What is SaaS? Popular Billing Models You Should Know

Chris Lueck
Chris Lueck
December 13th, 2018
Estimated read time: 4 minutes, 27 seconds

Scaling a Software as a Service (SaaS) startup is a tricky process. Depending on the business’s current situation and how their subscription management service and recurring billing models achieve customer acquisition, the most beneficial billing model can vary greatly.

While there are many factors that contribute to a successful business, customer satisfaction is crucial for attracting more customers, maintaining relationships, and retaining existing customers. Conversely, customer dissatisfaction quickly leads to frustration and missed opportunities for any commercial operation.

Let’s take a look at some of the different SaaS billing models out there to help you make an informed decision about which one is the best option for your business:

  1. Per-User Pricing Model
  2. Pay As You Go Pricing Model
  3. The Free-Based (Freemium) Model
  4. Tiered Use Pricing Model

1. Per-User Pricing Model

Per-user models were born out of the per-license model, in which software services are priced according to the number of copies installed on different workstations. Per-user pricing follows the same logic, but businesses are charged for each user profile that makes use of the software.

A principal advantage of SaaS is that it can be used on multiple devices without additional charges. However, in its advent, there was no system that could measure its usage and its value and most businesses followed what they knew best—per-user pricing.

The problem with per-user pricing is that it limits the number of monthly active users and potential users, and ultimately detracts from the value of the product and service. This is otherwise known as the ‘value metric’: a pricing system that helps businesses optimize their pricing strategy based on perceived value for their customers.

The pay-per-user model is likely to yield a poor outcome for your business because it doesn’t allow for the adoption of your service

For example, if you offered a tiered pricing service in which each tier included different features and services but a uniform core service, you could tie value directly to that specific offering. The different tiers would then motivate the buyer to purchase that product based on their needs.

With this in mind, the pay-per-user model is likely to yield a poor outcome for your business because it doesn’t allow for the adoption of your service. A value-based approach is preferred for scaling a startup, as you can tie value directly to your ecommerce platform.

2. Pay As You Go Pricing Model

The pay-as-you-go billing model charges for the volume of resources required to use that service. A typical pay-as-you-go cloud service, for example, could charge users for the amount of storage space required. If they required additional security software, such as anti-malware or ad blockers, then they would pay in advance for that service on a transactional basis.

An advantage of this billing model is that no resources are wasted on services the customer doesn’t need. It may also be beneficial for those with fluctuating software usage. However, the main disadvantage lies in trying to determine how much usage will be required, and what the ongoing costs for that software will be.


Learn more about Global Subscriptions for your Software and SaaS Business

3. The Free-Based (Freemium) Model

The free-based model offers users access to a basic service free of charge, but may also offer premium or additional services as an upgrade option. This option attracts customers who have already enjoyed the free version with paid upgrades that provide even greater value to the software or application they are using.

Furthermore, when scaling a startup, SaaS providers can monitor whether upgrades are being utilized and how popular they are, while prompting the user to upgrade at appropriate intervals.

Keep in mind that many users may not want or need the upgrades. If this option is one that you wish to provide, a way to get around this is to offer a limited free service and ensure your paid upgrade offers great value and functionality.

Another way to generate revenue is to make the main product free and include sidebar adverts for related, paid services. However, many users might not want to see adverts and may look elsewhere for access to a similar free service.

4. Tiered User Pricing Model

This model is similar to the pay-per-user model, except that the tiered user model charges according to a tiered structure and increases in price as the number of users increases.

The disadvantages are similar to the pay-per-user model: it limits the number of active users and has no real value for an individual business or small business owner who requires more features, not users. If you choose to offer tiered user pricing, carefully consider the grouping and number of options that you make available.

The billing model is the lifeblood of every online store platform. SaaS businesses must be able to adapt and adjust to the ever-changing economic climate of ecommerce and the clients that they work with when scaling a startup. With recurring billing, digital businesses can easily monetize the entire customer lifecycle and grow their bottom-line with a recurring revenue stream.

Whether you’re selling to SMBs or enterprise level customers, FastSpring’s all-in-one ecommerce platform is designed to support a full spectrum of digital products and distribution models. FastSpring is a leader in the digital commerce space that supports every kind of subscription and recurring billing model and is an essential growth partner to help you deal with all your ecommerce needs.

Chris Lueck

Chris Lueck

Chris Lueck is a Board Member at FastSpring. Prior to his time at FastSpring, Lueck served as Co-Founder and Managing Partner at Pylon Capital, a privately-held entrepreneurial investment firm focused on high growth, technology-enabled service companies. Chris earned a Bachelor of Science Degree in Electrical Engineering from the University of Virginia and a Master of Business Administration Degree in Finance & Entrepreneurship from the University of Southern California. He currently lives in Santa Barbara, California.

Try FastSpring

Get a free account and see why FastSpring is the ecommerce partner of choice for software providers around the world. Try our full-service ecommerce solution today to unlock revenue growth for your online company.