Dropbox, a SaaS business giant, has over 500 million registered users. However, out of this only 11 million users are paying for their services – a mere 2%. Giants like Dropbox can afford to support such a large base of free users. Most SaaS business cannot. The ‘freemium’ model can thus, be a good method to attract customers. However, SaaS businesses have to find compelling ways to convince their users to become paying customers. Strategic payment plans play a huge role here.
The SaaS economy is primarily based on flexibility due to auto-provisioning and cost-effectiveness. People are migrating their applications and data centers to the cloud for more availability but also for the control on costs that the cloud brings. And this flexibility brings in complexity in the SaaS pricing model. What do you charge for? How much should you charge? How much is too much? Where does the freemium model end? Are you giving away services for free? The right pricing model thus becomes both an art and a science – one which ensures that the customers get the most value out of the SaaS offering and the SaaS business economies add up to a profitable business model.
SaaS companies provide scalability and flexibility regarding their service offerings. In the same way, they need to be flexible about their pricing as well which can be based on usage and consumption, support services and ongoing value delivery. On the basis of this, here are a few ways that go beyond the conventional ‘pay-as-you-go’, freemium, loyalty pricing, discount, and term-based pricing model.
- Dynamic ‘just-in-time’ Pricing:
Just-in-time pricing is a dynamic pricing model that is making waves in the subscription business. In this pricing model, the product or service price is delivered dynamically at the time of purchase based on the business rules defined. There is no fixed price but the price is fetched dynamically – a particular service can be monetized at a specific rate at one point in time. When the surge reduces, the same feature or service can be secured at a lower rate. For example, the cost of video calling at peak hours can be priced higher. During lean hours video calling be at a lower price or even free.
- Variant Pricing:
Variant pricing means a price that can be customized for the product or service according to the customers budget or the requirement. This is a great pricing model to get your potential customers to start using your product/service. A low basic plan or a core solution can be created to attract users and a progressive pricing plan can be introduced to unlock different features via price personalization and consequently increase the revenue.
- Tiered Pricing:
Tiered pricing is a volume pricing strategy and is based on the volume of purchase. With this strategy, as the volume of purchase increases, the number of discounts increase. SaaS providers can define different volume thresholds and apply appropriate charges based on the same. For this, the SaaS provider has to define a volume threshold and a volume tier.So, if the volume tier is defined as 0-10 @ $10 and 11-20 @ $9, and the volume threshold is defined as 0-100 @10 and 101-500 @ 9, then with tiered volume based pricing the price for a quantity of 15 can be calculated at:
- Dynamic ‘just-in-time’ Pricing:
[1-10] @ $10 x Q10 = $100
+ [11-20] @ $9 x Q5 = $45
Total price = $145
- Feature-based Pricing:
Feature-based pricing takes price personalization to the next level. According to this pricing model, SaaS companies can levy charges on their product/service based on the features within a service that the customer wants to use. This dynamic pricing model allows the customers to choose how they want to pay and ensures that no revenues are slipping through the cracks.For example, a streaming service can be charged based on a) number of concurrent devices user want to use and b) on the quality of the content required (SD Vs HD Vs 4K).
Also, the other advantage of this model is that it helps keep the product catalog size in control – in absence of such pricing, the provider would have to define a separate product for each ‘combination of features’. In the above example, 2 devices with HD quality and 4 devices with 4K quality are sold using the same product which otherwise would require the creation of two separate products.
- Price bundling
In the SaaS world, it can be hard to upsell services individually. Price bundling is a creative way to combine offers to get the customers to buy them as a collection. By bundling two or more services together, SaaS providers can offer the price advantage to their customers and make their product/services more lucrative. SaaS companies just need to select, group and price their product/service features appropriately to make their offering more lucrative.
- Threshold-based Billing:
One of the key objectives of this model is to allow the service provider to control the ‘credit exposure’ per customer in a billing cycle and collect the revenue early on. With threshold based billing, SaaS providers can set up a threshold limit that is customized for the subscriber. When the subscriber reaches the threshold limit, the billing system generates an on-demand bill and charges the customer according to the next pre-defined limit. For example, a VOIP service can be used for making calls set for a specific limit of $10. One this subscriber cross this threshold, the billing system will automatically charge the user for the next $10 credit limit.
- Partner Pricing:
SaaS business models can be heavily dependent on channel partners. Hence having a strong partner pricing strategy to monetize the SaaS product/service is imperative. At the same time, this is also one of the most complex tasks in the subscription business as it involves going down to the last detail to define different prices hierarchies at different product levels.SaaS businesses thus have to keep a track of these different price points, price changes, and all promotional prices. Having an effective channel strategy that provides robust partner management capabilities using a subscription platform approach provides greater control over this partner network and ensures that the SaaS providers have complete control over the price.
As we move deeper into the subscription economy, SaaS companies need a robust pricing strategy to positively impact the bottom line and ensure that no revenue is left on the table. SaaS companies are hyper-focused on customer acquisition and customer retention, however, pricing can be an untapped growth lever. While the growth of a SaaS company is directly related to customer acquisition, it is equally essential to identify how to monetize these customers appropriately since monetization has the most significant impact on the bottom line. Clearly, the ‘one-size-fits-all’ pricing approach is now a thing of the past and SaaS companies need to get creative with their pricing strategies to give their customer more bang for their buck. At the same time, they have to ensure that they have the bandwidth and the right subscription management platform to manage these complex billing cycles with dexterity to ensure that they don’t suffer from revenue loss and don’t end up giving away their services for free.