B2B SaaS Pricing Models

Part
01
of five
Part
01

B2B SaaS Pricing Models - Per User Pricing

The per user pricing model is good for companies whose clients' needs are aligned with the number of users they have. Two successful examples of this model include JIRA and Slack.

Psychology

  • The per user pricing model plays on customer psychology because it spreads out expenses over a great period of time. Expenses at any given moment will look small compared to other expenses, even if the final total is greater.
  • Another way this model plays on customer psychology is through its low up-front costs. When usage is low, a customer can try the service with very few consequences.
  • Then, as usage grows, the expenses also grow, but the software by then is too important for the client to abandon.

Advantages

Disadvantages

  • A disadvantage is that this model may limit user adoption because the SaaS company provides an incentive to clients to limit adding new users.
  • In the same vein, the model may make it easier for customers to abandon the service because it limits user adoption.
  • Another disadvantage is that the model does not necessarily reflect real value, because a client may not care about the exact number of users they have. Active users, for example, can be a more important metric that this model squashes and does not consider.

B2B SaaS Companies that Use this Model

  • JIRA
    • JIRA is a project management and issue tracking software that uses a per user pricing model.
    • One reason that this model is particularly successful for JIRA is that it creates network effects. As more people use JIRA, JIRA becomes more valuable to each user, and the pricing model reflects that.
    • As a result, subscriber revenue has increased by 1200%.
  • Slack

Research Strategy

To determine the psychology, advantages, disadvantages, and examples of B2B SaaS companies that have implemented the Per User Pricing model, our research team reviewed technology publications, reports from research institutions, and B2B SaaS company reports. Through these sources, we were able to directly find all the information required without making any triangulations.
Part
02
of five
Part
02

B2B SaaS Pricing Models - Freemium Pricing

The freemium pricing model is used as part of a tiered pricing strategy that includes premium packages with the objective of motivating subscribers to the freemium model to upgrade to a premium package in order to unlock more benefits. The psychology behind freemium pricing is based on the endowment effect where users tend to place more value on a product that they consider to be part of it, thus acquiring the motivation to extract more value from the product by upgrading to a higher plan that provides more benefits.

Freemium Pricing

PSYCHOLOGY BEHIND FREEMIUM PRICING

  • The freemium business model is used by SaaS companies as a part of a tiered pricing strategy that includes regularly paid packages. SaaS companies implement this pricing model by providing a free, entry-level tier that provides user with free-to-use services as a supplementary to additional paid packages.
  • However, in order to encourage users who subscribe to the free entry-level tier to upgrade to paid packages, companies place limits to certain dimensions of usage for the freemium tier. Therefore, for users in this tier to enjoy the certain features that are not available in the freemium tier they will be required to upgrade to a certain level of usage.
  • The psychology behind freemium pricing is premised on the endowment effect where users place more value on something as a result of being able to own part of it. When users are part of a freemium product, they have a partial commitment to the company as well as a personal desire to extract more value from the product by upgrading to a premium package.
  • The success of the freemium pricing model depends greatly on the network effect. The network effect states that the value of a product or service increases when more people subscribe to the product or service. Therefore, by providing a freemium model that get people to adopt the product, it increases its value.
  • However, for the users to perceive the real value and to keep them from opting from the service, they need to be engaged. Engagement plays a vital role as an accelerator for freemium services. SaaS companies must deploy certain strategies and techniques to ensure that they keep the users engaged while accessing the service as well as while they are not using the service.
  • The techniques include providing premium add-on features that complements the free basic service. The add-ons are intended to make the users feel slightly dissatisfied with the freemium plan and thus willing to pay for a premium plan to unlock more value.
  • Premium add-ons increase user engagement because they enhance the value of the basic services thus providing a reason for users to upgrade to a paid package so that they can benefit from the enhanced services.
  • Additionally, the freemium model can also lead to the success of a SaaS business, because it provides users with the opportunity to experience a service without paying for it.
  • If users feel that the service is beneficial and that they can unlock more potential by upgrading to a package that provides additional benefits, then more users will be willing and ready to upgrade to a paid package. This in turn increases the revenue generated.

