Pricing Models

Part
01
of three
Part
01

Endpoint Gating

"Endpoint gating" is a tiered pricing model where a service provider charges for their service(s) on a per endpoint basis. The endpoints may be either per-device or per resource being covered for the period. Below, you will find more details.

Charging Based on Endpoints

  • Charging based on endpoints is when a company decides to bill for services or resources provided based on the number of endpoints (or devices) covered for a certain period.
  • This model of pricing is often the preferred model for monitoring services where the provider bills per the number of systems or devices being monitored or covered for the period. For instance, a software company providing security monitoring solution or managed IT solutions for various endpoints such as mobile, email, or an intranet may bill for their services based on the number of endpoints being monitored for a client.
  • The pricing is often straight forward for both the service provider and the customers as it simply involves multiplying the number endpoints with a unit price.
  • This pricing model is also useful where some endpoints are more resource demanding than others and as such the pricing will need to reflect that. For instance, the price to monitor a storage system may be different for the price to monitor a server and the vendor may want that to reflect in the price so may have different prices for each type of endpoint.

SaaS Company Using the Metrics

  • There are SaaS providers using this pricing model. Examples of such companies are Pruvan and Amazon (for its IoT management service).
  • Although there are SaaS providers using these models, industry experts believe that the model is not ideal for SaaS companies because most of the computing is done in the cloud.
  • For example, Vince Tinnirello, CEO of Anchor Network Solutions Inc, stated that they used to charge based on endpoints but had to abandon the model as their clients started using more mobile devices because it made it cost prohibitive for their clients if every mobile device is billed separately.
  • In addition, Tinnirello noted that such service providers "rely upon per-device pricing run the risk of losing money as their clients move more and more computing to the cloud."

Pros of Using Endpoint Gating

  • Charging based on the number of endpoints is attractive because of its simplicity. It is easy for both client and the provider to calculate cost based on the number of endpoints being serviced.
  • It also offers flexibility, allowing the client to scale operations as needed.
  • The pricing model also supports standardization, making it easy for the organization to establish "line-card pricing for a given service, with fixed per unit prices for all the device types that can potentially be supported."
  • For service providers servicing businesses where the ratio of devices to employees is low, the pricing is likely to be valuable. For instance, if the business being serviced has a ratio of five devices for each employee, it may be an attractive proposition for the service provider.

Cons of Using Endpoint Gating

  • The norm in most organization is "to have 10-30 employees for every device" and as such charging based on the number of devices/endpoints may not be an effective pricing strategy for most service providers.
  • Endpoint gating is also not a good fit for most SaaS service providers where services are primarily offered within the cloud.
  • With the proliferation of different mobile devices in the workplace, and with each employee likely working with multiple devices, businesses can find this pricing model cost prohibitive if they have to pay on a per-device basis.
  • A flat fee for each endpoint often lacks the granularity needed to determine the cost of offering a service where multiple services are offered for each endpoint and this may affect profit if not properly calculated.

Part
02
of three
Part
02

Seat Charging

Seat charging is defined as a SaaS pricing model where companies charge customers based on the number of seats allowed to use the product/service. It uses a tiered metric. Companies using this pricing model include Slack, Salesforce, Frontapp, Hubstaff, and Todoist.

DEFINITION AND WHAT COUNTS AS SEAT CHARGING

  • In general, seat charging is defined as a SaaS pricing model where companies charge customers based on the number of seats (users) allowed to use the product/service.
  • A Venture Beat article defined it as a pricing model "where pricing is not tied directly to how much a customer uses a service," but on the number of seats allowed to use a SaaS product/service.
  • According to Paddle, this pricing model also refers to per-user charging as it involves charging a subscription based on the number of people (seats) that uses a SaaS product/service.
  • If a subscriber needs more seats (users), they are expected to pay more to either gain access to more value or in some cases, lead to a reduction in the overall charge by increasing the number of people (seats) using the SaaS product/service.

