The SaaS pricing spectrum

In this guide, we explore the spectrum that spans three SaaS pricing strategies and everything in between: fixed subscription, consumption, and hybrid. You'll delve into the significance of pricing, examine the advantages and disadvantages of each model, and understand when to apply them.

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Magnifying glass looking at 3 SaaS pricing strategies

Contributors

Ariela D Bitran RichMonetization Strategy Director, Chargebee

Todd GardnerManaging Director, SaaS Advisors

Avi SethiSenior Director at Simon Kucher & Partners

Marek RubasinskiVP, Business Development & Partnerships, m3ter

Andreas PanayiotouDirector, Pricing & Monetization, Notion Capital

Shah ChoudhurySenior Manager, Pricing Strategy at Salesforce

Introduction to SaaS Pricing Spectrum

The guide delves into the SaaS pricing spectrum, emphasizing its critical role in the growth trajectory of scaling businesses.

According to McKinsey, pricing transformations can generate margin improvements of up to 7% in as little as 3 months. More importantly, they can also and sustain those improvements into the long term.

Get pricing right, and you stand a much better chance of gaining loyal users and growing market share. Get it wrong, and you risk leaving money on the table, losing deals, and being left behind by competitors.

Adapting pricing models at regular intervals can help accelerate the scale-up growth trajectory, and put your business on the path to profitability. Businesses that update their pricing at least once every six months see nearly twice the Average Revenue Per User gain of those who update it less regularly. (Profitwell "Pricing from the bottom line Growth")

But knowing when to evaluate different pricing models, how to choose the right pricing strategy, and how to implement the model you choose can be challenging. In the early days of a startup, the priority is acquiring customers at any price. As businesses scale, building out processes and infrastructure to manage pricing strategically is critical – but often overlooked. Research shows that some businesses only spend six hours on their pricing strategy across their entire lifetime.

Pricing isn’t a "set it and forget it" activity: As the product evolves and expands, and as the business enters new markets and targets new segments, pricing should be updated accordingly. Finding the optimal model depends on product type, market, organizational structure, business goals and more. In this guide, we’ll compare three of the most common pricing models: How they work, why businesses might choose them, and how they drive growth.

Pricing is the main tool you have to align customers, the value of your product or service, and your goals. At least one person in your company should be obsessing over it.

Ariela Bitran Rich, Director of Pricing Strategy at Chargebee

Popular SaaS Pricing Models

There are a number of ways in which SaaS businesses might choose to package and price their products. Different combinations can help reach different audiences, with different needs and use cases.

Increasingly, businesses are getting creative with the way they consider pricing – but to get you started, below are some of the most common, market-tested pricing models.

Fixed Subscription (e.g. User pricing, tiered pricing strategy)

What is fixed subscription pricing?

Historically, fixed subscription pricing has been the go-to model for SaaS businesses. Customers can choose the package that best suits their needs, and subscribe for access to the product over a defined duration.

A fixed subscription strategy is often a tiered pricing model . The simplest version has "good, better, best" options, each at a different price point and delivering different features and functionality. Sometimes the tiered pricing model will also include a freemium plan as the lowest tier.

User pricing, or per-seat pricing, is another type of fixed subscription that offers a single price per user or "seat" for the software.

With both types of fixed subscriptions, customers pay the same set annual or monthly fee for the subscription. The fee is the same regardless of how much or how often they use the SaaS product.

Pros and cons of fixed subscription pricing plans

What are the pros of fixed subscription pricing?

Simple to understand and implement: No complicated usage tracking or variable invoicing.
Clear correlation between price and value: The more customers pay, the more access they get.
Regular and predictable cashflow: Costs stay the same for customers, revenues stay the same for vendors.
Grows revenue: Price per subscription can be increased as functionality is added and the product evolves.
Grows loyalty: Existing customers are likely to need more subscriptions as they grow headcount, increasing product stickiness.

What are the cons of fixed subscription pricing?

Inflexible: Customers pay the same amount irrespective of how much they use the product. Features are often bundled, so price can include costs for analytics, security, infrastructure and more ‘invisible’ features that customers may not value.
Subscription bloat: The average business has over 130 SaaS subscriptions. Getting sign-off for more is becoming increasingly difficult as businesses seek to control costs and manage shelfware.
Missed opportunities: Customers who don’t fit into a prescribed tier are likely to look for alternative providers.
Barrier to growth: Scaled businesses with a static subscription model may struggle to retain or grow market share. They can’t monetize new features or functionality if customers are already on an all-you-can-eat package.