ADVANTAGES

  • Increased adoption- The initial adoption can be quite challenging to any SaaS business. However, by providing potential users with a freemium model makes it easier for customers to get started using the service which lead to increased and early adoption.
  • Viral potential- Freemium pricing model has a viral potential because early adopters find it more realistic to refer other users to the service because they have nothing to lose by subscribing to a free service.
  • Increased brand equity- When users love a free product, they tend to have an attachment to it and active usage of the product can lead to increased brand awareness, and customer loyalty which eventually leads to increased brand equity.

DISADVANTAGES

  • Revenue Killer- free users don’t generate revenue for any SaaS business. Therefore, for the business to continue operating successfully, it has to ensure that it has a reliable share of paid users who generate sufficient revenue that supports the cost incurred in acquiring and providing services to both the free and paid users.
  • Increased churn rate- Psychologically, people greatly value what they pay for. Therefore, while a freemium version of a SaaS product can lead to increased adoption, the model itself makes it easier for users to have a throwaway mentality which can result in abandoning the service leading to increased churn rate.
  • Devaluation of core service- When users are able to find a solution for a painful problem freely, they lack the motivation to pay for the service which can really lower the value of the service.

EXAMPLES OF B2B SAAS COMPANIES USING THE FREEMIUM PERICING MODEL

  • Examples of B2B SaaS companies that have implemented this model include MailChimp and Trello.

MAILCHIMP

  • While MailChimp was incorporated in 2001, the SaaS company launched its freemium plan, forever free, 8 years later in 2009. Just a year after launching the plan, MailChimp Co-founder and CEO Ben Chestnut stated that the plan helped the company to grow its customer base from 85,000 users to 450,000 users.
  • Additionally, despite offering a free plan, the company managed to increase its number of paying users by over 150%. The CEO also stated that the freemium plan helped MailChimp to increase its profit by over 650% because it was able to greatly lower its customer acquisition costs.
  • By providing customers with a free package, MailChimp was able to ensure that the users established more awareness and familiarity with the products. However, since there was a capacity limit in the free package, it was easier for users to upgrade to a paid plan.

TRELLO

  • When Trello was launched in 2011, despite the company having a strong product that provided immense value to users, the company used the freemium pricing model as one of its key marketing strategy to court potential customers.
  • Since the product was free, customizable and easy to use, many potential customers signed up for the free version. Within three years of launching, the company boasted of having acquired over 4.7 million users.
  • By the time the company was acquired by Atlassian in 2017, Trello had managed to increased its users by about 426% to hit 25 million users. Some of these users upgraded to paid packages eventually as they sought to unlock more potential from Trello.
  • Due to its massive customer base, Trello was acquired by Atlassian for $425 million. At the time of its acquisition, Atlassian claimed that Trello had over 13,000 paid subscribers.
Part
03
of five
Part
03

B2B SaaS Pricing Models - Per Active User Pricing

Examples of B2B SaaS companies that have implemented the per active user pricing model are Slack and Cloudesire.

