There are few things that have as much influence on a company’s sales as the pricing of its products. With software products, pricing usually proves to be even more difficult, since no physical product is sold. Here, one must be able to answer the question of what added value the software offers the customer. Is it a question of time or cost savings? For example, is it about increasing efficiency or about structuring? Depending on the market and target group, different pricing structures can make sense. In this article, you will learn about the 5 most important Software-as-a-Service pricing models and what aspects you need to consider about each variant.
“A cynic knows the price of everything and the value of nothing” said the poet Oscar Wilde. How important it is to know the value of things is of course beyond question. In some cases, however, it is still a good idea to know the price and be able to determine it. Especially start-ups and medium-sized companies in the software segment have difficulties in assigning the appropriate value and thus the price to their software. For this reason, it is indispensable to inform oneself in detail about the different variants of a software product before deciding on its price. They are at least as important as the price itself.
1. Pay per User Pricing
The pay-per-user pricing model is particularly popular. The reason for this is the simplicity of the pricing model. A single user pays a fixed monthly amount and can use the software. If another user is added, the price is doubled and so on. This pricing structure makes it extremely easy for customers to understand what they are getting for their money. For companies, in turn, it makes it easier to calculate their revenue. The advantage of this model, as mentioned, is simplicity. The monthly costs are manageable and calculable. The revenue scales according to the adoption rate and is predictable. The disadvantage of this model, on the other hand, is that it limits the adoption rate at the same time. Because if a user is already using an account, it may be more difficult to attract another user, of the same company. In the worst case, they share an account, if you do not know how to prevent it. In addition, it doesn’t reflect the actual value of the licenses, because it doesn’t make much difference to customers whether they use two or three licenses, and the abandonment rate is potentially higher. A team of 1,000 people using a particular service are less likely to switch it than a group of five users.
2. Pay per Feature Pricing
As the name suggests, the price here is calculated depending on the booking of the respective features. Often, the software is also offered here in three specific price ranges, depending on the features that want to be used. The advantage of this variant is that users have a great incentive to book the next higher package when they realize that the features in the current package are no longer sufficient. Cost-intensive and high-maintenance features can thus be priced in and compensated for. On the other hand, this model may leave a negative aftertaste for some users. After all, they already pay for a product and still cannot fully enjoy all the features it has to offer.
3. Freemium Pricing
Freemium pricing starts with a free variant with basic functions and limits its use. A prominent example here would be the cloud storage company Dropbox. A certain amount of storage space is free for the user. If the user exceeds the storage capacity allocated to him, he must switch to a paid model. The advantage here is obvious. The user is already familiar with the product and knows all the functions. Ideally, he is already so used to the service that he does not want to switch to the competition. The likelihood of a software product spreading further in this way is also much higher, as the barrier to entry is lower. The disadvantage lies in the revenue that is lost in this way. Users of free software do not generate revenue and the effort to convert these users into paying customers can be very high. In addition, these users can also cancel a service more quickly. They are less loyal because they are not tied to a service. The final point is that this variant can lead to users mentally devaluing the actual core product, even if the product offers great added value.
4. Flat rate Pricing
Most people are familiar with the flat rate principle. The approach is very simple, because a product with a certain number of features is offered at a certain price. In this sense, the flat rate pricing structure is quite similar to the software license model before cloud infrastructures existed, with the difference that in the cloud model, billing is usually monthly. The advantage of a flat rate pricing model, is the fact that it is easy to sell. One product – one price. The focus of the entire marketing and sales team is then on selling a product at a specific price. This fact also leads to the fact that communication is simple. Software-as-a-Service pricing models can get very complicated, but a flat rate is something every potential customer understands immediately. The downside, however, is that it can be difficult to extract value from different users. For example, if the pricing strategy is focused on enterprise customers, then you miss out on SMB business, which in aggregate can be a big part of your revenue. Since the pricing strategy is so clearly communicated in this model, there is only one opportunity to convince the customer of the value of the offering. Unlike many other models, there is no room for negotiation here, so that in case of doubt you could still convince the customer with a customized offer.
5. Tiered Pricing Strategie
Tiered pricing is probably the most widely used pricing strategy in the Software-as-a-Service world. This variant offers different (price) packages with different feature combinations from which customers can choose. The most commonly used number of packages is three – consisting of an entry level, a medium price segment and a more expensive variant. One advantage of the tiered pricing strategy is that several target groups can be addressed and a broader field can be served. In addition, it paves the way for upselling. As soon as the selected package no longer covers the customer’s needs, the next larger variant must be booked. On the other hand, the large offering can also be irritating, and customers can quickly lose track of things if it is divided up too granularly and there are too many different price structures. There is then a risk that customers will drop out because they are overwhelmed by the sheer flood of offers. Another danger lies with users who use the software excessively and regularly exceed the service volume allotted to them. In the case of top tier customers, it then becomes difficult to claim further costs.