Imagine owning a business with high profit margins, monthly recurring revenue, and the ability to expand rapidly—sounds like a dream, right? Some of the greatest companies in the world utilize the software-as-a-service (SaaS) model, and for good reason.

Entrepreneurs and developers pour countless hours into perfecting a useful software product but might skip the planning required to promote it. Unfortunately, having a good product isn’t enough.

In this guide, you’ll learn what an enterprise SaaS business model is, different model types, metrics to measure, and a deep dive into what advantages you’ll gain with the right strategy.

What is an enterprise SaaS business model?

Enterprise software-as-a-service (SaaS) business model is a strategy used to sell cloud-based software to customers on a recurring basis.

There are countless iterations of SaaS business models that use different strategies to attract customers, such as:

  • Freemium (Spotify)
  • Storage amount (Microsoft One Drive)
  • Per-user (Asana)
  • Processor time & data transferred (AWS)
  • Advertising (Google w/ Google Ads)
  • Broker fees (Robinhood)
  • Project-based (Basecamp)
  • And many more…

Each highlights a different use case that can be tailored to suit the target audience.

The main differentiator of enterprise SaaS is its sheet scale. That is, it impacts numerous parts of an organization, including business intelligence, human resources, project management, and customer relationship management (CRM). It also plays a role in asset management, marketing automation, and overall communication management with all stakeholders. Enterprise resource planning across all sectors of your organization can be streamlined and made far more efficient by incorporating enterprise SaaS solutions custom-tailored to your company’s needs.

Common characteristics seen in SaaS enterprise software

SaaS enterprise software is widely versatile, and can solve a number of very specific problems across just about any industry. However, regardless of the way it’s built or used, most SaaS enterprise software tends to share several common characteristics. These are some of the most common characteristics of enterprise software:

  • Multi-tenancy: Enterprise software is frequently designed to be shared by more than one customer, or “multiple tenants”
  • Scalability: Enterprise software is built with organizational growth in mind, and as such, often has the unique ability to easily scale up or down as needed
  • Customization/configuration: Organizations are able to customize or configure the software to fit their specific needs, nearly to the level of being custom-designed
  • Security: Enterprise SaaS applications typically implement robust security measures, including encryption, access controls, and regular data security updates to safeguard customer data
  • Extensive integration libraries: With enterprise SaaS, organizations gain access to extensive integration libraries and APIs. This allows for seamless data exchanges and workflow automation between platforms and interfaces.

Though you’ll see these characteristics in most enterprise software tools, the unique combination and configuration of these functionalities allow users to create nearly custom-built solutions that address their pain points.

Enterprise SaaS vs. B2B SaaS

While B2B and enterprise SaaS tools both target a professional audience, the solutions provided by each are vastly different. B2B SaaS tools are usually a smaller product overall, featuring tools with minimal customization options. While these tools can be incredibly helpful for smaller SMBs, they don’t often expand further beyond the immediate solution provided.

Enterprise SaaS tools, on the other hand, typically provide a wide suite of micro-solutions or features within the overall tool. They tend to offer significant customization options and excellent customer service, and they can scale with your business as it grows.

Additional differences between enterprise and B2B SaaS include:

Pricing and payments

Enterprise customers understand their highly customizable solution will cost more than a smaller B2B platform. They’re larger corporations with larger budgets. As such, they’re also more likely to pay annual fees upfront, and contracts could be longer term than what you could expect with a B2B SaaS platform.

Complexity of SaaS offerings

Typically, enterprise SaaS providers will have more customizable solutions with the goal of meeting more of a larger organization’s needs. Beyond this, software providers are often pushed to continue enhancing and expanding their offerings. SaaS offerings at the enterprise level offer a huge number of offerings within its platform, while B2B models may not.

Average sales cycle length

The typical SaaS sales cycle is about 84 days, though there are a wide range of differences present. However, the enterprise sales cycle is typically longer, lasting over six months. Often, SaaS providers will need to consider the length of the sales cycle to have a better idea of cash flow.

Average implementation time

Though all SaaS vendors are different, across the SaaS industry, the average time to implement a new solution is usually between three and 18 months. That assumes all goes well. Enterprise customers should expect a longer implementation process since enterprise SaaS solutions are tailor-made for the company itself. A startup B2B SaaS model, on the other hand, tends to take a much shorter time to implement because the software is more generalized overall.

Even considering all of these aspects of SaaS software, each organization is different, and having customized business intelligence metrics is critical.

Benefits of having an enterprise SaaS business model

Touted by some as one of the most lucrative business models in the world, enterprise SaaS companies have four distinct advantages:

1. Recurring revenue

Recurring revenue is the foundation of enterprise SaaS business models—which is why customer loyalty is worth its weight in gold. Recurring payments ensure SaaS business models are repeatable, scalable, and profitable growth machines.

2. Easy to scale

All the predictable revenue generated from subscription services makes expansion a breeze. SaaS companies tend to have high margins, which allows them to funnel profits into expansionary marketing and sales.

3. Sticky products

When businesses move onto a platform that accomplishes one or many daily processes, switching to another isn’t easy. Because SaaS services integrate with data and other software, they’re time-consuming and expensive to replace.

4. Higher AOV

Enterprise SaaS platforms typically have higher average order values (AOVs) because they serve a higher volume of users. This is balanced out by higher expenses across staff, R&D, and servers, but the economics are appealing regardless.

Implementing SaaS enterprise software: Planning a successful rollout

Implementing SaaS enterprise software is a great way to improve your business processes. However, the success of your software rollout is directly impacted by the strength and quality of your implementation plan.

The following are some of the most common hangups that organizations face when lacking a proper implementation plan, and for that reason, should definitely be included in your own software rollout.

Review implementation timeframes

Implementing an ERP platform takes, on average, at least six months. This could go a bit faster in some situations, but more commonly, it takes longer because of how robust the solution is. As a result, your team must be readily able to deal with a potentially long rollout. Consider in advance if you’ll need to alter labor, and how you’ll manage personnel changes over that timeframe.

