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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.

In this guide

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 sustain those improvements into the long term.

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. 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.

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.

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.

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.

What are the cons of fixed subscription pricing?

Inflexible: Customers pay the same amount irrespective of how much they use the product.
Subscription bloat: The average business has over 130 SaaS subscriptions.
Missed opportunities: Customers who don’t fit into a prescribed tier are likely to look for alternative providers.

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.

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.

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.

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.

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.
Low commitment: Customers are not sticky and scalability is hard to predict.

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.

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).

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.

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.
Flexibility: Customers can move up or down in usage when they need to.

What are the cons of hybrid pricing?

Complex design: Difficult to optimally balance subscription and consumption elements.
Sales challenges: Selling based on long-term value and technical metering can muddy the narrative.

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.

Which businesses should use hybrid pricing?

At scale, the majority of leading SaaS businesses can offer hybrid pricing to serve enterprise clients.

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.

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?
Renewals: Flexing pricing at the point of renewal can help reduce customer churn.
New Markets: Major SaaS pricing models that work for one business size, industry, or use case won’t necessarily work for them all.
New Product Lines: Product launches are a good time to consider and transition to alternative pricing models.

How to implement new pricing models

Pricing transformations are whole-business transformations. They require input and collaboration from several core teams.

Leadership: Moving to a new pricing model changes the revenue model of the entire business.
Product: Metering, tracking, and billing usage elements is complex.
Customer Success: Getting customers to see product value quickly is critical to retain them.
Sales: Sales teams will need to be re-trained, especially if transitioning to a hybrid model.
Finance: Billing accuracy and reconciliation processes need to be flawless to ensure money is not lost, especially where consumption and metering elements are involved.

Getting started with a SaaS pricing transformation

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