PSYCHOLOGY AROUND PER ACTIVE USER PRICING MODEL

  • Active user pricing appears closely related to bundle pricing which simplifies complexities for potential consumers. Bundle pricing is especially good "when a multitude of apps and add-ons are available….it draws focus away from individual product price, and encourages outcome-oriented thinking: customers are encouraged to think about the value of a ‘productivity suite’ or ‘design studio’, instead of individual SaaS products."
  • A close cousin to active user pricing is per user pricing, which is described as a relic of the 1980s, when software companies came on to the market but used a value-based metric that "wasn’t a way to easily monitor how much usage was occurring and even then it didn’t make sense in the cost structure of [software] integration or delivery." The psychology of per user pricing could be described as uneasy, unconfident, and insecure since rather than coming up with a fitting model, the software industry grabbed on to what was already in use by hardware style businesses. Per user pricing is also said to "throttle the number of people who can access an account" which contributes to churn rate and makes the knowledge about the SaaS product less ‘sticky.’
  • Active user pricing models nurture enterprises away from risk (and the associated monetary failures) of buying big-ticket software packages upfront.
  • Sometimes the psychology of active user pricing is discussed regarding freemium vs. other subscription pricing models, and the thoughts are not so much on the psychology of the user as much as the conversion rate strategy and whether to use it for SMEs or enterprise companies.
  • Employees must be active in using this model, since uploading and exchanging information as soon as possible is incredibly important.
  • If a company's success depends on all the staff using a per active user pricing model consistently and independently, it is very difficult to cheat and share login details.
  • Customers only pay for the number of users actively using the software over a given period of time and not for the number of users associated with the account.
  • Large organizations are usually not willing to pay for hundreds of employees to have access to proprietary software when many of them may not even use the software once.
  • Customers easily understand what their monthly subscription buys them.
  • Additional psychology of pricing discussion, such as price anchoring, charm pricing, bundle pricing, etc. are discussed more here and here. A more indepth discussion of the psychology of decoy pricing is here.

ADVANTAGES OF PER ACTIVE USER PRICING MODEL

DISADVANTAGES OF PER ACTIVE USER PRICING MODEL

  • Predicting revenue and required capital is challenging for software vendors because they need to accurately estimate the percentage of users who are active in a given month.
  • Even though this model applies to large organizations, it may not apply to small teams or SMEs. If they want to target smaller companies, vendors must come up with other opportunities.

B2B SAAS COMPANIES USING PER ACTIVE USER PRICING MODELS

1) SLACK

2) CLOUDESIRE

RESEARCH STRATEGY

To establish the psychology, advantages, disadvantages, and examples of B2B SaaS companies that have implemented the per active user pricing model, we leveraged SaaS articles such as WeavSaaS, business journals such as Cloudesire, reputable publications such as Medium and company websites such as Chargebee. After scouring through these sources, we were able to find pre-compiled data on per active user pricing. Careful analysis of these sources enabled us to identify B2B SaaS companies that have implemented the per active user pricing model as they were provided as company examples that have successfully used this pricing model.


Part
04
of five
Part
04

B2B SaaS Pricing Models - Flat Rate Pricing

The flat-rate pricing model is premised on the need to provide users with the maximum benefits that they can obtain from a product by accessing all its features. The model considers the fact that customer loyalty can be greatly enhanced because of the increased value and full benefits that users get to enjoy.

