How To Price A SaaS Application

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How To Price A SaaS Application

SaaS: Software As A Service has become widely accepted and is a popular choice among businesses. Businesses consuming SaaS applications favour the low upfront cost and zero infrastructure headaches. Also, SaaS applications being deployed online have the advantage of being available anywhere, anytime and even on any platform. Businesses developing software have embraced the SaaS model with open hands. The emergence of Cloud computing, subscription ready payment gateways and success stories of the likes of SalesForce and Google Apps makes it an easy model to follow.

Clearly SaaS applications have adopted a different pricing model than the traditional one-time license fee based desktop or web applications. There is a definite recurring cost per user in the hosted model that warrants the need for a different pricing approach. You not only provide an app but also manage users data.

Let’s dive into a few of the popular pricing strategies to understand the available models and what could fit your next SaaS application.

FREE

There is actually no free model when it comes to SaaS applications, unlike desktop or deployable web based apps. The Free model is actually an Ad-Supported model or something that helps a business leverage/popularize another brand or product. YouTube is a good example that falls into this model. No user ever pays to upload or consume the videos. The revenue generated for the business is using Ads. Other services that follow similar models are popular Networking Sites like Facebook, Twitter & Orkut.

The free model can scale quickly and you need to achieve critical mass to make sense of running on an Ad driven model. You would need to have a lot of cash in your pocket to scale up the infrastructure to support a large user base before ad-revenue starts pouring in. The free model works well for business-to-consumer (B2C) rather than business-to-business (B2B). While businesses do leverage these applications quite well they have no control, support & one-to-one relationships with the service providers.

The most successful Free SaaS applications have their own Ad Networks. Think Facebook, Twitter & YouTube (Google). Other apps that don’t have their own ad networks end up sharing their profits with their advertising network partner (such as google adsense) making it even more difficult for the business to survive purely on ads. Recently, Ning the popular Social Network provider decided to close their Free offering and price their service instead.

There are startups that use the Free model while offering their service in beta. They are likely to move to other pricing models.

Freemium

This is probably the most popular pricing model for SaaS applications. There are plenty of B2C and B2B apps that use this model effectively. The idea of Freemium is to offer a Free plan along with paid plans. Paid plans usually offer some benefits over the free plans. Free plans become a great starting point for users.

Flickr is a great and the simplest of example that follow this model. You can upload pictures and share with a free plan but with a limit of 200MB uploads per month ,unlimited viewing of your images but would have ads on the page. If your usage is going to go above that limit you can consider upgrading to their PRO plan (for an annual fee you can upload up to as much as 100 times more content).

Premium plans are usually selling more usage, features, priority support or sometimes even additional data security and back up. To arrive at what could be premium in your SaaS application could depend on the market segment you are addressing to and/or the costs to enable you to provide the additional services. Free plans help the business generate more word of mouth and attract small businesses early on.

Free Trial, Paid Only

Try before you buy. A more serious, built-for-business pricing model. Applications are usually available for anywhere between 7-60 day trial but are full featured. Apple’s MobileMe andHubspot are good examples that use this model effectively.

You probably need to have a product that stands out, has limited competition or is perceived as an extremely useful app. Many services indeed require you to submit your credit card information when you sign up for the trial period and start charging you as soon as the trial is complete. While this could prove an entry barrier for users it surely helps you minimize non-serious trial users.

Arriving at your pricing model

Having discovered and determined various segmentation that can help you price your service (what to charge for) the next big question is how much to ask and how often. How much quite often determines the entry barrier while how often determines retention ability. IMHO, How much is of course the bigger challenge. The real number could be arrived by studying competition, market size, target audience, perceived value of your service and many other factors. However, there is a clear choice you can make, between having a Single Plan or Multiple Plan.

Single Plan

Evernote, Flickr, MobileMe use a single plan strategy; Premium/Pro plan.

They are essentially selling more storage space and bandwidth, targeted towards individuals rather than businesses. Their product does not involve multiple users within a single account and can be categorized in to B2C. Hence, the rationale behind a single price point.

Multiple Plans

It is important to evaluate if your market could be segmented. For instance – Small, Medium and Large Enterprises, Open Source and Proprietary software vendors, Freelancers starting out and well established freelancers. The goal of multiple pricing plans is to charge more to customers who use your service more and vice-versa. For instance, if you are selling a project management solution, you can easily segment your target audience on either the company size or number of projects. Businesses often may experiment with the most low end plan before they think the solution is fit for the entire company.