How does fixed subscription pricing drive growth?

In order to drive growth with a fixed subscription model, vendors need to add new customers. The only way to drive revenue is to sell the product to more people, as opposed to encouraging more usage within the same customer base.

There are three key metrics vendors should track to understand whether their fixed subscription model is helping them scale:

New Bookings: this is a forward-looking metric that indicates the amount of year-one recurring revenue the business will earn from contracts signed with new customers in a given period.
Net Revenue Retention (NRR): this indicates the total revenue generated by existing customers in a given period, minus churn from subscription expirations, cancellations, or downgrades. It’s a useful indicator of future revenue potential.
Logo Retention: this indicates the percentage of customers who renewed their contracts in a given period. It’s closely aligned to Net Revenue Retention. If logo retention is trending downwards, vendors should seek to understand why customers are cancelling subscriptions. Churn due to high costs, low usage or looking for alternatives with more specialized feature sets are signs pricing may need to be adjusted.

Which businesses should use fixed subscription pricing?

Fixed subscription pricing works well if the product delivers value through individual usage – those that help sales reps or designers work more efficiently or be more productive, for instance. It is not a good fit for products where the value is generated via systems, such as ecommerce or data infrastructure.

Businesses that leverage fixed subscription pricing models include Salesforce, Netsuite, Workday, and Adobe.

Per seat pricing can increase if functionality is added, and total revenue can grow if your customers are growing their headcount. Likewise, if you charge a subscription based on locations, revenue can grow with added functionality, or locations being added by your customers.

Todd Gardner, Managing Director of SaaS Advisors

Consumption-based pricing (i.e. usage-based pricing)

What is consumption pricing?

Consumption pricing has become more popular in recent years, as businesses have looked for ways to directly tie value added to pricing.

There are several different ways to set up and manage consumption models, including credit systems (e.g. 1 credit = 10 API calls), prepayment limits, and pay-as-you-go usage.

With a pure consumption model, customers pay only for what they consume. This contrasts with the other end of the spectrum, where they would pay a fixed price based on their prediction of what they need. Though payment intervals remain regular, the amount customers pay can vary from period to period.

Example of consumption pricing with 5 plans

What are the pros of consumption pricing?

Low risk and commitment: If customers don’t use the product, they won’t pay for it.
Low friction: Avoids lengthy subscription approvals processes.
Reduces churn: Customers can scale back usage to cut down on costs, instead of churning altogether.
Clear correlation between price and value: Costs only grow once customers see the value of the product and start to use it more.
Promotes virality: No requirement to buy additional subscriptions means more users and teams within the customer organization can use it.
Grows revenue: No subscription cap on spending, or complex negotiations to move customers up another tier. Net Revenue Retention is usually higher.
Clear CTAs for customer-facing teams: Sales and Customer Success teams can refer to usage data to proactively drive conversations around customer usage fluctuations, such
as product adoption strategies or renegotiating for higher thresholds.

What are the cons of consumption pricing?

Unpredictable cashflow: Both customer and vendor can struggle to forecast costs and revenues.
Prohibitive costs: Exponentially increasing costs can lead to less, not more usage, if vendors are not proactive about responding to fluctuations in customer behavior.
Low commitment: Customers are not sticky and scalability is hard to predict.
Complex to understand and implement: Accurate metering and billing requires substantial infrastructure investment, which traditional subscription tooling cannot support.
Complex sales incentives: The size and value of the customer is hard to gauge up-front. Incentive structures should be designed around ongoing adoption as well as upfront commitment.

How does consumption pricing drive growth?

There are two ways vendors can drive growth with a consumption pricing model. One is to add new customers (as with fixed subscription models), the other is to expand within their existing customers by encouraging them to use the product more.

One of the major benefits of consumption pricing is that it allows for frictionless expansion.

Customer usage and revenues may start small, but can expand automatically and exponentially without the need for deal renegotiation. This frictionless growth is particularly profitable for vendors because there are no sales and marketing expenses. Consumption pricing models are therefore a popular choice among vendors seeking to grow revenue and minimize costs.

Frictionless growth doesn’t mean sales and marketing teams can be entirely hands-off. When leveraging consumption pricing within a Product-Led Growth (PLG) strategy, sales teams will need special training. They'll need a strong technical understanding of the product to ensure they can help drive adoption.

