How to Monetize Your SaaS Application: Pricing Models and Strategies

There is no denying the fact that a SaaS business is very similar to running a marathon while juggling flaming torches. You are probably pretty good at developing a product that a market wants, but that’s merely the starting point. You’ve put in long hours, thousands of dollars, and tons of sweat and tears to build an incredible product as a SaaS founder. And now it’s time to reap the reward. Pricing is the single most important factor that influences your business’s revenue and growth rate.

Choosing the best SaaS pricing strategy greatly influences growth and revenue. Some actionable strategies and tactics help in selecting the best pricing model for your SaaS. There are a number of subscription models available that you can choose from based on business needs. Currently, the most frequently used subscription model is the usage-based pricing model, with 38% of SaaS companies engaging this model to better align with customers’ needs. Additionally, 94% of B2B SaaS companies keep updating their pricing tiers at least once per year to adapt to the continually changing pricing context. These stats prove a key point: how important it is to choose the right pricing model that aligns well with changing customer dynamics and usage. 

Let’s discuss some effective pricing models, such as freemium and premium models, the potential risks associated with these pricing strategies, and the most widely used SaaS monetization strategies adopted by SaaS founders.

What Makes a Pricing Model Effective?

A decent and effective pricing model is a balance of value and revenue. Effective SaaS pricing strategies will support continued growth. Pricing is a complex and controversial process. During this process, it’s essential to pay attention to the most important stakeholder – your customer. You should be excited about pricing not only to acquire customers, but to delight customers!
In the past, many SaaS companies worked with either payment gateways or Independent Sales Organizations (ISOs) to issue merchant accounts and process payments. Often, however, they received no revenue from that payment processing.

Now that the SaaS industry has evolved, getting in on merchant services revenue has become an attractive option for meaningful revenue margins. Today, modern SaaS platforms can earn revenue not just from selling their core product, but by monetizing the payments made by companies using their software. 

SaaS monetization

One of the most common ways of SaaS monetization is through markup pricing. For example, a SaaS platform partners with an integrated payment service provider who charges 2.5% for credit card processing. The bookkeeper charges their customers 2.9% for payment processing, meaning they can make 0.4% in residual revenue (which they can keep all or part as profit). 

Here’s the kicker: most SaaS founders completely overlook that there is a hidden revenue opportunity each time a customer pays you. Immediate revenue may be sitting right under your nose. And no, we’re not talking about upping prices or upselling additional features. Customers are paying you to access your service. This opportunity is called payments monetization, and it’s quickly becoming one of the simplest ways to monetize every transaction on your SaaS platform while maintaining the customer experience.

Understanding the Challenges of Pricing Your SaaS

ome common risks and challenges SaaS developers face include overpricing or under-pricing their product. Overpricing can potentially cause them to lose customers, especially in a competitive market. Similarly, under-pricing puts your product at risk of being perceived as cheap or low quality, which can also hinder the growth of your SaaS business.

In short, how you price your SaaS affects your growth ceiling and your potential number of new customers. It’s best to understand the potential risks of monetization. Pricing can be puzzling. Regardless of how deep your experience is in the SaaS marketplace and how well-informed (or misinformed) your potential customers are, pricing can be overwhelming. But don’t let it be a hurdle that derails your business. Every new business (of any kind) struggles with pricing. The trick is to find the right pricing for your SaaS product or niche. Many popular companies have been asking these pricing questions. Companies like Dropbox, HubSpot CRM, Slack, and Basecamp all went through the same exercises and struggles in their earlier days.

A vast array of pricing models exists in the SaaS market for you to choose from according to your financial business model for your SaaS product. Price changes and pricing decisions can seem like a daunting task early in your SaaS product lifecycle; that is why we are going to discuss some of the most used pricing models and strategies that have proven to assist in the revenue and growth of your SaaS business.

Pricing Models and Strategies in SaaS Applications

When you’re talking about SaaS, your pricing model is not just a number on a landing page; it’s the engine of your revenue. If by any chance, you picked the wrong model, you could potentially chase customers away or leave some money on the table. If you get it right, you could supercharge growth, improve customer retention while scaling sustainably. Customer needs are always changing—and so are SaaS pricing models. There is no one right way to price, but there are a few models that have emerged as popular and most used models. Let’s take a look at some of the most popular ones in the SaaS world today.

1. Subscription/Flat Pricing

Unquestionably, the most frequent pricing model in the SaaS space is one with a flat monthly pricing structure, often referred to as flat rate pricing. A flat monthly price (for example, $50/month) gives the user access to all of the product’s features and functionality. Free versions may have some features, but the paid versions have more. 

Customers pay a recurring fee, whether monthly, quarterly, or annually, for access to your software. Basecamp and HoneyBook are popular companies that are using this pricing model.

2. Tiered Pricing
Tiered pricing is yet another model that many SaaS users are familiar with. If you are not familiar with thinking in “tiers,” then you might find it more digestible to think in terms of “packages.” So, in “Package A,” the user gets a certain stack of features, and in Package B, users get all of the features in Package A plus some extra features. Package C would be everything in Package B plus the same package stack of features. The SaaS company may have named these packages as Lite, Basic, and Pro.

It can be as simple as shifting the “Most Popular” or “Recommended” banner to your high-tier pricing option. This is a simple, strategic shift used by a number of SaaS companies to their benefit. ConvertKit is a platform that offers tiered levels of pricing. Depending on the price paid, subscribers can access an increasing number of features.

3. Usage-based Pricing

Essentially, the user pays more (or is required to be on a higher subscription level) the more the user consumes the product. Pricing can be based on a consumption model. It helps the company with customer retention because customers don’t feel like they’re being pushed down the rabbit hole of expensive plans they don’t need. This is one of the main reasons why most SaaS companies are choosing this pricing model nowadays.
A usage-based pricing product that I think of is Zapier, which has usage-based pricing based upon how many tasks you automate each month (but also has additional features you can get at higher package pricing).

4. Freemium vs Premium model 

The freemium model allows customers to access a basic free version of your application. Customers receive limited features for unlimited time. They can only pay for a feature when they need to upgrade. The premium model does not include any free features. You have to pay to use the application and gain access to other features. It typically carries multiple plans at different price points for a customer to consider based on usage and features. Companies like Slack, Spotify are utilizing freemium pricing models, while Companies like Salesforce, Adobe Creative Cloud are successfully incorporating the Premium model into their business model.

The pricing strategies we’ve discussed above are among the most widely used in the SaaS industry. However, there are several other approaches that vendors can adopt, depending on their target audience, market positioning, and product offering.
Value-Based Pricing: This pricing method is based on the value the customer perceives, rather than just the costs, and it often requires extensive market research.
Psychological Pricing: This pricing scheme may involve price-ending strategies, such as using $49 instead of $50, or bundling features to make higher-tier products more enticing to consumers.
Annual Discounts: Annual discounts incentivize customers to pay for 12 months upfront. This is a great way to generate cash upfront.
Localized Pricing: Localized pricing strategies take into account a customer’s currency, purchasing power, and whether or not pricing is competitive.
In short, after viewing all the popular pricing models, one option is still open: you can always customize your pricing model if the existing models are not working well for your business. There is no hard-and-fast rule. An effective pricing model will do one job, i.e., it will effectively turn your casual browsers into regular customers, thus increasing revenue and growth. There’s no denying that optimizing revenue requires a rigorous pricing model that is appropriate for your business value. You have to keep playing with the pricing models until you get the right one. Keep analysing customers’ needs and your business value; this will eventually help in choosing the right monetization strategy for your business.