Discover hidden requirements

You should expect to discover a few hidden requirements during your SaaS enterprise software rollout. While this is unavoidable, it’s certainly not ideal.

To mitigate the delays that such deliveries cause, take some time to work with several teams across your organization and brainstorm any unexpected (or not instantly obvious) software requirements. For example:

  • Many organizations need to migrate data to another platform in advance, which could take some planning work.
  • Is there a need to build APIs or integrations between your existing software and systems to meld with the new enterprise software? If you’re not sure, some research could be necessary.
  • Have you identified current and future scalability and customization goals? If not, consider a planning session to do just that.
  • Are you building enterprise software processes out with future scaling in mind?

Think about each area of the process to determine what hidden requirements may extend the timeline or make the process a bit more complex.

Ensure data security

Today, nothing is more important than ensuring all data—from company-sensitive information to customer data—remains securely protected. What steps are you taking, or do you need to take to ensure proper data security and safeguard all business processes?

  • What on-premises solutions or on-demand systems are you using now for security?
  • If you are using cloud computing, have you considered the security as you migrate? Does your cloud service integrate with your new tool, or do you need to create that integration?
  • Consider secure billing solutions and any changes you need to make there.

Multi-stage user onboarding

Once the day comes to start implementing your system, having everyone jump on board all at once is not ideal. It’s better to onboard in small groups. Or provide small introductions to your new tool over time. Give users bite-sized opportunities to learn the new system, rather than expecting them to just start using an entirely new and different program one day. 

Onboarding B2B SaaS and enterprise-level SaaS can be complicated, but having and following a plan helps.

Customer acquisition models for enterprise SaaS business models

SaaS companies use several models to attract and grow their customer base—some with upfront costs and others that forgo profitability to boost their subscriber count. Each of these models can potentially lower the cost of acquisition with the hopes of converting customers later.

Here are the most popular customer acquisition models SaaS companies are using today:

Freemium pricing

Acquiring customers without dumping cash in marketing and sales is obviously beneficial. But the opportunity cost of getting paying subscribers from the start is a head-scratcher that leaves SaaS companies asking, “Will free users choose a premium offering down the road?”

In a perfect world, the freemium model brings customers into the ecosystem and upgrades them to a premium tier once they try the product. The ultimate goal is to provide a reliable tool and solid user experience, then use a tiered pricing model that encourages users to upgrade for additional tools as they become comfortable with the base model.

One company that has mastered this SaaS business model (for B2C and B2B) is Canva. Canva offers a free platform with thousands of customizable templates to design and create graphics online. But their premium service gives unparalleled customization and studio-quality imagery perfect for creatives of any sort. Offering upgrades like SEO or social media tools for a higher cost could keep customers engaged.

Free trial

Business customers, those who need more than promises, rely on free trials to align decision-makers on the usefulness of a product. The cost of acquiring customers for this model is low due to the low barriers to entry (free) and the minimal effort it takes to educate customers on how to use the product.

Amazon has mastered the art of the free trial with Amazon Prime. They’ve periodically offered a month for free (usually $119/annually) to get their customers hooked. Once you’ve subscribed, Amazon’s universe of free shipping, faster delivery times, video, and more is immediately available to your account. And if they raise the price tomorrow? Most people wouldn’t blink.

While it’s tough to compare any SaaS company to Amazon’s Prime membership, there are a few themes to consider:

1. Free trials should bring immediate value to the customer

2. Free trials work better with simplistic onboarding

3. Free trials can help sell expensive or “sticky” services because customers can preview the value

During those free trials, providing exceptional customer support, building out a strong customer experience, and offering solutions like hands-on messaging for problem-solving helps customers like the company and want to keep working with them.

Sales demos

When hunting upmarket in the SaaS business—trying to acquire high-value customers—free trials and freemium models aren’t the most effective acquisition methods. Many companies trying to sell their software to so-called “whales” of the industry need sales demos to help them understand product fit and expectations.

These sales demos shouldn’t show how a SaaS product works; there’s a website for that. Instead, they put all parties involved in the purchase (typical of larger businesses) at ease. Demos should address customer pain points and provide a resolution through context. This is key to successful customer acquisition and should be a core component of your SaaS customer acquisition strategy.

One company with an epic track record of bringing in large companies is Salesforce. And while their sales demos used are likely proprietary, they’ve landed customers like Amazon Web Services, T-Mobile, and Spotify. 

Key performance indicators (KPIs) to watch

Launching an enterprise SaaS company and promoting it feels like trying to hit a moving target. Many companies discover they’re using the wrong model, mispricing the offering, or not providing enough value. In the discovery phase, measuring key performance indicators is essential. As Peter Drucker says, if you can’t measure it, you can’t improve it.

Get Your Free SaaS Metrics Template

Template provides you with a comprehensive set of pre-built SaaS metrics (that you can trust) to wow investors and make key business decisions with confidence.

Here are a few metrics SaaS companies need to measure:

Lifetime Value (LTV)

Customer Lifetime Value is the projected amount of revenue received from a customer throughout the lifetime of a professional relationship. SaaS LTV can help companies envision future profitability and determine how much to spend on acquiring customers.

Cost of Acquiring Customers (CAC)

The cost of acquiring customers is the amount spent on marketing and sales divided by the number of customers acquired. This formula is compared with LTV to determine budget and profitability. Customer Acquisition Cost can play a big role in overall competitiveness.

Monthly Recurring Revenue (MRR)

The MRR metric is a combination of all predictable revenue every month. SaaS companies rely on MMR to show the growth of the business.  

Churn Rate

Churn is the percentage of customers who cancel their recurring revenue subscriptions. Breaking this KPI down into gross and net churn can provide different perspectives on the trajectory of growth. Understanding churning in business enables companies to make better decisions over time.

