Do not index
Do not index
In SaaS, charging a subscription to access the product is the de-facto default option. If you don't know any better, you charge a monthly fee and you roll with it.
Charging a subscription is only one of the pricing models you can offer, though. And, pricing is just one part of a good offer.
Instead of thinking "how do I price my SaaS?", we should ask ourselves first and foremost, "how do I craft a good offer for my target market?"
If you want to dive deeper into creating a great offer, I recommend reading Alex Hormozi's material, which I've been devouring lately.
I'll limit myself to giving you some alternative pricing models and offers I've been experimenting with in my own SaaS products:
- Lump sum Make the customers pay a high setup fee and then either give them more value or discount their monthly subscription as they go (or do both). This model works because of a few principles:
- The more the customer stays subscribed, the less the customer is costing us. This is based on the fact that keeping a customer is always more convenient than acquiring a new one. As an example, in month 1 the customer will cost you more because you'll have to pay for the acquisition costs, maybe you'll have to pay for more resources because they open more tickets. Whereas in month 10 you'll have already repaid the acquisition costs and they'll be more familiar with the platform.
- Customers are also typically less excited and perceive less value from the product as months go by. This means they are also more likely to churn in month 10 than in month 1. That's why the more they stay with us, the more we want to reward them.
- Consumption Lately, I've been thinking of SaaS as a service that can reach net negative churn. The fact that the word software is in there, just means I'll have no replication costs as well. Consumption is a great pricing model for achieving net negative churn because it brings expansion revenue by nature. Here, instead of charging a flat fee per month, you are charging a (usually low) fee per unit of whatever you sell, or per seat. Especially if your product has enough stickiness, the more the customer grows their business, the more they'll need your product, and the more their account with you will grow, too.
- Pure performance-based Here, you don't charge anything upfront or monthly. You just charge your users when they use your product and get the ultimate outcome they signed up for. An example of this would be lead generation software that just charges a fee when their customers close a lead. The cons of this model are that you have to get your tracking down to perfect, otherwise, you'll risk leaving money on the table.
Of course, you can mix and match these.
One hybrid model that I like a lot is lump sum + performance-based: you make the customer pay a one-time (usually high) fee to access the software for free, lifetime, and then make the customer pay when they actually get value from the software.
One thing to notice is that the order I presented the different models was not random: switching from monthly subs to lump sum, to consumption to performance-based, we make the customer risk less and less and only pay when they drive value from our product.
We are also becoming more and more partners of our customers. Their success is our success in that we will literally be able to charge them more the more they get value from the product.
