SaaS Pricing Models Explained (With Examples)

A well-designed pricing model is essential to maximizing the potential of your SaaS product. After all, finding the right balance between value and affordability is crucial for attracting and retaining customers. But with so many different options available, choosing the right SaaS pricing model can feel like navigating through a maze.

To help you make an informed decision that suits both your business goals and customer needs, we'll break down the most common SaaS pricing models and go through real-life examples of each. And if you're feeling adventurous, stick around till the end for hybrid SaaS pricing models that combine the best of the basics.

What we'll cover

1. One-time fee pricing
2. Subscription-based pricing
   • Flat rate pricing
   • Pay-as-you-go
   • Per-user pricing
     • Charging per active user
   • Per-feature pricing
   • Tiered pricing
   • Freemium
3. Hybrid SaaS pricing models

Charging a one-time fee

While not as popular as it used to be, charging a one-time fee for your SaaS product can be an attractive option for customers who prefer upfront payment and want to avoid long-term commitments. This pricing model allows users to access the full range of features and functionalities without worrying about recurring charges.

Pros of charging a one-time fee

• Generates immediate revenue. Since customers pay upfront, you can generate a lump sum income to invest in further development or marketing efforts.

• Gives customers a sense of ownership. With a one-time fee model, customers are not locked into any long-term contracts or subscriptions. They can purchase the product once and use it indefinitely without having to worry about recurring payments or cancellation fees.

Cons of charging a one-time fee

• No recurring revenue stream. Offering a one-time fee means that you won't have revenue coming in at a consistent pace. This can make it challenging to predict and maintain cash flow over time. Without the steady income generated by subscriptions, you'll need to constantly acquire new customers in order to sustain your business.

• Potential to limit your customer base and growth. Not everyone will be willing or able to pay a large sum all at once, especially if they're just starting out or are on a tight budget. If the upfront cost is too high for your average customer, a subscription-based model might work better.

One-time fee pricing example

Hemingway Editor, a piece of text editing software, is a great example of a one-time fee pricing model. While it's possible to use the browser version for free, you can also get the desktop app for $19.99.

Naturally, the app comes with a set of features that aren't available in your browser, such as saving your work, different file formats, and offline access. However, since there's no way to transfer the license to another device, customers only have access to it as long as they don't change their device.

Subscription-based pricing models

Subscription-based models are the most common in SaaS pricing because they offer flexibility and recurring revenue. With this type of pricing model, customers are automatically billed on a monthly, quarterly or yearly basis and receive access to the product regardless of how much they use it.

For SaaS businesses, these models are easy to track thanks to tools that help them manage subscription payments, upgrades, and downgrades. Here's a breakdown of the most popular SaaS pricing models that work on a subscription basis.

1. Flat rate pricing model

Flat rate pricing means your customers pay a fixed amount for full access to your product, regardless of the number of users. It's based on a straightforward and transparent approach: you offer one product with one set of features and charge one price for it.

Usually, customers can choose between paying monthly or annually. The annual subscription generally comes with a discount to encourage customers to a long-term commitment.

Pros of flat rate pricing

• Simplicity and predictability. With a flat rate, customers know exactly what to expect in terms of cost each month or year. This eliminates any confusion or surprise charges, making it easier for them to budget and plan. On the other hand, SaaS companies benefit from having stable revenue streams that are not dependent on usage fluctuations.

• Better user adoption and increased customer satisfaction. Flat rate pricing encourages customers to fully utilize the software's features without fear of incurring extra costs. They can explore all functionalities and make full use of the product's capabilities.

Cons of flat rate pricing

• Customer dissatisfaction. With flat pricing, customers pay the same fixed amount regardless of their usage or needs. This is a disadvantage for businesses that have fluctuating needs or seasonal variations in their usage patterns. If a customer’s actual usage falls below the flat rate, they may end up feeling like they're overpaying for the product.

• Limited scalability. Flat rate pricing may cause challenges when it comes to scaling your business or accommodating growth. As your customer base expands, you might find it difficult to adjust your pricing structure accordingly without risking alienating existing customers or creating confusion.

• Potential waste of resources. Since all customers pay the same flat fee, there is no incentive for them to optimize their usage or prioritize certain features over others based on their specific needs. This could result in inefficient resource allocation for both you and your customer.

• Difficulty in expanding your customer base. The inflexibility of flat rate pricing makes it challenging to attract diverse market segments with varying budgets and requirements. Different customers have different expectations, so offering only one fixed price limits your ability to capture a wider range of customers.

Flat rate pricing example

Basecamp, a project management and team collaboration platform, offers flat rate pricing for larger teams. For $299/month billed annually, businesses get access to all the features regardless of the number of employees using the platform.

2. Pay-as-you-go pricing model

Also known as the usage-based pricing model, it's a flexible option that allows customers to only pay for the features they actually use. Instead of being locked into a fixed subscription fee, customers are billed based on their usage. This can be particularly appealing for businesses with variable needs or seasonal fluctuations.