Flat Rate Pricing

THE PSYCHOLOGY BEHIND FLAT RATE PRICING
  • The flat-rate pricing model is among the simplest and most understood SaaS pricing models. A SaaS company provides a product, details the set of features that users can benefit from the service, and then the company sets a single price for the service.
  • The pricing model compares much to software licensing with the only difference being the recurring monthly subscription fees that users have to pay.
  • The psychology behind this model is to ensure that customers don’t feel locked out from accessing some features while they are paying for the product. The ability of a SaaS company to provide full benefits of a product to its users helps to increase the value metric of the product which ultimately enhances increased brand awareness and customer loyalty.
  • However, for effective onboarding of users, it is important to make sure that users understand all the features provided by the product and the benefits that they stand to accrue after purchasing the package.
  • Additionally, the flat-rate pricing model emphasizes value by removing all the barriers that may hinder a user from accessing certain functionalities. The model works best in enabling the user to derive the optimal benefits of subscribing to a product.
  • The flat-rate model sets apart the experience of paying from the experience of consuming. The mentality of the model affects how users feel when they are paying for the product because the separation of the payment transaction and the consumption affects the users’ perception of the cost of consumption.
  • Ideally, when users pay for a product, they incur a cost that they desire to recoup. The cost is recouped when the users receive a corresponding benefit which could be a gain or a loss. However, the flat-rate model strives to ensure that the consumption provides a gain because of its ability to remove all the limits that hinder users from enjoying the full benefits of the product.
  • The corresponding benefits of accessing the full benefits of the product without any limits provide a consumption experience of a cognitive gain that enhances the satisfaction of the users. This makes the users to perceive the monthly costs as an investment.
  • Ultimately, the consumption experience becomes worthwhile and induces the users to continue making payments for the service in the future without contemplating that they are losing any money.
PROS OF FLAT RATE PRICING
  • The pricing model is easier to sell- Offering a single product at a specified single price makes it possible for SaaS businesses to focus all its marketing efforts on a clearly defined offer which makes selling the product easier.
  • It is easier to communicate the pricing model- SaaS pricing models can become complicated and confusing to potential customers. However, a single flat rate pricing is easier to understand thus enhancing the product’s appeal among potential customers
CONS OF FLAT RATE PRICING
  • It is difficult to align the pricing of the model with value metric- If the product targets small and medium-sized businesses, and the SaaS company decide on using a SMB-friendly pricing strategy, the company is very likely to lose out on potential revenue if a large business enterprise decided to adopt the product.
  • The pricing model only provides a single shot at securing customers- Since all the features are provided by one plan, customers do not have any other options and, therefore, it is either they love the product or not.
EXAMPLES OF SAAS COMPANIES THAT USE THE FLAT RATE PRICING MODEL
  • Examples of companies that use the flat-rate pricing model include BaseCamp and CartHook
BASECAMP
  • Before 2016, BaseCamp used a per feature pricing model that comprised three tiers including $19 per month for the basic plan, $39 per month for the business plan and $59 per month for the enterprise plan.
  • In 2016, with the introduction of BaseCamp Version 3, the company revised its pricing for its plans to include $29 per month for the basic plan, $79 per month for the business plan, and $3,000 billed per year for the enterprise plan. During that year, the company announced that it won’t be catering to any special demands from large enterprises. Soon after the announcement, the company dropped the $3,000 per year tier, as well as the $29 per month tier, and increased the price of the remaining tier to $99 per month.
  • By making the decision to drop two customer groups, the company was able to focus and streamline its development efforts to just a single tier that had minimal maintenance demands.
  • Besides, if the company had chosen to maintain the basic tier of $29 per month, it would constantly face threat and growth obstacles from competitors that provided cheaper products or freemium versions such as Trello, Asana or Slack. On the other hand, if the company had chosen to retain the $3,000 tier, it would face the threat of having a special interest customer group that would feel that it was entitled to special privileges such as dedicated features.
  • The decision to implement a flat rate price of $99 proved worthwhile because while its competitors have cheaper prices, the products of the competitors need to be supplemented with other SaaS products in order to provide the same functionality as BaseCamp thus making them more costly in the long-run.
  • Additionally, by dedicating its service to a single customer group at a fixed flat rate, the company was able to immensely cut its software development cost, reduce its customer support expenses, and consequently increase its profit margin.
CARTHOOK
  • CartHook charges a flat rate of $500 for its e-commerce plugin.
  • CartHook’s single flat-rate pricing model has been responsible for impacting the growth of the company because the company can focus more attention on product improvement and service delivery.
  • Additionally, the company uses the model to primarily target large enterprises that have complex needs and thus, do not feel the pain of paying an expensive monthly fee. The pricing was psychologically set high so that the company would weed out users who are price-sensitive leaving the company with a focused customer group that it can efficiently serve.
  • The pricing model has also been responsible for enabling the company to maximize its impact by providing the highest level of service possible. This is beneficial to the users because they are accorded dedicated services that can help them to quickly spur growth in their business.
  • The model has also proved beneficial in the company’s marketing strategy because it can effectively reach out to potential customers and provide them with a clear understanding of what they stand to benefit by subscribing to the product.

Research strategy

In order to determine the psychology behind the flat-rate pricing model, we had to get creative and explore how the pricing model can impact the mentality of users. We critically examined how the pricing model affect the consumption experience of users while ensuring that the users receive the full benefits of the product offered without getting dissatisfied. We also researched on the implication of the pricing model on the perception of the spending habits of consumers and its impact on the cost-over-benefits among consumers. This strategy enables us to determine the psychology behind the flat-rate pricing model.
Part
05
of five
Part
05

B2B SaaS Pricing Models - Per Feature Pricing

The per feature pricing model is based on the value metric of a SaaS product that defines the features that are available on the different pricing tiers of the product. The different packages provide varying functionalities, with low-tier package having the least functionalities while the higher-tier provide more functionalities. Users are motivated to unlock more potential of the product by upgrading from a low-tier package to a high-tier package that has better functionalities.

