A Guide to SaaS Pricing Strategy: Models, Challenges, and Key Considerations
The right pricing strategy can make all the difference between a hyper-growth company and one that struggles to get traction. But striking the right price/value balance for customers isn't easy. Learn the pros and cons of different pricing models and how to choose the right one.
Content Marketing Writer
Pricing strategies require a strong understanding of the intrinsic connection between value and revenue: If your price is too high, you won’t attract customers, and you will lose money. And if your price is too low, you’re leaving money on the table and hurting your profit margin.
An effective SaaS pricing strategy will balance those sides perfectly while also driving revenue growth over time—and if yours doesn’t, then you need to reset.
That’s what Kalor Lewis, VP of Finance at Fivetran, did. Fivetran looked at their subscription-based pricing model and realized that it didn’t align with consumption-based pricing models in their market, which focused on pricing around data volume.
After resetting their strategy to fit a consumption-based pricing model, Fivetran continued on its hyper-growth trajectory, raising a $565 million Series D that put the company valuation at over $5 billion. The switch in pricing strategy is far from the only reason for Fivetran’s massive success, but it has certainly helped. (Check out our full podcast episode with Kalor to learn about the process of switching pricing strategies.)
Choosing the right pricing strategy takes strong collaboration across the entire business—but making the right decision isn’t easy. Here’s how you can pave the way to successfully establishing a SaaS pricing strategy for your business.
Table of Contents
Subscription vs. Usage-Based SaaS Pricing Models
The pricing model you choose has extensive ripple effects on the rest of your business. According to Lewis, “There are so many different factors that our pricing affects, from our go-to-market sales motion to all of our financial modeling and our success as a business.” That’s why it’s imperative to get this decision right.
SaaS leaders have a wide range of potential pricing models to choose from. As you evaluate different models, there are two major schools of thought to consider: subscription-based pricing and usage-based pricing (a.k.a. consumption-based).
Subscription-Based Pricing Models
Subscriptions have a set price on a set plan date and have been the predominant pricing model in SaaS for years. But there are different approaches when it comes to pricing:
- Flat-rate pricing (you pay the same price regardless of company size or feature set)
- Freemium pricing (sign up and start for free, but more advanced features stay behind a paywall)
- User-based pricing (price is set by the number of users, whether individual or “up to” a certain amount)
- Tiered pricing model (different versions with more or fewer features offered)
- Simplicity of cost. Customers know exactly what they’re paying per month/year and understand the terms of the agreement.
- Simplicity of renewal. Subscriptions allow for a “set and forget” mindset regarding renewals. This can be easier for customers and bring stability to your accounts receivable.
- Revenue predictability. Subscription-based models offer straightforward pricing. It’s easy to forecast revenue since price is not impacted by multiple variables (such as actual system usage).
- Churn. Standard subscription pricing makes it easy for subscribers to churn. If your subscription doesn’t offer a downgraded tier or the customer already is at the lowest tier, it’s easy for them to say, “We can’t keep this.” Or, if their needs have scaled in a way that falls in between subscription tiers, they may move on to another vendor.
- Cost/value misalignment. The cost may be too high or low based on the functionality of your product and what value your customers see in it. Seeing something “for a steal” gets customers excited, but you risk missing out on the money you could be making. Free trials and product demos easily combat this since customers can experience the product before fully committing to it.
- Limits account expansion. Static subscription pricing limits the number of opportunities for accounts to upgrade to higher-priced products. Without a more dynamic lever to base pricing on, SaaS companies can struggle to increase net revenue retention.
- Lack of scalability. While you can measure product usage, you’re not pricing based on it. Your power-user accounts that have grown significantly often pay the same price as a smaller, brand-new customer.
Usage-Based Pricing Models
The unit of measure sets the functional scope for a usage-based pricing model. It’s important to choose the unit that is well-aligned with how your business provides value to customers. There’s a variety of different approaches, including:
- Per-unit pricing (such as contacts, credits, transactions, etc.)
- Storage pricing (how much data or information users are storing within the product)
- Traffic pricing (per visitor or engagement, such as PPC ads)
- Volume pricing (how much data users consume with the product)
Some of the world’s largest SaaS companies have shifted to usage-based pricing as a more dynamic strategy than traditional subscription models. For example, Fivetran prices per credit, with tiers offering faster sync times and other benefits. MongoDB emphasizes its pricing around data and traffic. And depending on the program, Twilio offers per user, use, and unit (such as messages sent or received) pricing.
