SaaS 102 #24 How to Set Pricing Models That Help You and Customers Succeed

There are many different kinds of pricing models for SaaS products. Popular pricing models include:

1. Charging by the number of users
2. Charging by the volume
3. Charging by the product features
4. Charging by the results

From my point of view, none of these pricing models is better or worse than any other. What’s important is selecting the correct pricing model for the product type and the stage that the product is at.

But whichever pricing model you select, there are two principles that must be followed:

The pricing model should be simple. Ideally the customer should be able to understand it in a single glance.

No one likes to read tediously long and complex rules. Excessively confusing pricing models will persuade plenty of your customers to beat a hasty retreat. This is especially true for customers buying your product directly from your website, without any guidance from your sales team.

The pricing model has to grow with the customer’s business. If the customer does well, we should do well. If the customer does badly, we should lose out, too.

Our pricing methods must be very closely linked to the customers’ key success metrics. Here “customers” doesn’t just include those who pay for our subscriptions. We’re also referring to our cooperation partners and those who develop apps for our platform. We need to help everyone build a bigger pie, so that everyone, including ourselves, can take a bigger slice.

If we take Shopify as an example, they actually collect their revenue from three different sources:

1. Subscription fees from merchants who use Shopify’s services
2. Commission charged on the revenue earned by Shopify merchants, and other processing and handling fees
3. Commission charged on the revenue earned by Shopify app developers

Data shows that in the year 2020, approximately 69% of Shopify’s revenue came from the second and third items on the list. This means that a prerequisite for Shopify's revenue growth is that their customers and cooperation partners can increase the income they earn through the Shopify platform.

So what kind of pricing models are commonly used in SaaS? How can we decide what kind of pricing model a product should use?

These are the questions I will explore in the rest of this article.

Charging by the number of users

We can charge by the number of users when:

• The product’s services need to be provided to a large number of people
• A company with more users means the company is doing well

Let’s look at an example.

Suppose that your product was a customer relationship management (CRM) system, and that the main users of this system are your customer’s sales staff.

In general, if your customer has a lot of room to grow their business, and if they have the confidence that they can achieve fast growth, they will go out and hire more sales staff. They will then train those new staff to use your CRM system to increase efficiency and achieve targets.

In this kind of scenario we can charge by the number of users.

But as well as charging by the number of users, we can also charge our customers according to how many customers they have. An example of this is our AfterShip Email product.

AfterShip Email is a SaaS product that helps customers with their digital marketing. With AfterShip Email, customers can send 3,000 emails to 300 contacts free of charge.

But if the customer’s business grows comparatively quickly, and the customer wants to market to more potential customers in the hope of converting them into paying customers, then they will have to pay according to the number of contacts.

Charging by the volume

We can charge by the volume when:

• The product doesn’t require much manual operation
• Our costs are closely linked to how much the customer uses the product

Many cloud computing and cloud storage companies charge by the volume. One example is Snowflake, a SaaS company specializing in cloud computing.

On the Snowflake pricing page, they get right to the point and announce: “Pay for the compute and storage you actually use.”

It’s also worth noting that Snowflake does more than provide customers with cloud storage and computing. They also analyze data related to customers’ cloud storage and cloud computing resource usage, and use that analysis to help customers optimize their usage methods.

This helps ensure that customers only buy more cloud storage and computing resources because those resources are actually required for their business development, rather than because they are wasting resources due to incorrect usage methods.

Snowflake is actually utilizing the same concept that we mentioned above: The pricing model has to grow with the customer’s business.

SaaS products should earn more money by helping their customers grow their businesses. They should not earn more money by allowing their customers to make mistakes or by cheating their customers.

Charging by the product features

You can charge by the product features when:

• Your product offers a strong range of different features
• You have customers willing to pay more for advanced features

When you charge by the product features, you can reserve your best features for your highest-paying customers.

For example for a video website, members might be divided into three levels:

1. Basic users might not pay any fees, but be only able to view free content
2. Paying customers might be able to view HD versions of paid content
3. High-paying customers might be able to view 4K versions of paid content

Another example is our AfterShip product:

We divided our pricing plans for AfterShip into “Free”, “Essentials,” “Pro,” “Premium,” and “Enterprise.” With each different plan, different features are available.

For example, customers who buy our Essentials plan can only send notifications to their customers by email and SMS. Customers who buy the Pro plan can use our tracking API and webhook. Enterprise customers, meanwhile, can utilize our powerful carrier auto-correction feature.

If you look carefully enough at our pricing page you can see, our AfterShip product actually charges according to both the following two pricing models:

1. Charging by the volume
2. Charging by the product features

When compared to only charging by the volume, this offers a distinct advantage.

If we only charge by volume, the more volume a customer uses, the cheaper they will expect our price per individual shipment tracked to be.

Of course, we can consider giving customers discounts for larger volumes. But as customers grow, they can also consider using better features to help their business develop even more.

Charging by the results

Readers who have read my previous article, “Why Do We Need to Keep Adjusting Pricing Strategies?” will know I strongly approve of value-based pricing strategies. I believe that:

If we can measure how much value our product creates for our customers, the best pricing model is charging by the results.

What does charging by the results mean?

Let’s take our AfterShip Personalization product as an example.

AfterShip Personalization uses AI algorithms to provide product recommendations for the customers of eCommerce sites. By doing so, AfterShip Personalization can increase average revenue per user (ARPU) for customers of eCommerce sites, and drive additional gross merchandise value (GMV) for merchants.

From the pricing page screenshot above, we can see that pricing for AfterShip Personalization is based on value created for users (the value the product creates for users can be measured using the GMV metric).

For every 10,000 US dollars of GMV that AfterShip Personalization creates for its customers, the product charges an additional fee of 249 US dollars.

AfterShip Personalization also provides an ROI guarantee. If the additional GMV the customer gains through AfterShip Personalization is less than their subscription fee, they are eligible for a refund.

Yet not every product is a good fit for a charging by the results pricing model. For a product to use the charging by the results model, it must first meet the following criteria.

1. The product must have a metric which is both easy to measure and closely linked to customer success.
2. The product capability must be strong enough. The product must be able to create real business results for its customers.

Summary

There are many kinds of pricing models for SaaS products. The most common are:

1. Charging by the number of users
2. Charging by the volume
3. Charging by the product features
4. Charging by the results

None of these pricing models is better or worse than any other. What we need to do is select the correct pricing model according to the product and business scenario.

The pricing models for our products also need to be continually revised and reconsidered according to developing business scenarios and market trends.

Whichever pricing model we choose, it needs to meet our two principles:

1. The pricing model should be simple. Ideally the customer should be able to understand it in a single glance.
2. The pricing model has to grow with the customer’s business. If the customer does well, we should do well. If the customer does badly, we should lose out, too.

Only in this way can SaaS products have the chance to achieve long-term, sustainable revenue growth.
Links for further reading and reference: Shopify revenue

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I'm Teddy, Co-Founder & CEO of AfterShip, SaaS 102 is a series of articles where I share my experience in SaaS startups.

We are looking for great SaaS sales talent and welcome you to join us at careers.aftership.com.

(Article translated by Joseph O'Neill)