Price Packaging for SaaS involves structuring pricing plans in a way that delivers the most value to customers while driving the most revenue for the SaaS business.
But what are the methods companies use? Is it one price, tiered pricing, a series of modules or add-ons or something else? I’m going to explore some of the thinking here.
Good-Better-Best
On the face of it we often think of SaaS price packaging being a version of the Good-Better-Best model. Typically with labels that imply greater functionality (and price) as you move from left to right. Labels like: Starter; Basic; Individual; Team; Pro; Business; Premium; Enterprise etc.
The advantages to this approach are that you can account for different customers using the same product. It possibly doesn’t cost you any more to provide additional features, but at the same time, customers who see a massive feature list that they will only use a fraction of will feel annoyed that they are paying for something they don’t need.
If a competitor comes along and undercuts you, rather than dropping your prices to head them off, you can introduce a lower priced tier. Dropping your price, if you only have one, means that 100% of your customers pay less, introducing a lower tier means maybe just 10 or 20% do.
The downsides are that, even with multiple tiers, some customers might get annoyed that they need to access one element of a higher tier even though they feel they fit a lower tier need more broadly.
All-inclusive
A simple, one price for everything approach, as used by Basecamp takes the pain out of choosing. It can be reassuring for users because they don’t feel like they are going to be penalised down the line if they end up using more than the tier they selected allows.
On the flip-side of course, there will be a group of people who only need a subset of the all-inclusive list and will feel aggrieved that they have to pay as much as a company ten times their size.
What often happens too is that as SaaS companies evolve features they create add-ons to their all-inclusive. Which kind of defeats the point. Maybe one or two add-ons make sense, but if it starts getting a lot more, it becomes messy.
Persona Based
This strategy tailors packages to specific user personas or use-cases, offering features and services that align with the needs of each persona. An example is HubSpot (see examples below), where they package things up based on different teams within a customer’s organisation.
This is really helpful where the value proposition is different depending on who you’re talking to in an organisation. It means you can totally tailor your messaging.
However, it does require solid customer research and you always run the risk of marginalising a group who might be a user of your product.
Build Your Own
Rather than force people to compromise on a tier that most closely suits what they want, they can be very specific about what they do and don’t pay for.
On one hand this seems like the perfect solution if you can make it work. Each customer gets a highly tailored solution based on their exact needs. But on the other, it can easily run the risk of becoming a bewildering mess.
Hubspot also have a build your own approach which allows you to connect a series of add-ons to your Persona-Based selection. The trouble is, there’s so much choice, it’s hard to know whether you’re accidentally selecting something you don’t need. In the example below, as you add more seats, marketing contacts and services, the price on the bottom-right of the page changes like adding garlic bread, potato wedges and cookies to your Domino’s Pizza order.
Usage Based
With this strategy, pricing is based on usage metrics such as the number of API calls, data storage, or active users, allowing customers to pay only for what they use.
The pros of this approach is that it is often tied to costs that the SaaS company themselves might incur - such as hosting. It means that the revenue should always mirror costs. And for the customer it might be especially attractive where their own use of the service fluctuates.
Downsides are that revenue for the SaaS company may become less predictable and for the customer they might get a price hike surprise. Anyone who has ever used AWS will probably have a horror story of when they missed something and got hit with a whacking bill they weren’t expecting.
AWS is a good example of a usage based pricing package. Another one is Zapier who charges by the number of tasks you want to run.
You probably won’t be surprised to learn that the ‘Good-Better-Best’ approach is the most popular strategy among SaaS companies according to pricing experts, Price Intelligently. Although it only represents 41% of the packaging strategies that are used, so most businesses use something other than Good-Better-Best.
My preference is Good-Better-Best with a couple of add-ons where appropriate. This gives customers choice but allows you to generate more revenue from some of them where you are able to provide niche features that a minority really want and are prepared to pay for.
Really good overview ! Love that 💯