- Aligns value and price for customers. Customers pay for what they use, which promotes transparency and trust. They can upgrade or downgrade based on their needs and budget—or it’s automatically done for them, depending on the pricing model. You get to bundle features and create experiences for each customer versus supplying them with excess features they won’t touch.
- Data collection toward feature expansion. Depending on what your pricing model is based on (per user, volume, unit, etc.), it sets a premium on that data internally. The data helps companies implement a land and expand pricing model, where the data dictates where companies should invest more in terms of developing current features and expanding product/service offerings.
- Less predictable revenue stream. Customers are most likely not going to be charged the same amount month over month, which complicates SaaS revenue forecasting.
- Complexity for customers. Clarity is required from the start. Customers need to understand precisely why you’re pricing based on a feature or certain unit of measure—and why your competitors may not be doing that.
- Getting the unit of measure right. It may seem as simple as, “The data will tell you what to charge for.” Lewis noted that Fivetran had to consider how to differentiate themselves in a SaaS space (cloud data integration) that focuses pricing around the same unit (data volume). When Fivetran moved toward a usage-based pricing strategy, Lewis noted, “It just put us much better in with the market, and ultimately it was a better measure of how our customers were actually benefiting from Fivetran.”
3 Challenges of Choosing the Right SaaS Pricing Strategy
Much of the SaaS world is heading toward usage-based SaaS pricing models, where the price is set by how often customers use the product and resources a company provides. And while you may want to evaluate that kind of strategy as well, there are challenges to choosing the best approach within the context of your product and industry.
1. Accessing Data to Plan and Set Your Strategy
Your data may be spread across departments, each with their own timelines to work through month to month. What can you change to make data more available or transparent exactly when you need it?
When Lewis reflected on the challenge of switching from a subscription to a usage-based pricing model, he noted that everything needed an overhaul, from the billing system to Salesforce and CPQ implementation. The product and engineering teams were heavily involved in measuring Fivetran’s customer consumption data—which led the team to build a new element within the product infrastructure.
Lewis also noted that while Fivetran could track “monthly active rows,” it wasn’t something they tracked historically. “We had raw usage, and depending on use cases, that doesn’t always align exactly to the measure we were moving to, so we had to do our best to understand a small amount of data and use that to extrapolate as best we could,” said Lewis.
2. Balancing Revenue Predictability with Financial Goals
One reason usage-based pricing has become so popular for SaaS companies is that it creates a built-in engine for increasing net revenue retention. But that advantage comes with a new challenge, especially for finance teams: maintaining revenue predictability.
Finance should always strive to build predictability in its models. But according to Lewis, when you make the shift to usage-based pricing, “the predictability is all out the window.”
A strong foundation of data accessibility and integrity will help you forecast revenue as accurately as possible. If your data infrastructure isn’t quite mature enough to help you run advanced sensitivity analyses that make revenue forecasts more accurate, you have a couple of options.
You could choose a subscription-based pricing model that inherently offers more revenue predictability. Or, you could institute annual contract minimums to put some guardrails on a usage-based pricing model.
There’s no right or wrong answer—only what works best for your business. Whichever pricing strategy you adopt, make sure revenue predictability remains a priority.
3. Ensuring Customers Understand the Pricing Model
Companies need to be transparent as to how pricing models match the value of their product.
Customers show a sense of understanding when they pay for something—but really, you’re looking at how customers value their purchases.
A per-user pricing model relies on how many people use the product. But some companies may be inclined to create a “master user” and have team members log in under one account if it’s a product they don’t need to use all the time.
You can forecast value within any pricing model. While Fivetran prices per credit, user access is implied as a benefit via each tier’s description and sync frequency:
As tiers and prices get higher, the sync frequency becomes faster. Each level notes itself (“Starters” with “foundational” use, “Enterprise” with “enhanced” use), which sets expectations for the size of the company. Multiple users on different teams don’t have time to wait for data to become available: They have other responsibilities and need up-to-date data as soon as they log in.
Fivetran was able to align its messaging around how customers get value from the product. But it doesn’t mean that these qualities are forever set in stone. Lewis noted that having both internal and external check-ins “on a monthly basis is really important, just to talk about changes, challenges, what customers are seeing, and what’s difficult on the engineering and finance sides.” These conversations are opportunities to strike even clearer messaging on customer concerns and forecast customers’ needs and desires through future offerings.