Pros of pay-as-you-go pricing

• Scalability. Customers have the freedom to scale up or down as needed, without incurring any additional costs when they don't need the service. It offers a level of cost control and transparency that many businesses appreciate.

• Low risk. Pay-as-you-go pricing lowers the barrier to entry for potential customers. With no upfront commitment or long-term contracts, they can try out different features and services without a significant financial risk.

Cons of pay-as-you-go pricing

• Lack of commitment. While its flexibility might be beneficial for customers, pay-as-you-go pricing can result in challenges retaining customers and bulding sustainable revenue streams for SaaS companies. This is because usage-based pricing allows customers to easily switch providers or stop using a product.

• Billing complexity. Due to the flexible nature of pay-as-you-go pricing, billing processes can become complicated and time-consuming for both SaaS companies and customers. Usage-based pricing requires careful monitoring and accurate tracking of usage data, which adds complexity to invoicing and payment procedures.

Pay-as-you-go example

Usage-based pricing is common among messaging and voice call platforms. One example is Twilio, with pricing based on usage metrics like:

• The number of messages sent
• Phone minutes used
• Other communication interactions

3. Per-user pricing model

As the name suggests, this pricing model is based on the number of people who use your SaaS product. One user pays a fixed price. If a second one joins, your revenue doubles and so on. This not only makes it easy for customers to predict their monthly costs, but also simplifies your revenue management.

Pros of per-user pricing

• Flexibility and cost control. Per-user pricing provides transparency in terms of costs. Businesses know exactly how much they will be paying based on the number of users accessing the software.

• Revenue growth. By upselling additional features or expanding user licenses as businesses expand, SaaS companies can use per-user pricing to drive revenue.

• Customer loyalty. When businesses see value in a product because each employee actively uses it, they're more likely to continue subscribing long-term.

Cons of per-user pricing

• Cost inefficiency. Per-user pricing models favor larger organizations with a high number of users. For smaller teams or startups, this pricing structure can be costly and potentially unsustainable, especially if they only require access to a limited set of features or functionalities.

• Lack of flexibility. With per-user pricing, businesses are often locked into paying for a predetermined number of licenses or seats, regardless of actual usage levels. This can result in wasted resources and unnecessary expenses if there are seasonal fluctuations in demand.

• Variability in user needs. Different users within an organization may have varying levels of engagement with the software depending on their roles and responsibilities. Per-user pricing treats all users equally, potentially resulting in companies paying more than necessary for inactive users.

Per-user pricing example

Canva, an online graphic design tool, offers per-user pricing for teams. Starting at $29.99/month for the first five users, it also comes with additional collaboration features not included on their individual plans.

3.1 Charging per active user

Charging per active user is a variation on the per-user pricing model. Instead of paying for the number of users they've added into the software, this means companies pay only for the ones actively using it.

Pros of charging per active user

• Scalability. Charging per active user allows SaaS companies to scale their pricing based on the number of users actually utilizing the software. This means that, as your customer base grows, so does your revenue.

• Fairness and transparency. Charging per active user ensures that customers only pay for what they actually use. It eliminates the possibility of overcharging customers who have inactive or dormant users, resulting in a fair and transparent pricing structure.

• Room for growth. Charging per active user gives SaaS companies flexibility when it comes to adding new features or expanding their offers. As new functionalities are introduced, you can apply additional charges based on the number of users who take advantage of them.

Cons of charging per active user

• Difficulty in predicting revenue. Charging per active user can make it challenging to accurately forecast revenue since customer usage patterns fluctuate over time.

• Complex pricing structures. Implementing a per-active-user pricing model often requires complex pricing structures to accommodate for different levels of usage or functionality.

• Potential misuse by customers. In some cases, charging based on active users could incentivize customers to share accounts or login credentials amongst their team members, leading to revenue losses for SaaS companies.

Active user pricing example

The most famous example of per-active-user pricing is Slack. No matter how many users you've added, you'll only be billed for the ones using the software.

4. Per-feature pricing model

Besides users, SaaS companies also often use features as a guideline in their pricing strategy. With per-feature pricing, customers pay for the specific functionalities they want to get out of the software.

Pros of per-feature pricing

• Personalization and cost-effectiveness. Per-feature pricing allows businesses to tailor their subscription plans based on individual requirements. Customers can choose the specific features they need and avoid paying for unnecessary ones, making it a cost-effective option.

• Upselling opportunities. Offering additional features as add-ons or upgrades can be used to encourage customers to upgrade their subscription, resulting in more revenue generated.

• Easy price adjustments. Per-feature pricing allows SaaS businesses to adjust prices easily when introducing new features or updates. They can set different price points for high-demand features while keeping base prices competitive.

Cons of per-feature pricing

• High cost potential. Being charged based on the specific features they use can be a plus for those who only need a few key features. However, it can also become expensive and inconvenient for businesses that require access to multiple features.

• Slower purchasing process. Determining which features are essential and worth paying for can be challenging. For customers, it requires careful evaluation to determine what they truly need versus what is simply nice to have. As a result, this can slow down the decision-making process and lead to confusion.