Retention Rate

Retention Rate is how many customers sign up and continue using a SaaS platform. The higher the retention rate, the more predictable the revenue. Small increases in retention signify customers are happy with the product and can lead to upselling opportunities.

Understanding the retention rate vs churn rate allows for a better understanding of what works and what may not.

Enterprise SaaS business models grow your business

It’s easy to see how entrepreneurs who master the enterprise SaaS business model can rapidly grow their business with the right tools and metrics. While it’s tough to choose which model is best, making an informed decision and then gathering data will lead to results. If you’re looking to take your SaaS company to the next level, consider getting the right tools to drive growth. 

Maxio is the #1 subscription and billing platform for companies that need precise accounting, in-depth business analytics, and agile subscription management. Visit our website or take a self-guided tour to learn how Maxio can work for you.

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Your Plug-and-Play SaaS Metrics Dashboard

In this template, you’ll find a comprehensive set of pre-built SaaS metrics (that you can trust) to wow investors and make key business decisions with confidence.

Chart your path to profitability with metrics like:

  • Subscription Momentum (ARR, customer count, average ARR)
  • Churn & Retention (churn rate, renewal rate, net revenue retention)
  • Customer Lifetime Value (CLV)

In our Fall product update webinar, Chief Product Officer Barrow Hamiliton, Manager of Product Grant Chambers, and Director of Product Marketing Andrea Wunderlich (that’s me!) showcased some of Maxio’s most powerful features for helping companies activate a hybrid go-to-market strategy.

We covered:

  • The changing market dynamic 
  • What a hybrid go-to-market motion actually entails 
  • A sample B2B SaaS company with a complex, hybrid GTM model 
  • A sample subscriber journey 
  • What’s next on Maxio’s product roadmap

Why should SaaS companies leverage a hybrid GTM strategy?

We all know the business environment around us has changed significantly over the last couple of years. A new B2B era is upon us. Gone are the days of growth at all costs, sky high valuations, and an unlimited supply of funding. 

This new era requires growth efficiency and greater financial rigor. There is no better proof of this change in the market than what we are seeing happen with valuations. 

The

Rule of 40, and its impact on company valuations

You’ve likely heard a lot recently about the Rule of 40, a useful tool for measuring the balance of a company’s growth and profit margin. Less than 18 months ago, 10% on the rule of 40 was the low bar to get a 10x valuation. Based on a 2023 study from Software Equity Group, companies now require 50% on the rule of 40 to command a 10x valuation, meaning if you aren’t growing north of 50%, you better be profitable. 

That’s a pretty significant swing in expectations.

How to achieve growth efficiency in today’s market 

So how do you achieve the Rule of 40? Well, it has two implications. 

On the profit margin side, you need to think about how to keep your G&A and R&D costs low, but on the growth side, you need to think about growing your revenue more efficiently.

Reducing headcount and cutting back on tech spend for GTM teams can only take you so far. 

You need to fundamentally rethink the way your products are packaged, sold, and delivered to customers to discover where you might capture efficiencies.

Product-led growth, which in many cases means self-service models and pay-as-you-go, has long been touted as a path to efficient growth because customer acquisition cost is lower.

However, our recent Maxio Institute data shows companies that offer sales-negotiated contracts have higher CLV and have maintained healthier growth rates in the downturn. 

Additionally, Gartner reports that PLG-only models result in a 23% higher chance of buyer regret, which spells disaster for retention efforts.

The logical conclusion here is that you need to run both a sales-led and product-led motion—a hybrid go-to-market model. 

But what does a “hybrid go-to-market motion” even mean? 

Some in the SaaS space define hybrid GTM as the ability to offer both subscription and usage-based pricing to customers. Others define it as the ability to run both self-service and sales-led motions in parallel. 

More often than not, a single GTM motion aligns with a single pricing model. This isn’t because customers want it that way, it’s because mixing and matching acquisition and pricing models is an operational nightmare

That’s where Maxio comes in.

How to operationalize a true hybrid GTM model in Maxio 

Maxio is a financial operations software that was purpose-built to support the needs of growing B2B SaaS companies. That includes supporting your hybrid billing model. Let’s take a look at how it works:

For demonstration purposes, let’s look at how this would work for a fictional SaaS company with a complex, hybrid GTM model. 

SaaS Mail Co. is a B2B SaaS company that specializes in email marketing. They have two “self-service” type plans, the usage-based plan and the starter plan, and one sales-negotiated enterprise plan.

Blog_SaaS Mail Co pricing

As you can see, the SaaS Mail Co. product catalog is pretty complex. It includes offerings like metered components, overage charges, user seats, and non-product items like 24/7 support. 

All of this is easy to configure in Maxio’s Advanced Billing platform.

On our product webinar, Manager of Product Grant Chambers walked us through a sample subscriber journey for a SaaS Mail Co. customer. (We’ve included his demo below.)

This journey includes things like: 

  • Moving from an evergreen to a term subscription 
  • Mid-period upgrade 
  • Reverting back to an evergreen subscription after the term has expired 
  • Using a self-service portal to make changes to the subscription 

All of the subscription actions taken in Advanced Billing are reflected on in Maxio Platform’s financial and SaaS metric reports, making it easy for SaaS Mail Co. to see:

  • Future draft invoices for a term subscription that includes a usage component 
  • Easily see future revenues at the customer and term subscription level 
  • Easily distinguish between subscription and usage revenues in SaaS metric reporting

What’s next on Maxio’s product roadmap

Stay tuned to learn more about what’s coming for Maxio, and how you can better leverage our software to meet your revenue goals. Here’s a sneak peek at what’s coming next:

Maxio Payments

Unlock automated reconciliations, batch reporting, journal entries, and seamlessly sync payments & deposits directly to your GL.

Developer Tools 

Easily integrate your web applications with Maxio using our embeddable components and SDKs (Software Development Kits).

