive or not likely to generate recurring purchases from customers. The single payment model is also very simple to understand and compare, and allows customers to pay a’la carte with no hidden fees and shenanigans. This is something invaluable for many price-conscious users.
When it makes sense
● The single payment model makes sense for non-returning customers. It lends well for physical or highly customized products (e.g. cars).
● Single payment can also be tiered per various premium product options, which is best leveraged by the automotive industry. In most cases, purchasing the extra options involves very hefty margins – for the car’s audio, navigation and a variety of comfort options.
● Single payment is in many ways more convenient for the company. It is easier to sell and communicate to the users. It is important especially in SaaS products as pricing models can get complicated, and the abundance of choice is distracting for the users who want to be sure they’ve chosen the best option.
● This type of pricing model is quick and easy to understand for the customer it does not hold them responsible for choosing wisely. Offering a single price for a product makes it possible from the marketing point of view to focus on and better showcase the advantages of buying, rather than getting into the complexities of options.
● In the SaaS world, single payment is not the most economical option from the user’s point of view. Although sites like Adobe Stock (Formerly Fotolia) allow users to buy a single photo as an option, but it’s rarely the user-preferred model.
● Single payment makes sense especially for physical products whose value does not scale down when bought in larger volumes.
Check out 5 best app monetization strategies and earn more on your digital product.
Credits originated as the preferred payment model for microstock photography websites as a way to encourage users to buy more photos. The company that first introduced credits as a payment option was iStockphoto. The pricing model proved effective and got quickly replicated by many other similar stock photo services like 123RF, Adobe Stock or Dreamstime, and persists today in numerous other services.The concept of credits is simple at the core: clients wanting to buy photos must first buy a credit pack, and then use the purchased credit towards their later purchases. Credit pack economy is governed by a simple rule: the larger credit pack you buy, the lower price per credit you get.
When it makes sense
● The psychological effect of credits is significant from the users’ point of view – because the payment for future purchases is deferred, users are more likely to be more extravagant when spending them. The direct connection between the payment in a known currency (e.g. in dollars) and the spending (in credits) is lost over time, and the discomfort associated with paying is less.
● Credits are the model of choice for many popular stock photo websites today. And even though some services may not replicate the model in its original form and offer variations, the mechanism is the same under the hood. For example, although Shutterstock doesn’t sell credit packs and their images are priced in dollars instead, the charge per photo still vary depending on the selected plan.
● Annual plans offer the best bang for the buck, but come at the cost of a long-term commitment. Whether users are ready to invest vastly depends on how many future purchases they are willing to make.
Most sites, in their attempts to generate a steady cash flow, offer recurring subscriptions the most economical option. The advantage here is that subscriptions, by default, come with automatic renewals, and users, whether due to laziness or the additional hassle – may not remember or want to cancel in time.
With prices per a single product much cheaper than in the case of single purchases and credits, this pushes customers into purchasing recurring payments, but only makes sense if big amounts are purchased monthly.
Although the pricing of subscriptions is usually the most attractive of all the models, the trade-off for the user is the longer commitment – not necessarily something acceptable for the users.
When it makes sense
● Pricing strategy based on subscriptions allow young businesses to generate a more predictable cash flow and allow them to better plan for the future growth. As users agree to make longer commitments, the company can focus on the customer retention activities.
● Due to the additional hassle associated with cancelling a service, customers are likely to stick with a service for longer, even if they are considering other options.
● SaaS platforms also lose customers, but there are many options to lure them back – discounts or a couple of months for free.
● Automatic billing functionality means users don’t have to worry about remembering to pay an invoice and your business benefits from a consistent revenue stream.
● Subscriptions can be designed to cater to all types of potential customers. They can be tiered according to functionality, usage levels, or reward long-term commissions with better bang for the buck ratio.
● Because the service is paid for in advance for many and low cost of acquisition. Such providers demand much higher multiples when they divest.
Per user pricing
Per user pricing is a popular option in the SaaS pricing model (especially enterprise), where clients are charged different amounts depending on the number of users using the software. This model may hurt some SaaS companies by affecting the key metrics like daily active users.
Per user pricing has to be used with caution: when implementing it, you may be cutting down on the number of people actively using the software, and thus cripple recurring revenue.
When properly implemented, this pricing model can work for SaaS company, but most SaaS platforms implement more value-based approaches.
When it makes sense
● To make per-use pricing work, the number of users doesn’t have to be the only factor differentiating the plans. E.g. there could be a 3 tier pricing model: free plan limited to a couple of users, another plan for >4 and a Pro plan for 10+ users.
Freemium has become a preferred method for many companies entering a market or initiating trial. In a fresh approach, WhatsApp offers a customer service utility where businesses don’t pay for the service unless the company takes more than 24 hours to respond to a customer. Freemium can be used in a way to make a customer perform.
Made popular by services like Uber and Airbnb, usage-based models appeal to specific groups of consumers, especially those who are conditioned to only pay for the proportion of an asset they use. Amazon Web Services is an example of service properly leveraging this model. Usage-based fees promote higher asset utilization for the seller.
Read also: How to make an Uber like app?
Abundance of choice?
While customers appreciate choice, they are unlikely to benefit from abundance. Offering too many plans and a complicated checkout process can deter customers and leave them overwhelmed.
The sweet spot is offering from three to four different plans with clearly defined differences and benefits for the user.
When it comes to pricing your SaaS, having clear buyer personas and a deep understanding of how your target customers use your software is critical for success. Understanding how your SaaS helps solve your customer’s pain points will help your digital business make important decisions about how to price your software or service.
But If you’re still on the fence between choosing between pay-per-use or subscription-based pricing, the good news is that you don’t really have to be confined to either. Many SaaS companies offer a combination of various pricing models like pay-per-use and subscription. Converting pay-per-user customers into regular subscribers typically pays off – it’s a way to maximize the revenue.