Marketing will also have to build a PLG go-to-market strategy. This makes it easier for customers to grow their own value down the line as they increase usage. But to make this possible, all teams must align with Customer Success to ensure ongoing frictionless growth.

Metrics tracking can be somewhat more complicated for consumption pricing models. Vendors should look to measure:

New Bookings: While this metric is still important, it can be hard to measure because the first year’s revenue is unknown when the deal is closed.
Expansion Rate: This indicates the annual percentage increase in revenue being driven by existing customers. A high Expansion Rate suggests customers are seeing value from the product. A low Expansion Rate may mean the product has not achieved the predicted virality, or that fear of uncapped costs is limiting usage.
Net Revenue Retention: Expansion Rate and Logo Churn both impact NRR. It is a more complex metric with consumption pricing versus fixed subscriptions, because more emphasis is placed on expansion within the existing customer base.

Which businesses should use consumption pricing?

Consumption pricing is best when other value metrics aren’t available. It’s typically used by businesses whose solutions sit lower in the stack (e.g. computing and storage), but it's also growing in middleware and applications. Customers understand that those services are valuable and expensive, but they’re utilities, not value-drivers.

For consumption pricing models to work well, usage needs to be both trackable, and predicted to grow. There’s more detail on evaluating usage-based pricing in our blog, Is Usage-based pricing right for my business?

Consumption pricing makes sense for vendors pursuing Product-Led Growth strategies. How? By removing barriers to entry with free or low-cost trials, and expanding usage and revenue from there without having to negotiate a deal.

Businesses that leverage consumption pricing models include Snowflake , DataDog , Elastic , Clickhouse, and Twilio .

We typically see use usage or consumption-based pricing models if/when:
a) consumption is trackable,
b) consumption metric is expected to grow,
c) down-trade risk is low,
d) market acceptance is high,
e) there is a clear link to value, or
f) there is a clear link to cost / other methods have too material a risk of not recovering cost.
To effectively implement a usage-based pricing model, SaaS companies need to think about the pricing model will affect the wider business. This includes looking at the impact on the sales organizational structure, how salespeople will be incentivized, and the collateral they will need to sell. It also includes the importance of a strong Customer Success function, as well as KPI tracking and the need for new usage tracking and billing capability.

Avi Sethi, Senior Director at Simon-Kucher & Partners

Hybrid pricing strategies

What is hybrid pricing?

Hybrid pricing encompasses the center of the SaaS pricing spectrum, combining elements of both subscription and consumption pricing models. Usually, vendors will sell a subscription package with overlaid consumption elements, such as overages or usage-based add-ons.

For this reason, hybrid pricing is sometimes referred to as usage-based subscriptions. Many SaaS companies are testing usage-based pricing elements, some have largely usage-based pricing models, and over a third offer usage-based subscriptions.

Pros and cons of hybrid pricing plans

What are the pros of hybrid pricing?

Security and scalability: Delivers the security and cashflow predictability of a subscription model, alongside the potential scalability of consumption pricing.
Product monetization: Vendors can monetize their product outside of core recurring revenue, e.g. price core product as a subscription, and supplementary products on a usage basis.
Nuanced correlation between price and value: Complex products may deliver value through both users and usage. Hybrid pricing allows each feature to be monetized most effectively.
Larger market: Wider range of right-sized pricing packages reduces the risk of customers looking elsewhere.
New markets: Repackaging market-specific product features can help vendors reach new audiences.
Flexibility: Customers can move up or down in usage when they need to. They don't have to make a big step up to the next subscription tier or lose control of usage costs.

What are the cons of hybrid pricing?

Complex design: Difficult to optimally balance subscription and consumption elements. Vendors may give away too much or too little functionality in the core subscription package, curtailing potential growth.
Sales challenges: Selling based on long-term value and technical metering can muddy the narrative and make it hard for customers to predict future pricing.
Long sales process: More stakeholders will need to be involved to clarify and approve metering and costs.
Unclear costs: Understanding how their bill has been calculated can seem like a black box for customers.

Hybrid models are a great way of having your cake and eating it, too. Businesses can stick with the "good, better, best" subscription model and start layering in usage elements, typically around allowances or bundles. They either allow you to monetize additionally outside core recurring revenue, or use usage to move people up and down a sophisticated set of subscription tiers.

Marek Rubasinski, VP, Business Development & Partnerships at m3ter

How does hybrid pricing drive growth?