Per Feature Pricing Model

PSYCHOLOGY BEHIND PER FEATURE PRICING MODEL
  • The common variable that is used by the per feature pricing model is premised on the different functionalities of the product as a value metric that motivates users to subscribe to different packages that provide the features that they need.
  • The model defines the functionalities of the different features that are bundled together in different paid packages and provides different pricing tiers according to the number of features that the packages offer. Ideally, higher-priced packages are usually associated with the highest number of available features
  • Users in a low-tier package can easily unlock more features by upgrading to a high-tier plan that provides the features that they need. Therefore, this model appeals to users be wooing them into paying for high-tier packages whenever they want to unlock more potential and benefits of the SaaS product
  • The psychology behind per feature pricing model is the decoy pricing strategy. The low-tier packages act as decoy packages that tend to showcase high-tier packages as better and more superior options. Therefore, users will perceive the high-tier packages as the reference point to a greater value influencing their decisions to opt for the high-tier packages.
  • The effectiveness of this pricing model is built on the premise that modern consumers already know what they want and thus they will not be willing to pay more for features that they don't currently need. Therefore, consumers are likely to choose a product based on its price in relation to the features that they need.
  • If a consumer wants less features, s/he will opt for the low-priced package, and when the consumer wants more features s/he will upgrade to a high-tier package.
ADVANTAGES
  • Strong incentive to upgrade- The per feature pricing model provides a clear motivation for users to upgrade to a higher-tier package. The motivation behind the upgrade is the ability of the consumer to unlock extra functionalities.
  • Compensation for delivery-intensive features- Some functionality in a product may require the utilization of more resources to deliver. Therefore, such functionalities are much expensive and they can only be compensated through a high-tier package without demotivating other users in low tier packages to abandon the product.
DISADVANTAGES
  • Difficult to strike a perfect balance- It can be difficult to determine which features appeal the most to users. Getting the wrong balance or bundling the features imperfectly can easily discourage adoption. For instance, if crucial features end up in a high priced tier, users may result in abandoning the service. Additionally, if resource-intensive features end up in the cheapest tier, the business may likely lose potential revenue.
  • Creates room for bad taste- Users may feel resentful if they are paying for a service but still find themselves locked out on accessing some features. This can result in a high churn rate if users feel dissatisfied.
EXAMPLES OF SAAS COMPANIES THAT USE PER FEATURE PRICING MODEL
  • Examples of SaaS companies that have effectively used this model to grow their business include LeadPages and PandaDoc.
LEADPAGES
  • After launching in 2013, LeadPages focused on acquiring its customers by hosting webinars, creating compelling blog content, and uploading videos on YouTube that created awareness of the product that the company was offering. The awareness created was focused on educating the marketplace of the different plans that were available while encouraging potential customers to join a certain plan because of how the functionalities of the plan would help the customers to grow their businesses.
  • The per feature pricing strategy proved successful by enabling the company to gain over 40,000 users within less than two years of launching. Additionally, during that time frame, the company was able to acquire over 150,000 email subscribers and got to be named number 220 on Inc. 500.
PANDADOC
  • PandaDoc per feature pricing enabled the company to gain quick traction because the company had a tiered pricing plan that detailed the features that small and medium-sized businesses would benefit from by purchasing different packages.
  • The concept was focused on validating the features of the products by detailing how they provided value through solutions that reduced the pain points for businesses. The fact that potential customers were able to correlate their pain points with the value that they would derive from the different packages had an impact on increasing the number of users who found that the pricing of the different packages was worth the value obtained.
  • Besides, the company ensured that its different prices for the different packages aligned with the product’s value by providing functionalities that solved the problems of consumers.
  • By being able to provide value in all its packages, the company was able to attract more users enabling the company to increase its growth to $10 million within two years.
Sources
Sources