Data Extensibility 

Extend the value of your Maxio data and enable new insights with new benchmarking and reporting capabilities.

Ecosystem Integrations 

Facilitate business processes and with Maxio’s continually evolving ecosystem of integrations including NetSuite, Intacct, QuickBooks, Xero, Salesforce, HubSpot, and more.

Watch the full recording from Maxio’s Fall 2023 Product Update Webinar: Hybrid GTM Demystified.

Ready to operationalize your company’s hybrid go-to-market model? 

Maxio is the only billing and financial operations software purpose-built to support growing B2B SaaS businesses. We automate your billing, subscription management, collections, and reporting, so you can stop chasing dollars and focus on evolving your business strategy and operations.

Get a demo to see first-hand how Maxio can help you adapt to the changing market.


About the author

Andrea Wunderlich has spent the last five years working in various GTM roles including sales development, content marketing, and market strategy for B2B SaaS leaders like Chili Piper and FullStory. She now leads Product and Customer Marketing at Maxio, a billing and financial operations platform built for B2B SaaS, helping SaaS leaders carve a path to efficient growth.

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The State of SaaS Growth 2023

We’ve analyzed the billing data of over 2,100 B2B SaaS companies between 2022 and 2023 and have presented key insights, including:

  • Growth rates of businesses based on billing type
  • Where some of the fastest growing companies are located
  • The bar for raising your successive round of investment.

Download the report

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Estimate your cashflow with the SaaS Billing Change Calculator

Quantify the cashflow impact of changing billing terms with this SaaS billing change calculator created by Todd Gardner with SaaS Advisors.

Get the calculator

As we enter a period of great uncertainty in SaaS, companies are re-examining their payment terms.

Some businesses will look to maximize cashflow by moving from monthly to annual payments, while others may wish to mitigate churn by renewing annual customers onto monthly terms. Regardless of your objective, changes in payment terms can have a significant impact on your business that will not appear on the income statement.

The SaaS Billing Change Calculator is designed to easily quantify the cashflow impact of changing billing terms.

In this video, watch Todd Gardner explain how to use this powerful tool to streamline your financial strategy.

Discover the subscription management software your company won’t outgrow.

In sales, showing is infinitely more powerful than telling. And in SaaS, this couldn’t be easier than by offering free trials.

SaaS free trials allow you to engage new potential customers by showcasing the value of your product or service firsthand. SaaS companies, in particular, are uniquely positioned to take advantage of free trials as a part of their customer acquisition strategy.

Free trials have minimal risks, but that doesn’t mean they’re risk-free… There’s always a chance that your customers won’t renew after the free trial period ends or that they won’t upgrade to a paid subscription.

So, how do you make the most of this powerful strategy? In this guide, we’ll outline the best practices for offering free SaaS trials and how you can leverage them to increase your user base and earn more revenue.

What is a SaaS free trial strategy?

A free trial strategy in SaaS involves giving new customers free access to your software. This may be through a limited-time free trial period, or by offering a free option with limited features or certain usage restrictions – also known as a freemium model.

In many cases, companies take payment information from free trial customers, but the customers don’t have to make an upfront payment. They just enter their credit card details to show you that they’re seriously considering the tool. This setup allows new users to experience the value of your product without making an immediate financial commitment.

Conversion rates for SaaS free trials tend to be relatively high, resulting in more paying customers and higher revenues.

Typical length of a free trial in SaaS

The ideal free trial length for your SaaS product will vary based on its complexity and its average time to value (TTV), a metric showing how long it takes customers to realize your SaaS is worth the investment. You want to give new users time to realize the value of your product, but you also need to build a sense of urgency so that they feel the need to subscribe at the end of the trial.

When deciding on the length of your free trial offers, consider the following criteria:

  • Product Complexity: High complexity software (like a CRM) typically means it takes longer to evaluate – meaning you’ll need a longer free trial period.
  • Price Point: A higher price point typically means more internal buy-in and a longer decision process.
  • Current Free Trial Performance: If users are frequently asking for extensions or you have high churn rates on the free trial, consider extending the period.  

There is no silver bullet here.  Keep monitoring and testing what gets customers to stay and what causes them to leave. Then, tweak your trial length accordingly. The most common free trial lengths are usually within a 7- to 14-day window, though some companies have great success with five-day trials while others offer a full month.

Types of SaaS free trials

The B2B SaaS free trial model has a lot of advantages, but to make it as successful as possible, you should use the most appealing method for your target customer base. Here are a few variations:

  • Freemium model: You provide a free version of your product, typically without any time constraints. This version has less functionality in comparison to paid versions of your product. Once your free trial users have experienced the value your product provides, you can ask a member of your sales or customer success team to engage in upsell or cross-sell activities.
  • Free trial without a credit card: You allow users to try your product for a limited period of time without requiring payment details in advance. This can be appealing to customers who are skeptical about your product, or who have failed to cancel ‘free trials’ on time in the past. However, these users may just be testing the waters and may not be high-quality leads.
  • Free trial with a credit card: You let new users experience the value of your product with a free trial, but you take their credit card details to get a soft commitment. You can follow up with them at the end of the trial to see if they’d like to upgrade to a paid version of your SaaS.
  • Free trial post-product demo: Customers can access a free trial after attending a product demo, usually held in the form of a video conference or webinar.

When planning your free trial, keep in mind: Consumers have a lot of products vying for their attention, and they aren’t just going to use something because it’s free. For this reason, any free trial you provide should be paired with a well-planned customer acquisition strategy within the trial process.

SaaS free trial best practices

To convert trial users to paid customers, you need to hone in on their pain points and show them why your SaaS is worth the investment. Here are a few ways to help your users get the most out of their free trial experience.