Hybrid pricing models can drive growth in a number of different ways, depending on the different elements vendors choose to leverage, and how they work together. Hybrid models may depend on new customers, expansion within the customer base, or both. They can also open up new revenue streams by enabling vendors to target new markets or segments.

Hybrid pricing models enable vendors to monetize outside of their core product and diversify revenue streams. They offer stability and scalability: Subscription elements ensure ongoing financial security, while consumption elements leave headroom for unlimited growth.

The SaaS funding landscape has pivoted from "growth at all costs" to efficient growth, where top- and bottom-line growth are balanced. This shift is increasing the popularity of hybrid pricing models.

Which businesses should use hybrid pricing?

At scale, the majority of leading SaaS businesses can offer hybrid pricing to serve enterprise clients. Businesses that leverage hybrid pricing models include Zapier , HubSpot , Atlassian and Shopify .

How to begin a pricing transformation

As businesses scale and start to serve bigger customers, it’s wise to put processes in place that allow for ongoing adaptation of pricing models.

Startups can afford to wait until later in their growth journey to refine their pricing model. Rigorous pricing strategies are a lesser priority than winning early customers and understanding product market fit. Keeping pricing simple in the early days means the widest possible market can access the product. Businesses can gather feedback and understand product value, then use these insights to inform the growth and pricing strategies.

Andreas Panayiotou, Director, Pricing & Monetization at Notion Capital

When to review pricing

So, when is the right time to get strategic about pricing? There are a few indicators that businesses should assess and adapt:

Customer Feedback: Are customers telling you directly that the product is too expensive? Are they starting to churn to competitors that are cheaper or cover less surface area? Then it may be time to consider repackaging and re-pricing.
Renewals: Flexing pricing at the point of renewal can help reduce customer churn. It may reduce revenues in the short term, but provides space for customers to growin the long term.
New Markets: Major SaaS pricing models that work for one business size, industry or use case won’t necessarily work for them all. Different customers may want to consume your product in different ways. Enterprise customers may have more need for cost certainty than early-stage businesses, and prefer a fixed rate element, for example.
New Product Lines: Product launches are a good time to consider and transition to alternative pricing models. You may be able to increase your footprint in certain sectors by repackaging the product into its most relevant feature sets.

How to implement new pricing models

Pricing transformations are whole-business transformations. They’re not just technology processes, but also operational and cultural processes – and they don’t happen overnight. A considerable amount of operational change management is required, as well as input and collaboration from several core teams.

Leadership: Moving to a new pricing model changes the revenue model of the entire business. It therefore needs to be a top-down decision.
Product: Metering, tracking and billing usage elements is complex. Careful system design is required to ensure metering is accurate, integrated into your existing systems for invoicing, and transparent, i.e. that customers understand how, why and when they have reached usage thresholds.
Customer Success: Where consumption pricing is concerned, getting customers to see product value quickly is critical to retain them. More Customer Success resources may be required to get new customers onboarded and ramped-up at speed. Customer Success is also a critical stakeholder in managing the transition to a new pricing model with customers. Handled poorly, changing pricing can cause conflict, and result in churn rather than revenue growth.
Sales: Sales teams will need to be re-trained, especially if transitioning to a hybrid model where narratives about value and price can be complicated. Profit margins are narrower where consumption elements are involved, and this can make discounting and deal-closing difficult. Sales compensation needs to be carefully considered and aligned so that sales teams remain motivated, and understand how they will be remunerated.
Finance: Billing accuracy and reconciliation processes need to be flawless to ensure money is not lost, especially where consumption and metering elements are involved. This can be resource-intensive, especially in usage-based pricing models where costs are often calculated and billed manually.

If you want to move to a new model, the whole revenue model changes. The decision has to come from the very top, as it changes the monetization plan. It won’t happen overnight, and it has to be designed as a solution. Transitioning existing customers to the new plan is a particularly complex balancing act. Nobody wants to lose a customer over a pricing model, so businesses need to work out how best to how to protect them and their revenues.

Shah Choudhury, Senior Manager, Pricing Strategy at Salesforce

Getting started with a SaaS pricing transformation

For SaaS leaders, pricing transformations offer an opportunity to get creative and take control of growth, even in uncertain economic conditions. A thoroughly considered (and regularly reviewed) pricing strategy can open up new revenue streams, and create headroom for ongoing scale in competitive markets.

It’s critical to understand the spectrum of different pricing models, and how they connect to business growth. With an informed strategy in place, growth businesses can start to build out the teams, processes and tooling to support it.

m3ter can help.

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