Estimated read time: 3 minutes, 29 seconds
Pricing can be difficult to determine on for many Software as a Service (SaaS) companies. First, you need to be sure that you’ve priced your product fairly, and second, you want to offer the option for payment that will appeal to the largest number of users. So, do you extend a pay-per-use (or PPU) option, or do you ask people to subscribe to your service on a monthly, quarterly, or yearly basis? It’s a tough call to make. Let’s look at the different factors that affect each pricing model for your SaaS company.
Pay-per-use: when and why?
Pay-per-use certainly has its place. Many customers appreciate its affordability, particularly when they don’t have a need to use the software more than a few times per month. A service that’s got a relatively limited lifetime should be available to customers in a format that allows them to pay for the service only when they need to use it.
Additionally, should your particular service have a material cost associated with it, PPU is a sensible way to go. If for instance, your SaaS company helps users to create and print custom t-shirts, it would just make sense to manage costs by charging for each use rather than requiring your customers to sign up and pay for a service that they might never use again.
PPU is also useful for SaaS companies who are interested in getting truly accurate feedback on their pricing. Should you offer a wide variety of services, but you have a few customers that use only a handful of them, it wouldn’t be very cost-efficient for them to pay for the whole menu. They would probably look favorably on your organization if you offer the option to go a la carte, paying only for the services they use as they use them.
What’s the story with subscriptions?
If your SaaS is just getting off the ground, subscriptions can be a lifesaver— particularly annual subscriptions. It’s much easier to forecast growth and pay all the expenses associated with starting out when you have the cushion of people paying consistently for your services. SaaS businesses are notorious for their cash flow issues in their early days, and subscriptions can help keep you afloat until you’re making enough to invest in new customers.
Subscriptions are great for retaining customers, too. Canceling a service is typically perceived as a hassle, and many customers would prefer to stick with a service that’s working for them than switch to another service, even if that second service offers them a better deal. Really, the only way most SaaS companies lose subscribers is if they’re unhappy with the service, but even that’s not an insurmountable challenge. Offering a discount or a couple of months for free is usually sufficient to tempt them back, and then, as long as they are satisfied with the service going forward, you’ve got a customer for the foreseeable future.
If your SaaS is just getting off the ground, subscriptions can be a lifesaver— particularly annual subscriptions.
Many customers prefer subscriptions as well. It’s convenient; no one has to remember to pay an invoice, and they can easily create a line item in their monthly budget. Pay-per-use models can quickly spiral out of control— if someone ends up using the service more frequently than anticipated, they could be on the receiving end of quite a shock when the invoice arrives at the end of the month. A straightforward subscription fee can preserve your relationship with your clients.
When it comes to pricing your product, it comes down to knowing your audience and having a solid understanding of how and when they use your software. To get started, track your metrics. This will help make important decisions about how to price what you have to offer. The good news is that you don’t really have to choose between the two. Many SaaS companies offer both PPU and subscription services, though as a standard, you should work toward converting PPU customers into subscribers.
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