USAGE METRIC OF SEAT CHARGING

  • Seating charging uses a tiered metric.
  • This pricing model is popular due to its simple to understand tiers where a single user (seat) pays a fixed price and adding another user (seat) doubles that price.
  • Due to this easy-to-understand tiering, existing and potential customers know their costs based on the number of people in their organization using the SaaS product/service.
  • Even though seat charging is one of the most popular pricing models among SaaS companies, its level of popularity seems to be declining.
  • Seat charging model adoption dropped from 37% in 2014 to 35% in 2016, while usage-based pricing increased from 23% to 29% during the same period.

SAAS COMPANIES USING THIS METRIC

  • A report by Paddle revealed that SaaS companies such as Slack, Salesforce, and Todoist are utilizing seat charging.
  • According to Unscope, other companies such as Frontapp, Hubstaff, and Mention are also using this metric.

CONS OF SEAT CHARGING

  • Seat charging limits adoption as charging per seat/user gives customers a reason to avoid adding new seats to the tool.
  • The model incentives users to cheat as they can share their login details with other team members who do not have access.
  • It does not reflect the true value of a product as there is hardly a difference if a company using the product has two or more users.

PROS OF SEAT PRICING

  • Seat charging is simple to communicate to users, and the most direct SaaS pricing models for would-be users to calculate costs for using a software.
  • This pricing model makes it easy for a company to increase revenue by increasing adoption as an increase in seats (users) directly increases revenue.
  • SaaS companies using a recurring revenue model, and per seat pricing can easily forecast revenue generation.

Part
03
of three
Part
03

Charging Credits

Hewlett Packard Enterprises (HPE) and Oracle both have a type of "credits" model that is used in conjunction with other pricing models. The details found for each did not include pricing, but did provide some information on what the credits can be used for. After extensive searches through consulting websites, SaaS companies' sites, Hewlett Packard and Oracle's sites, and sites of companies that provide the software for other SaaS companies to implement their pricing strategies, we were unable to find the other data requested, including the structure of the "credits" model, what counts as credits, how the metric is used, and the pros and cons of the model were not available.

Helpful Findings

  • HPE has a Service Credits program for integration and performance services. The credits cannot be used for maintenance of hardware and software, or for installation and startup services.
  • Oracle offers Universal Credit Pricing which has both a pay-as-you-go option and a Monthly Flex option. The Flex Option gives clients a certain number of credits each month that can be used for any IaaS/SaaS services. However, any credits that are not used by the end of each month are forfeited. They do not roll over to the following month.
  • Neil Patel, a best-selling author, consultant, and entrepreneur, published an article on 12 SaaS pricing strategies, where he examined the strategies of 12 different SaaS companies. None of the companies used the "credits" model. However, there are interesting takeaways from the various types which may help with determining the best model for a particular company.
  • An evaluation of the companies on the SaaS 250 list showed that the average number o pricing plans was 3.5, 50% highlighted a "best" option, 63% offer a free trial, and 4% offer sliding scale pricing. The analysis did not mention the "credits" model.
  • SuperSaaS allows customers to set up a credit system for their customers. There are various options including how much credit customers start with, whether credit is displayed as currency or credits, and whether combined payments are accepted (for example, paying partially with credits and partially with PayPal).
  • Chargebee allows for clients to set up Prepaid Credit Packs. There are various options that can be personalized such as how the initial purchase is made, how credits are replenished, and what they can be used for.
  • In an article on payment forms offered by the most popular SaaS companies in the world, MailChimp was described as using credits with their pay-as-you-go model. Further research indicated this wasn't exactly what we were looking for as this was a straightforward plan of paying per email. The credits do not allow clients to have access to different services.

Research Strategy

We began our search by looking for details on how the "credits" model works for SaaS companies. We searched consulting firm websites such as Bain, Deloitte, and Gartner. Since these firms all offer business consulting services, we expected we could find some details about the "credits" model, along with the pros and cons of using it. While we found a report by Bain that included results from a pricing survey, a paywalled report from Gartner on how to choose a pricing model, and an article by Cobloom that discussed various popular models, none of them specifically mentioned the "credits" model or anything similar.