Start with clear expectations

New users need to understand exactly what your software does when signing up for a free trial. Don’t allow salesy messaging to overpromise on your free trial landing page in an effort to increase free trial sign-ups. If they think they’re getting one thing and they get something else, they’ll be less likely to convert at the end of their free trial period.

Instead, provide a clear and articulate description of what features your trial includes – being sure to call out any that are gated during the trial period. If your product provides no-code solutions, but they can’t be saved, used, or published until after paying for a full subscription, mention that. Having this awareness when starting their free trial allows users to focus on testing the product without being distracted by finding solutions that they don’t yet have access to. It also builds anticipation for accessing those gated features after subscribing, and enables retention rates to stay high over time by providing exactly what had been promised. 

Acquire credit card information

While some SaaS businesses don’t require credit card information to activate the free trial, doing so has a definite impact on increasing conversions. Multiple studies (like this one and this one) show varying conversion rates when testing trials with and without credit card details required … and all of them show that requiring a credit card leads to significantly higher conversion rates. 

It’s worth noting that you don’t have to charge the card—simply requiring a credit card to activate the trial does enough to qualify leads and prove their true interest in your product. 

However, you also have the option to request or require user approval at signup for auto-enrollment in your program after the free trial ends. This helps to increase your conversion rates, however, consumers usually feel skeptical about it. They don’t want to start a trial, forget to cancel, and get charged for months of access before remembering to cancel. For this reason, requiring credit card information does tend to reduce the number of free trial signups in total.

Provide a personalized and comprehensive user onboarding process

Trial users will only upgrade or continue their subscription if you provide a great user experience that showcases your product’s value. To ensure they know how to get the most out of your product, develop a comprehensive onboarding process featuring webinars, tutorials, or other educational materials to prepare them to use your product.

Then, consider using personalized trial dashboards or notifications that show users the features they’ve tried and the ones they have yet to sample. Include the user’s personal details, like their name and company information, their goals for the software, and a personalized plan to follow that would help them reach that goal.

Finally, consider using an email marketing campaign to check in with customers, give them additional ideas or inspiration about how to optimize your product, and of course, remind them when their trial period is approaching its end.

Ensure that free trials fully show off your solutions

For every stage of the sales cycle, from the prospect’s first introduction to the software to the moment they sign up as a paid user, you must clearly show how your product solves their problems. The free trial is the best chance to do this.

Beyond simply providing access and offering guides, consider walking users through real-life uses and case studies. Show each trial user step-by-step examples of how others have used your software to solve the same problems.

The benefits? Providing a hands-on experience creates a stronger connection with the user and increases the chances of conversion. It allows users to see exactly how your product solves their problems and improves their workflows. And, perhaps most importantly, it sets realistic expectations for customers, letting them feel confident that your product meets their needs.

Don’t make your free trial too long

If your free trial is too short, customers won’t get a chance to get to know your product. But if it’s too long, they may forget about it and fail to try it out. In both cases, they leave the trial without converting into a paid user. In the worst case, their lack of understanding after participating in the trial may leave them with the impression that your product isn’t right for them, when in truth, they just didn’t try it out properly.

You need to make sure that your SaaS free trial is long enough that they get a chance to explore your features, but you also need a length that encourages urgency. Depending on the complexity of your product, this is usually somewhere between one and two weeks.

Maintain contact with trial users

Don’t let closed-lost deals go.

If someone ends their trial, don’t give up on them. Instead, have your Customer Success team reach out and ask them why they left. Find out what motivated them to jump ship, and point out solutions to their concerns. Or, leverage that information to improve your product or the type of free trial that you offer.

The same is true for defecting subscribers. While churn rates tend to be relatively low once users become subscribers (the median churn rate is only 13% for SaaS subscribers), it’s still worth reaching out to those who do decide to end their subscriptions, as those users will have extremely valuable feedback having used your product for so long.

Track free trial conversion rates

Famed management consultant Peter Drucker is often quoted as saying, “If you can’t measure it, you can’t improve it.”

This is as true for free trials as it is with anything else. You’ll never know whether or not your free trial business model is working until you track the numbers. Once you have hard data, you can compare it to your specific goals or other benchmarks from similar SaaS businesses. The right financial insights and industry trend data can help you identify opportunities for improvement.

The free trial period can be used to supplement your broader pricing strategy if you embrace these best practices. As you set up your trial strategy, expect to experience a bit of trial and error. Pay attention to what works and what doesn’t. Then, adjust as needed.

Wrapping up

The SaaS free trial strategy lets you give customers a risk-free, hands-on look into your software, allowing them to really see how your tool can solve their business pain points.

Setting clear expectations, providing personalized onboarding, and showcasing the value of your solutions are key to attracting and retaining trial users. By tracking conversion rates and maintaining contact with trial users, you can continuously improve your strategy and address customer concerns. 

By following the best practices provided here, you can enhance your customer acquisition strategy, increase conversions, and generate more revenue. 

Want to make the most of free trials in your business?

Maxio supports your evolving monetization strategy with a flexible billing engine built for your B2B needs. Schedule a demo to learn more.

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Get usage-based pricing benchmarks and best practices

In partnership with The SaaS CEO and RevOps Squared, we surveyed 490 SaaS professionals to better understand how usage-based pricing fits into a B2B SaaS monetization model. In this report, we share the data we gleaned along with commentary from SaaS across the industry.

The subscription-based pricing model is not just a trend or an industry standard. It’s one of the most profitable pricing models for software companies. 

A KeyBanc survey of 100 software companies shows a median gross profit margin of 80% on subscription or SaaS revenue. In fact, only about 10% of respondents reported a profit margin of 60% or lower on their subscription revenue.

The benefits of subscription pricing are clear, but it’s still challenging to narrow in on the right price and billing model for your SaaS. Businesses need price points that correlate to the value of their products, as well as pricing strategies that appeal to their customers.

While narrowing in on the right pricing, you need to think about your customer needs, the competition, and your bottom line. Then, you need to identify benchmark metrics that help you track the success of your subscription business. 

