In March 1999, the first software as a service company was created. The dot-com bubble of the early 2000s saw the number of SaaS vendors globally dramatically increase, with the industry valued at more than $130 billion in 2022. However, SaaS markets are incredibly competitive, meaning that the likelihood of a company experiencing growth is largely dependent on effective revenue optimization.
The industry’s highly competitive nature requires SaaS businesses to continuously optimize their revenue by implementing appropriate pricing strategies. Numerous SaaS pricing strategies exist, with user-based, flat rate, and per-user pricing being the best choice for businesses aiming to optimize revenue.
Determining the best pricing strategy for your SaaS business can be overwhelming due to the sheer number of quality options available. However, by selecting a specific pricing strategy, SaaS companies can optimize their vital revenue streams effortlessly. This article will detail the optimal pricing practices for SaaS companies aiming to swiftly increase their profitability and market share.
Best Pricing Practices for SaaS Business Revenue Optimization
Despite the SaaS industry being just over twenty years old, it has become one of the largest, most influential, and fastest growing globally.
Numerous professional financial analysts have predicted the global SaaS market to reach a valuation of at least $200 billion by 2026. The anticipated growth of the SaaS industry is demonstrative of its incredibly competitive business environment, meaning that companies must implement optimal pricing strategies.
Pricing strategies have always been a fundamental consideration for businesses operating in sizable and competitive market environments. However, selecting an appropriate pricing strategy in your SaaS business is enormously consequential as it will directly impact your ability to optimize yearly revenue.
Currently, global SaaS markets are dominated by giant companies such as Google, Salesforce, Dropbox, and Slack. The SaaS industry giants are continuously attempting to consolidate their market position while increasing their market share. Despite the ever-increasing competition, smaller companies can gain access and entrench their position within global SaaS markets if they adopt an appropriate pricing strategy for revenue optimization.
The Most Beneficial Pricing Models for Saas Businesses
To select the most beneficial pricing strategy for SaaS businesses will require careful consideration and analysis of factors such as market trends, customer demand, supply curves, and buying patterns.
A detailed and thorough analysis is essential as it will allow you to select an optimal pricing strategy for increased market share, yearly revenues, and enhanced industry positioning. While numerous pricing strategies are implemented throughout the SaaS industry, there are five distinct models best suited for instant or long-term revenue optimization:
1. The Flat Rate Pricing Strategy
The flat rate pricing model is currently considered the most straightforward strategy utilized by many global SaaS companies. The associated simplicity and proven success of the flat rate pricing strategy have made it the most popular model implemented by SaaS companies aiming to optimize their revenue.
Most SaaS pricing models are complex, requiring the assistance of expensive and experienced industry professionals. However, the flat rate pricing strategy is straightforward to understand and implement, resulting in smaller SaaS businesses frequently utilizing the pricing model.
Essentially, the pricing structure is formulated on company-specific SaaS solutions, enabling them to seamlessly include special and critical features. Most SaaS companies utilizing the flat rate pricing strategy permit their customers to sign up for a monthly payment subscription plan, which they can cancel without unnecessarily losing money.
Customers favor the flat rate pricing strategy as it offers sufficient user transparency and does not require much knowledge. Social media content creation companies favor the pricing model, with most experiencing significant revenue optimization.
Take Zoho Connect as an example, which offers a flat rate pricing model for external network users.
2. The Usage-Based Pricing Strategy
Usage-based pricing strategies most frequently implemented by SaaS companies attempting to optimize their yearly revenue.
While the usage-based pricing model is most applicable for infrastructure or platform-based software businesses, it has been successfully employed by many profitable SaaS businesses. Usage-based pricing structures are popular among many online consumers as they do not require a restrictive subscription plan.
At the end of the month, customers will only be invoiced for the products or services they consume. The associated freedom of the usage-based pricing strategy dramatically enhances the company's customer base, as many are hesitant to lock themselves into long-term subscription plans.
Online consumers are notoriously frugal, with the usage-based pricing model allowing them to only spend what they can afford. The strategy is most widespread in SaaS businesses offering a usage-type model, such as email marketers. By implementing the pricing strategy, the likelihood of your company’s revenue being optimized will intensify.
Take Zapier, for instance. Users can pre-pay and upgrade as needed based on their consumption. They can also customize their plans based on the number of “Zaps” and tasks they need.
3. The Per-User Pricing Strategy
SaaS companies offering tools for enterprises, collaborative-based creative firms, and B2B businesses often utilize the per-user pricing strategy to dramatically optimize yearly revenue. Per-user pricing models are most effective when combined with usage-based or flat-rate pricing models. While per-user pricing strategies are not as prevalent as the more widespread models, they are enormously effective for collaborative-based businesses.
Usually, per-user pricing models are purchased by companies for their staff, instantly enhancing their collaborative abilities. While the business initially purchasing the product should pay the full price, the per-user pricing model permits them to pay a minor additional fee for their employees to gain access to the full range of offered services.
The per-user pricing strategy is enormously effective for SaaS companies attempting to optimize their revenue. This is due to the pricing strategy based on a subscription model and a continuously expanding user base throughout teamwork-oriented companies.
Here's BuzzStream's pricing page as an example.
4. The Penetration Pricing Strategy
Penetration pricing strategies are among the most effective models for SaaS companies aiming to optimize their revenue by capturing significant market share before their competitors.
Moreover, penetration pricing models offer immediate results and substantial revenue enhancements. By capturing additional market share, SaaS companies will experience exponential and immediate growth.
However, it should be noted that this pricing model will require SaaS businesses to initially decrease their prices, which can gradually be raised once the customer base is secured. Over the long term, the firm can initiate cross-selling and upselling marketing techniques, securing its market share and profitability.
5. The Premium Pricing Strategy
Despite the premium pricing strategy being the least popular among current models, it will guarantee long-term revenue optimization if appropriately implemented. Premium pricing strategies are most commonly utilized by industry giants such as Adobe, Salesforce, and Shopify, although smaller companies can experience similar success if they exclusively offer premium products.
By maintaining high prices for products offered, SaaS companies will continuously enhance their brand’s value and customer loyalty. While it may seem counterintuitive, many online consumers are willing to pay more for high-quality products and premium services.
Despite premium pricing strategies being more challenging for smaller SaaS companies to implement effectively, the model’s associated revenue optimization opportunities are enormous. The premium pricing strategy is best suited for SaaS companies offering a small number of incredibly high-quality products with inherently above-average profit margins.
Here's Salesforce's pricing as an example. Undoubtedly, the "Unlimited" plan is the most expensive one. Any potential customer will be able to see that the product they would receive with this more costly option will be almost totally different from the "Essentials" plan.
The global SaaS industry is highly competitive, with analysts predicting further growth over the coming years. However, by selecting the best pricing strategy, SaaS businesses can instantly and permanently optimize yearly revenue while simultaneously gaining vital market share.
(Related article: 10 Pricing Page Best Practices That Will Boost Your Sales)