Per-feature pricing example

Evernote is a popular note taking app that offers three plans, the main difference between each of them being the features included. As a result, users upgrade in order to gain more functionality out of the software.

5. Tiered pricing model

Tiered pricing is a commonly used SaaS pricing strategy that offers different levels (i.e., tiers) of service at varying price points. This allows customers to choose the level of features and functionality that best fits their needs, while also giving them the option to upgrade or downgrade.

Pros of tiered pricing

• Wide range of customers. Tiered pricing offers different levels of service at varying price points. This approach provides flexibility for customers to choose the level of features and functionality that best suits their needs, allowing SaaS businesses to capture value from different customer segments.

• Scalability. As customers' needs evolve over time, they can easily upgrade or downgrade their subscription based on the changes in their business. This flexibility allows for long-term customer retention and fosters a sense of loyalty.

• Upselling opportunities. By showcasing additional features and benefits in higher-priced tiers, SaaS companies can encourage existing customers to upgrade their subscriptions for more value. This strategy not only generates additional revenue, but also strengthens the overall relationship between SaaS companies and their clients.

• Flexibility. Tiered pricing enables SaaS businesses to experiment with different pricing packages based on market demand and competitor analysis. The ability to fine-tune each tier's feature set and price point gives SaaS companies the opportunity to optimize their product-market fit and maximize profitability.

Cons of tiered pricing

• Pricing structure complexity. With multiple tiers and different features or usage limits associated with each one, customers may find it difficult to understand which tier is best suited for their needs.

• Ongoing management. Implementing and maintaining a tiered pricing model can require significant effort and resources. It involves constant monitoring and adjustment based on customer feedback, market trends, and competitors.

Tiered pricing example

Intercom, a customer service platform, uses the tiered pricing model to offer three different plans. Each plan is designed around the needs and budgets of different potential customers.

6. Freemium pricing model

The freemium pricing model is has gained significant popularity in the SaaS industry. This model offers users a basic version of the software for free, with limited features or functionality. However, if users want access to additional or more advanced features, they have to upgrade to a paid plan.

That said, when it comes to SaaS pricing strategies, we're not big fans of freemium at Better Proposals. If you're considering it, first take a look at our separate article on the dangers of freemium here.

Pros of freemium

• Large user base. With more people using the product, there's also an increased chance of converting some of those free users into paying customers as they discover additional functionalities they need.

• Market breakthrough. When you offer something for free, chances are a lot of people will want to use it. As a result, freemium can help you spread the word about your product, fast.

Cons of freemium

• Limited functionality. One downside of the freemium pricing model is that the free version often has limited features and functionalities compared to the paid versions. This can be frustrating for users who are looking for a solution, but find themselves restricted by the limitations of the free version.

• Upselling pressure. Freemium models rely on upselling to convert free users into paying customers. While this can be an effective strategy, it can also create pressure on users to upgrade and may lead to feelings of being constantly bombarded with upgrade offers or notifications.

• Higher support demands. Offering a free version often attracts a large number of users who may require customer support assistance. This can put a strain on resources, as providing quality support becomes essential in order to retain potential customers.

• Difficulty monetizing non-paying users. Not all freemium users will eventually convert into paying customers, which means that there is a segment of your user base that generates no revenue.

• Long-term profitability challenges. Depending solely on converting freemium users into paid subscribers can pose long-term profitability challenges if not enough conversions occur or if customer churn rates are high.

Freemium example

Dropbox uses a freemium pricing model based on the amount of storage you want to use. The first 2GB are free, but you'll need to upgrade to one of their paid plans if you want more space or extra features.

Hybrid SaaS pricing models

Hybrid SaaS pricing models are a flexible approach to pricing that combines different elements from previously mentioned pricing models. This allows companies to cater to the diverse needs of their customers while maximizing their revenue potential.

One example of a hybrid pricing model is offering a base subscription fee with additional charges for extra features or usage. This gives customers the option to choose the level of service they need, while also providing opportunities for upselling and generating more revenue.

Another example is combining a freemium model with tiered pricing. This means offering a basic version of the software for free, while charging higher fees for premium features or enhanced functionality. This allows customers to get started with the product at no cost, but encourages them to upgrade in order to access advanced capabilities.

At Better Proposals, we combine tiered pricing, per-user pricing, per-feature pricing, and flat rate pricing. Each of our three plans is tailored for a different business type - one for freelancers, one for small businesses, and one for large teams. Every plan comes at a fixed monthly price with the number of features growing as you go up. And if you add another user, you know how much extra it will cost.

Final thoughts

When it comes to the best pricing model for your SaaS product, there is no one-size-fits-all solution. Each pricing model comes with its own advantages and disadvantages, and the best approach for your business will depend on your target market, competition, and value proposition.

The key is to find a pricing model that aligns with your customers' needs while also ensuring profitability for your business. Consider experimenting with different pricing strategies to see what resonates most with your target audience.

And remember: flexibility is crucial. As customer preferences evolve and new competitors emerge, you may need to adjust or even combine different pricing models to stay competitive.