With so many moving parts, it can be hard to know where to start.

To help you out, this guide looks at the strengths and challenges of subscription pricing. Then, it outlines several different pricing models and provides tips on how to manage subscription-based pricing as your company grows.

What is a subscription-based pricing model?

A subscription-based pricing model is when your clients pay a recurring fee to use a product or service. This is typically invoiced as an annual or monthly fee.

This model is very popular with both SaaS and streaming service providers—think Spotify, Netflix, and Quickbooks. However, businesses ranging from car washes to HVAC companies to pest exterminators also use subscription pricing models to bring in extra revenue.

Subscription pricing typically leads to greater retention in your customer base, lending a degree of predictability to your revenue stream. Because of this, the subscription based pricing strategy has become popular in many different industries. But don’t let its growing popularity make you think that subscription pricing is simple.

In fact, this pricing model can be very complex. You have to ensure that it works well with your business model. You also have to consider software development, maintenance, and customer acquisition costs, and the number of users you need to cover those costs. You then have to make decisions about pricing tiers and which type of pricing model you want to use. Then, of course, you have to consider subscription lengths, add-ons, and inclusions.

Benefits & challenges of subscription-based pricing

There are pros and cons to all different price strategies. Here are the main benefits and challenges of a subscription-based business:

Benefits:

  • A predictable recurring revenue stream
  • Potential low cost of entry for new customers
  • Promotes customer retention and higher customer lifetime value
  • The pricing model can be easily modified as the product or company grows

Challenges:

  • Early-stage revenue uncertainty
  • Customers may be hesitant to sign up for a recurring fee
  • Risk of cancellations that increase your churn rate
  • The need to constantly provide more value

As you can see, many of the pros and cons overlap, and they vary based on the decisions you make. For instance, if you embrace freemium pricing options, you create a low cost of entry which can help attract new customers. However, if you use a value-based pricing model, some potential customers may be hesitant to sign up.

Similarly, some subscriptions build customer loyalty in a way that reduces churn, while others don’t meet customer expectations and have higher churn rates. But this also depends on your buyer persona. For this reason, it’s important to remember that you shouldn’t limit yourself to one pricing model. In some cases, you may use many models to enhance customer engagement and cross-selling opportunities.

6 Subscription pricing models

To ensure that you select the best subscription pricing strategy for your business, you need to look at all the pricing models. This overview will help you find the ideal subscription-based pricing model for your software company.

Freemium

This pricing model uses a combination of free and premium offerings. Generally, the free option is designed to hook users and showcase some of your product’s potential. When subscribers need or want more, they can purchase individual add-ons or upsell services, or upgrade to a premium subscription.

Offering something for free can be very useful from a marketing perspective. When a client finds something free that they enjoy, they often post about it on social media or tell their followers. This builds brand awareness in an inexpensive and convenient way. Some companies even offer referral bonuses to subscribers who get others to use the product.

Freemium often tends to work better than a free trial period. Consumers are becoming increasingly skeptical about free trial periods because they worry that they won’t remember to cancel or that the offer comes with strings attached.

If you opt for this model, you have to make careful decisions about which features are free vs. paid. Your free offerings need to be compelling enough to hook new subscribers. At the same time, you don’t want to give anything too valuable away. If you give away too much for free, it signals to your users that your SaaS isn’t worth the premium price you’ll eventually want them to pay.

This pricing model is successful in a wide range of industries. For example, LinkedIn, DropBox, Semrush, and countless other SaaS companies offer both a free version and multiple premium options.

Flat-rate pricing model

With flat rate pricing, you pay a set price for access to a product or service. Companies that select this pricing model generally offer a single fixed price for unlimited use. They don’t usually have free options or different tiers, though they may incorporate free trials.

The main benefit of flat-rate pricing is its simplicity. Using a single price streamlines financial projections and makes future price adjustments easy. It’s also a breeze to advertise a single upfront price point to your customers.

Flat rate pricing is not ideal for most SaaS businesses, but there are exceptions. Basecamp, for instance, has had a lot of success with flat-rate subscriptions. The company has a per-user monthly price and an unlimited-user monthly price. This model tends to work best for companies that have a very specific product and a well-defined customer base.

Tiered pricing model

Businesses that offer several subscription options at different price points use tiered pricing. The tiers may be based on volume of use, features, or even on how your customers perceive your offerings.

This pricing model lets you appeal to the needs of a broad audience. When optimized, it lets you target different market segments without risking revenue loss. However, that’s also the inherent challenge. You need to narrow in on prices and offerings that make sense for your business and your audience.

The tiers should help you maximize the lifetime value of your customers (CLTV). If you have too many tiers or options, your customers will end up confused or frustrated. Additionally, if the tiers are too similar, there won’t be a compelling reason for someone to pay for a higher tier.

The most popular tier-based pricing offers basic, standard, and premium. But this isn’t the only option. Ultimately, you need to shape tiers based on your customers’ needs and expectations. This pricing model is ideal for SaaS companies that have defined levels of offerings.

Value-based pricing

With value-based pricing, pricing is based on the customers’ perceived value of the product or service. It is not based on the cost to produce the product or other quantitative metrics. Instead, the pricing model reflects the customers’ appreciation for the product and how much they’re willing to pay.

Value-based pricing allows companies to maximize profit margins while providing as much value as possible for their users. While setting your subscription rate, you should of course consider costs and the profit margins you want your company to hit. However, the main consideration is customer delight.

How does the product make their life easier? How does it make them happier? These variables will guide you to the amount customers are willing to pay. You must understand your customers’ motivations if you want to use this pricing model.

Value-based pricing works well for companies that produce high-end offerings that command a lot of prestige. For instance, companies in the art and fashion industry often use value-based pricing, but this strategy can work extremely well for SaaS companies that serve a niche customer based or offer better features than their competitors.