How to Choose the Right SaaS Pricing Strategy
You’ve discussed every factor and concern. You’ve forecasted against your financial standings and data. And now, it’s decision time.
Start with the End in Mind
Whether you’re beginning to plan your SaaS pricing strategy or resetting it, you need to know what outcomes to expect. When you envision the end, you can work backward to anticipate hurdles, such as customer impact from plan changes.
Lewis recalled that Fivetran went into their strategy planning “eyes wide open” and anticipated that with the positive changes, there would be some foreseeable bumps in the road: “Some customers were going to get smaller, some were going to get larger, and it was really important for the finance team to have a good understanding of that because it affected our planning and our numbers for quite a while.”
Think About How You Provide Value to Customers
Pricing strategy focuses on financial figures, but the overall end goal is providing a product that justifies its price through the value it provides.
Setting strategy is a “slow down to speed up” decision-making process. You need to scope the pricing model’s infrastructure from every angle.
Define buyer personas and your ideal customer lifetime values (LTV). Ask current and prospective customers for feedback about your products, services, and messaging. And segment your data as soon as possible to learn about customer behavior.
Evaluate Competitor Pricing
It’s important to understand how competitors approach their pricing models—not because you need to adopt a competitor-based pricing model, but so you can align with customer expectations for your market.
Lewis realized Fivetran’s competitors were all pricing around data volume, which convinced him to reevaluate Fivetran’s SaaS pricing strategy as a subscription-based model, asking questions like:
- What growth opportunities were they missing out on because of subscription pricing?
- What appeals to customers about pricing around data oversubscription?
- What were Fivetran’s competitors learning about their customers through their pricing models?
Lewis also encouraged getting external advice through consultants or advisors: They bring an unbiased, fresh perspective into the conversation that will push you to find the unique language for your SaaS pricing strategy.
Encourage Collaboration Between Teams
C-suite leaders are tied to the larger growth goals of a company, but every team has leaders that work with a product every day. They’re closest to the data, and how customers use it, so cross-collaboration needs to happen at all times, especially when discussing pricing strategy.
You need to look at the entire pipeline of your product/service, from the customer success representatives to engineers, and have them collaborate. That’s when you strike synchronicity around messaging and get ahead of any potential changes that affect your team internally and customers externally.
There’s a temptation to look at pricing as an “experiment” that’s easy to change over time. And even though iteration is critical, businesses need to commit to seeing an iteration through.
Lewis noted that the first iteration of Fivetran’s pricing model “didn’t quite get there” because of all the nuance they had to untangle in market studies and product usage data. “But we’ve been integrating to iterate,” said Lewis, “and finance is there all along the way.”
Implementation requires optimizing all teams and systems involved. Everyone needs to work toward the same goal in their own ways. When someone forecasts a hurdle, it’s up to everyone to find solutions, whether they’re on that team or not.
There may also be updates that need to be implemented later (like Fivetran knowing all their systems needed an update as they moved to a usage-based model). These updates are part of your commitment to providing value to customers at a price point that remains right for your business.
SaaS Pricing Strategy Is a Never-Ending Project. Have the Right Systems in Place to Make it a Smooth One.
Financial leadership is headed toward being more technical and data-intense. Lewis stated that being in the language his team members use everyday set Fivetran up for success:
“Ultimately, it was just getting my hands dirty in as many workflows as I could, learning things bottom up, and wearing as many hats as I possibly could. It really helped with where I am today, able to build things and really understand how they work.”
Financial leaders must be able to speak the language of every department and know how the efforts and value are communicated to customers. When leadership has well-rounded knowledge of every factor of a product or service, they’re better able to lead a company’s SaaS pricing strategy discussions into a stronger financial future.
Pricing strategy conversations require up-to-date data at every turn, especially when forecasting how pricing will impact revenue. Mosaic provides real-time visibility and models different scenarios, saving your team time from playing in the clouds and focusing on real-world figures.
Request a demo, and learn how you can get one step closer to choosing the right SaaS pricing strategy for your business.
SaaS Pricing Strategy FAQs
What are common SaaS pricing plans?
There are many different pricing options in a SaaS business, including:
Feature-based pricing: Per-feature pricing offers different price tiers depending on the set of features and add-ons your active users sign up for.
Value-based pricing: Value-based pricing requires good knowledge of your product and customer base because the price of your SaaS product is based on the value of your product to potential customers.
Which SaaS pricing strategy is best?
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