Next, we looked for data on Hewlett Packard's pricing model since it was mentioned that they may have previously used this approach. We did find a document from HPE which laid out a Service Credit program for services such as Big Data, in-house IT, and infrastructure. Although the document laid out guidelines for use and how to purchase, there were no details on pricing. We did however use the terminology found in the document to try to find some other companies using a similar model, either alone, or in conjunction with other pricing plans. This led us to a Universal Credit Pricing document on Oracle's website which appears to be similar to the "credits" model.

Since we had not yet found any definitions or details on the "credits" model of pricing, we decided to examine the websites of companies that provide pricing software to see if they provided details on how the systems work. This led us to SuperSaaS and Chargebee, which both allow clients to set up a credit system. Although this showed that these systems are available, and likely used, by SaaS companies, the requested details still were not provided. Rather, there were details on how to use these systems.

Since there was limited data publicly available on the "credits" model of payment, we assume that is a model that is not frequently used, or possibly that it is used in conjunction with other models and is therefore not considered a primary pricing model for SaaS.
Sources
Sources

From Part 02
Quotes
  • "Where pricing is not tied directly to how much a customer uses a service."
Quotes
  • "We’ve just made it much easier to manage per seat billing, a popular subscription type used by the likes of Slack, Salesforce or Todoist, whereby you charge companies based on how many people use your product."
Quotes
  • "This popularity can largely be attributed to simplicity: a single user pays a fixed monthly price; add another user, and that price doubles; add a third user and, you guessed it, the monthly cost trebles."
From Part 03
Quotes
  • "Bain’s recent survey on pricing behavior found that nearly half of companies are using some form of dynamic pricing and that those companies are better at monitoring markets than those that don’t. Our survey also found that companies that make good pricing decisions are more likely to have the right pricing tools and data to support them. Overall, one-third of respondents said that digital tools are important for their pricing work."
Quotes
  • "And yet, the average SaaS startup spends just six hours on their pricing strategy. That's not six hours a week, or six hours a month - six hours, ever, to define, test and optimise everything."
  • ""
Quotes
  • "HPE Service Credits gives the customer the flexibility to choose from a variety of specialized service activities. These include assessments, performance analysis, firmware management, professional services, and operational best practices to supplement the services provided under the active warranty or support services coverage with HPE. The service activities are designed to span a broad spectrum of IT technology domains including traditional in-house IT, Big Data, converged infrastructures, and hybrid cloud infrastructures. The credit approach allows the customer to select the specific services they need, when they need them, to help them maximize their IT performance and achieve their business goals."
Quotes
  • "These credits function like a regular currency – you could price something at, say, 1.5 credits – but they can only be obtained upfront. If, instead, credit is denominated in your local currency, clients can partially pay with credit and pay the remainder via PayPal, for example."
  • "Another way to use the credit system is to allow your clients to buy credits from your webshop and use them to pay for services and/or resources provided by you. You can set an expiration date or have them be valid indefinitely."
Quotes
  • "I am a New York Times bestselling author. The Wall Street Journal calls me a top influencer on the web, Forbes says I am one of the top 10 marketers, and Entrepreneur Magazine says I created one of the 100 most brilliant companies. I was recognized as a top 100 entrepreneur under the age of 30 by President Obama and a top 100 entrepreneur under the age of 35 by the United Nations."
Quotes
  • "Presenting 5 plans clearly enforces the level of seriousness, capability, and value increase by price plan, without doubting higher price points. Also, adding simple CTA conversion paths helps validate services."
  • "Don’t be afraid to leverage popular clients to enforce higher value plans. Also, segmenting plans by visitor size helps potential customers determine where they would fit."
  • "By identifying clear customer targets and segments, SaaS companies can dictate higher value per plan. Also, as SaaS companies grow, they don’t need to change the prices for existing customers. Instead, they can offer a higher-end option like the Dedicated plan."
  • ""