Per-user pricing

Per-user pricing is a fee based on the number of users. For instance, if a company wants 15 employees to use software that charges $10 per user, they must pay $150. If they only have one employee using it, they would only need to pay $10.

At first glance, this is one of the most straightforward subscription pricing strategies, but it can become complex. If you decide to take this route, you need to consider your customers’ needs very carefully.

This option may not work well for software that is generally only used by one person at a time. In this case, per-user pricing can also backfire because a team may just share login credentials.

Per-user pricing is most ideal for software that works best with multiple users. Still, it can be used as a supplemental pricing strategy alongside others.

Usage-based pricing

The usage-based pricing model involves a subscription fee based on a subscriber’s consumption levels. The more the subscriber uses, the more they pay. If they don’t use the software, they don’t pay as much, and in some cases, they may not pay anything at all.

This is not a new pricing model. Arguably, it’s one of the oldest subscription-based models. It has been used by utility and communication companies for years. Water and electric companies still use this model, while communication companies have moved away from it. For example, decades ago, people had to pay for the time they spent on long-distance calls, but now most phone companies have integrated long-distance calling into their base price.

The main disadvantage of this model is that customers aren’t paying a set fee every month. Instead, their prices fluctuate. This can complicate revenue recognition and financial projections. However, this doesn’t mean that software companies should shy away from this model.

According to Ray Rike, Some of the “fastest growing SaaS and cloud companies have used [usage-based pricing]. The results have been impressive, including extremely high net dollar retention (NDR) rates and increased enterprise value to revenue (EV:REV).

This pricing model works for many different SaaS companies, but it may be particularly useful for software products that involve frequent API calls and data usage.

The best pricing model varies based on your product, business objectives, and target customer. And once you’ve chosen a model, you need to track the right financial metrics and adjust as needed. 

How to choose a subscription-based pricing model for your business

When choosing between different pricing models, you need to consider internal and external elements: Your costs, your competition, and what appeals to your customers, just to name a few.

To narrow in on the right pricing model, you should work through the following questions.

  • What pricing model makes sense for your unique product?
  • What does your current customer base want? What will appeal to new potential customers? Are you marketing to individuals, small businesses, or other software companies? What is their perception of your product?
  • What are your competitors doing? Should you follow suit or is there a compelling reason to break away from the pack?
  • What value metrics do you want to use to measure your success? How do the metrics you select influence the pricing model you choose?

Managing your subscription pricing models over time

Choosing a subscription pricing model is never a ‘set it and forget it’ task. It requires consistent planning, testing, and monitoring to find one that works well for both you and your customers. 

While pricing exercises become increasingly complex as your company scales, subscription management software makes the process much easier.

At Maxio, our subscription management platform allows our users to consolidate their product catalog, manage subscription activity, and test new billing and pricing models to see what really moves the needle.

Need help finding the right pricing model for your SaaS company? Schedule a demo to see how Maxio can help you turn pricing into a growth lever for your business.

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SaaS companies have various pricing strategies available to them as they consider product pricing, and each comes with strengths and weaknesses. 

In particular, value-based pricing is a powerful option for many SaaS companies because it allows them to set a final price based on what their customer base is most likely to value. This focus on customer value allows for higher sales and also a potentially higher profit margin.

Throughout this article, you will see a number of pricing approaches, direct comparisons to value-based pricing, and all of the key information to show you why this strategy is so popular and why it might be the best route for your SaaS company.

What is value-based pricing?

Value-based pricing is a pricing method that focuses on setting each price according to how customers perceive its value. Value-based pricing is an effective pricing strategy for high-value and easily distinguished products, such as SaaS companies that have achieved product/market fit. 

This pricing model is quite different from other common pricing models, like cost-plus pricing and competitor-based pricing, which rely on external factors like R&D costs or competitor pricing. Instead, value-based pricing is based on the ROI that a SaaS business generates for its users. In essence, if your SaaS can help your users save or make more money than they’re spending to work with you, then you’re delivering value.

Benefits of value-based pricing

To really understand the value of this pricing strategy, we can look at three specific benefits that are tied to value-based pricing:

  • Enhances customer loyalty. Delivering consistent value over time is the key to developing brand loyalty. Loyal customers have greater LTV and will continue subscribing to your SaaS—ultimately resulting in greater profit margins due to the lack of customer churn.
  • Results in higher price points. As your customers develop brand loyalty, their willingness to pay higher prices rises. This results in an upward trajectory wherein your brand gains momentum to continue boosting prices to meet their demand and perception of your product’s value.
  • Enables focus on customer service and customer feedback. At a certain level, customers begin valuing service over savings and are willing to pay a premium for a quality product with service to back it up. Businesses that go this route often invest in their customer service teams, helping to double down on ensuring customer and brand loyalty. At the same time, two-way conversations from the customer service team are the perfect opportunity to collect customer feedback and help maintain a close eye on customers’ perceived value.

When you focus on the value of the product, you find more opportunities to optimize your price point and increase your brand value. To this end, increasing the price (within reason) can create a positive feedback loop that further adds value to your product and your brand.

Challenges of value-based pricing

While the benefits of value-based pricing are compelling, it’s not quite that simple. Simply raising your prices isn’t enough to create an infinite loop of increasing value. In fact, there are three specific challenges that you should understand before diving into a value-based pricing strategy:

  • Product prices are harder to set. Using value-based pricing requires significant time and energy spent on understanding your customers’ view of the value of your product. You’ll need to continue to watch as customers’ perceptions shift over time, which requires a long-term investment in time spent just making sure your pricing aligns with customers’ personal product valuations.
  • There’s room for error. It’s not uncommon to make a few mistakes when first setting prices with a value-based pricing strategy. While there are tools to use to approximate the ideal price for your products—like price sensitivity measurements and feature analyses—there are no guarantees that you’ll get it right from the start. Those first few months of feeling out the market to find your ideal pricing may be hard on sales and revenue generation because of it.
  • Potential for lower markups. The customer’s perception of your product might not always reflect your internal assessment. When this happens, you may be forced into a lower price, and you have to raise the value of your brand in order to improve perception to eventually justify higher prices.

