What are the different types of SaaS business models?
To make your software project a success, you need to find the right SaaS business model for your product.
This might seem like stating the obvious, even if you’re just starting out in SaaS software development. That said, you’d be surprised at how often startup founders, and even more established companies, go into the build phase with little to no thought about it.
Not knowing how you’re going to monetize your product isn’t ideal, to say the least, so avoid the trap and get clued up now.
Whilst, on the face of it, the SaaS business model is relatively simple, there are a few variations on how to implement it that you need to be aware of. These variations may make it easier for you to sell your product, retain your customers and grow when the time is right.
Below, we’ve laid out the different types of SaaS business models. We’ve also given some real-world examples and a quick overview of the pros and cons of each. Only you can decide which one is right for your product. Use this article as a reference guide for those important (but nevertheless very tricky) decisions!
The SaaS Business Model, Explained
‘SaaS’ is a business model in itself. Within the SaaS bracket, there are several ways of pricing your product, which we’ll discuss below.
First, however, it’s important to outline what people mean when they talk about SaaS as a business model. Don’t worry – if you have this down already we won’t be offended if you skip right through to the next section.
‘SaaS’ (‘software as a service’) is a way of providing and licensing software. Unlike traditional ‘on premise’ software, which is installed on your customers’ servers, SaaS vendors host their software in the cloud.
This means that users typically pay a recurring fee to access the software, and can use the software anywhere there is an internet connection.
How often and under what terms users pay for access to the software is an essential part of your SaaS business model.
What Are The Different Types of SaaS Business Model?
There are a number of ways you can structure your SaaS software pricing:
Have you ever been offered free access to a small subset of software features for free?
That’s the freemium model. You give away access to some features for free to draw users in. When they decide they like your product, or need a more extensive set of features, you start to charge them.
Is it technically a business model? Possibly, though there is a case for freemium falling under ‘useful marketing tool’ rather than ‘pricing strategy in and of itself’.
Regardless, any decisions about freemium will be directly related to your SaaS business model so it’s definitely worth including on this list and considering alongside the options below.
The classic freemium success story is Spotify, whose 2019 freemium to paid conversion rate was a staggering 46%. And whilst Spotify might be a one of a kind, there are plenty of other success stories (for example Dropbox and Evernote, with conversion rates of around 4%) that seem more achievable.
Be aware though – unsuccessful and poorly thought-through freemium products end up costing more than they draw in. Freemium to paid conversion rate is one the the most important SaaS metrics you can track here – HubSpot pegs the ‘average’ as 2-5%. You’ll probably need to be hitting nearer the top end of that, particularly if your product doesn’t cost much in the first place.
If you can’t convert freemium users into paid, you are giving away access to your software for nothing in return. And as strong a marketing tool as freemium is, you can’t escape the implications that has for your profitability.
2. Flat Pricing
The epitome of keeping it simple, flat pricing simply charges users a single, regular, non variable fee for access to your software.
It’s easy to communicate and no fuss. Users know exactly where they stand, and can access everything they need straight off the bat. Basecamp currently uses flat-rate pricing alongside a freemium version of their software.
Despite this, there are relatively few SaaS companies that use flat pricing right now.
It’s a question of profitability for your business. If you offer everything at a single price point, you lose the opportunity to provide more value for more money. The one-size-fits-all approach might also put off users who don’t need all the features you offer, and would prefer a more tailored package.
If you’re building a SaaS project with a small-scale MVP, or a super-niche product that isn’t large enough to break into tiers just yet, flat pricing could be a good first step. You may be able to make it work long term as well, but be aware of sacrificing profitability for initial sellability.
4. Usage-based Pricing
A popular way of structuring your SaaS pricing model is to charge users simply based on how much they use your software.
Usage-based pricing has plenty going for it, especially if your software is mostly single functionality. Users often see ‘pay for what you use’ as a fair way of charging, and smaller users won’t be put off by exorbitant costs.
If you’re charging by usage directly this can make keeping on top of your cash flow difficult – users will use your software different amounts each month. But with a bit of forethought, usage-based pricing can work very well.
For example, Dropbox charges based on how much storage you use and who uses it. This works for them because its sole function is cloud storage, and the main way they can add value for their users is by allowing more access to it.
Because Dropbox tiers this into monthly plans rather than billing usage directly, they have a stable revenue stream whilst offering users flexibility in how much storage space they offer.
5. Per-user Pricing
Per user pricing is the standard for many SaaS businesses right now. For each person that needs to use the software, you pay a regular fee (often per month, but not exclusively).
You’ll find this sort of pricing model across all sorts of software tools, including Salesforce, Slack, G-Suite and more. It’s easy to understand and familiar to users, because traditional on-premise software has typically been sold on a per-seat basis.
One thing to be aware of here: more licenses doesn’t necessarily equate to more value for your users. By charging for more licenses as need expands, you could be actively penalizing your users for adoption and encouraging them to find workarounds. If you’ve ever bought a single license of a software product and shared it between your office, you know what we mean.
Per-user pricing works best where large numbers of people need to access your software concurrently, especially if they each need access to personalized features, like target- based dashboards, for example. In large scale workplaces in particular, per-user pricing can be very effective.
Per user pricing won’t necessarily ‘kill your growth’ as some like to claim (Salesforce disagrees), but don’t choose it as a de-facto option either. Make sure it really is the option that works best for you.
6. Tiered Pricing
Tiered pricing is often used in conjunction with the options above to create a pricing strategy that generates revenue whilst keeping your product accessible to your users.
Tiered pricing allows businesses to offer two or more sets of feature bundles, with the price increasing for bundles offering more. This could be via a flat rate, usage, or via increasing the per-user price as the tiers increase.
If you have your customer personas nailed down, tiered pricing is a super effective way to build some useful targeting into your SaaS business model. Upselling becomes easier, without forcing your users to pay prematurely for features they don’t need.
The key to tiered pricing: keep it simple! There’s a reason most businesses restrict to three (or four, with a custom ‘enterprise’ option) pricing tiers – it’s easy to follow and each tier adds demonstrable value.
7. Hybrid Pricing
The great thing about SaaS business models? They’re flexible, so don’t be afraid to mix it up!
You might have noticed that several leading SaaS businesses price their software using a mixture of the options we’ve talked about above. For example, you might operate on a freemium model, with a tiered pricing structure behind it. Or, you could couple a tiered pricing system with a per-user pricing model, so that your per-user price increases as you access more features.
This flexibility can be vital in developing a SaaS pricing strategy that meets your users’ needs whilst remaining beneficial for your own organization.
5. Change Your Pricing Model if it Isn’t Working
Your pricing model should not be set in stone – as health and wellness success story ClassPass discovered on their journey.
“Our first business model gave users 10 classes a month anywhere in the network. Then we switched to an unlimited model, which was really great for usage and for studio payouts, but not great for ClassPass economics.
We spent a lot of time iterating on that until we ended on the credits model. Credits is a virtual currency that gives us the flexibility to offer any inventory we want in the network, significantly expanding our addressable market. Once we went to credits, we could both variably and dynamically price our inventory which is better for both our customers and our partners.”
Being able to work on and improve their pricing model as their business developed has allowed ClassPass to build the foundations for international expansion. They would not have done so without experimenting with their business model.
One final point to take from this article: your pricing strategy should evolve with your product. If you’ve built a user base that truly loves your product and sees the value in it, you shouldn’t be afraid to change your pricing when it no longer works.
What Do These SaaS Business Models Mean For Your Product?
Ultimately, if your customers pay a regular subscription of any type it’s easier for them to cancel if they feel dissatisfied with your product. SaaS business models of all kinds need an ongoing commitment to customer success if you want them to be successful.
What does customer success mean?
Partly, it’s about the relationship you foster with your customers. Are you visibly invested in their success as well as yours? Do you respond quickly, and take the time to listen to their concerns? Do you respond to feedback and suggestions with regular new releases?
The other half of it is in the product itself – and this is where we can help. There are lots of SaaS software options out there right now – if yours doesn’t stand out it’s easy for your customer base to cut ties and head towards competitors. This is why investing in custom-built software with a great UX is more important than ever.
At Tivix, we have over a decade of experience in SaaS software development for major worldwide organizations, early-stage startups and everything in between. If you’re starting out on a project but lack the in-house expertise for building SaaS tools, our worldwide network of talent offers expertise in:
- Frontend and backend development
- Mobile development
- UX and product design
- External project management
Think we could be of help? Why not get in touch – we’d love to hear all about your project.