Value-based pricing is a challenging prospect, and even though it provides chances for higher prices and profit margins, your target market could also force your prices down and hurt your bottom line.

Factors that impact value-based pricing

If you’re just another provider in a sea of similar products, your price point will be low, and you won’t convey a sense of value to your target customers. This is not the ideal outcome for any business. However, if you can leverage the following aspects, you can push your value higher.

Market segmentation

Market segmentation is a technique where you group your potential customers according to specific metrics, needs, or descriptions. You then study each segment to figure out their pain points, most valuable use cases, and what they’d be willing to pay for your SaaS. 

This information can help you anticipate how each customer segment will value a particular product or service. In terms of a value-based pricing model, market segmentation is a tool that helps you analyze your target audience and figure out what they might think your product is really worth.

Product scarcity

Product scarcity is a description of how available a product is relative to its demand. In general, higher scarcity creates a perception of higher value and can justify higher price points. This means that identifying and even developing scarcity can help your pricing model. 

If your SaaS is one-of-a-kind, or if there is just a small handful of software companies that do what yours does, then there is scarcity in the market.

Product differentiation

Product differentiation is what distinguishes your product from those of your competitors. For a SaaS company, features, design elements, availability, ease of use, customization, and many other factors can all tie into product differentiation. 

When you use value-based pricing, clear product differentiation correlates with a customer’s willingness to pay higher prices or endure inconveniences for the sake of accessing your software. High levels of product differentiation can help with the perception of scarcity. 

How to implement a value-based pricing strategy

There are three main elements in implementing a value-based pricing strategy: analyzing your audience, collecting customer feedback, and building pricing tiers based on the data you’ve compiled. Looking at each in more detail can help illuminate a successful marketing strategy built around value-based pricing.

Analyze target audience and customer data

With value-based pricing, it’s imperative that you wholly understand your customer; their wants and needs; and more so than anything else, their opinions of your product.

Be sure your buyer personas are fully developed, and undergo thorough research into the target audience that each persona represents. Review their personal background, their job titles, their pain points, and their expectations.

Then, dig into your actual customers to identify all of the same information. Confirm that your personas accurately represent those who buy from you, then confirm that you’ve got a firm grasp of what your customers are looking for and find valuable.

Actively collect customer feedback

Value-based pricing strategies should always include intentional efforts to request customer feedback—either via surveys or by asking customer satisfaction questions to those who submit help desk tickets, by reviewing online forums, or through other methods. All of this feedback is highly valuable in gauging the shifting value of your product or service.

At the same time, it’s helpful to do a little market research and review competitors’ products, and how their pricing works as well. While competitive pricing is not a core element of value-based pricing, it is necessary to review how customers feel about your competitors, and how they value their products or services. This information will be just as useful in assessing your selling price.

Merge data gleaned to create pricing tiers based on value

Review the insights you’ve collected and build data sets to compare and contrast trends in customer opinions; what features are most valuable, and which are less so.

With your data properly laid out, you’ll see which services or features can be grouped together into high-value/high-price offerings, and which can be offered at an entry-level price point. This information will be essential for periodically reviewing and adjusting pricing tiers or product bundles to ensure that you are optimizing your price points.

Examples of value-based pricing

One of the most common and well-understood examples of value-based pricing is the housing market. The value of a house can vary quite a bit, and over time, the value of the home tends to differ greatly from the cost of building it. The housing market depends almost entirely on buyer perception, and things like scarcity and differentiation clearly impact the cost of any specific house.

Another example that hits a little closer to home, for those in the SaaS industry at least, is that of the Apple brand. Apple’s business strategy is famous for charging premium prices for their products and services, and the brand has an immensely loyal customer base as a result. When consumers purchase an Apple computer, for instance, they are well aware that they’re not getting the lowest price. However, there is a sense of prestige and reliability that goes with the purchase. Apple presents itself as a provider of quality products largely through their pricing model and the differentiated features that clearly separate Apple from direct competitors. This is essential in value-based pricing and a core example of how it can flourish.

You can see how these ideas might apply to your target companies as a SaaS provider. While estimating value is not an exact science, the ability to justify higher prices can absolutely generate a perception of value.

When and how to utilize value-based pricing

In many cases, software is a prime candidate for value-based pricing. The cost of software development scales lightly with increased sales, meaning you can use value-based pricing and ensure you don’t incur losses on lower-valued product pricing tiers.

As customers’ perceived value changes over time, you must modify your pricing in turn. This is why so many software products utilize flexible pricing tier models along with a back-end financial operations system that makes pricing adjustments effortless.

Maxio, for instance, allows SaaS businesses to easily adjust their pricing tiers as needed to ensure they align with their customers’ perceived value of a product. If this sounds like a useful tool for your business, we encourage you to schedule a demo and see how we can help you make the most of your value-based pricing strategy.

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Developing the right pricing is critical if you’re trying to build a profitable SaaS company. To be successful, you need a pricing strategy that appeals to your customers and captures the full value of your product or service. Narrowing in on the ideal product pricing for your SaaS is challenging, and getting it wrong can result in unnecessary revenue leakage.

Your prices should attract new customers and help reduce the churn rate of existing customers. But at the same time, you don’t want to run the risk of setting prices too low.

To strike the ideal balance, you don’t just need the right prices—you also need the right pricing model. To guide you in the right direction, this guide looks at the difference between pricing strategies and models and then provides ten of the most common pricing models and how to use them.

Defining pricing strategy vs pricing model

When you research different pricing options, you will often hear the phrases pricing strategy and pricing model. These phrases overlap—they both help you find a price point that will maximize the lifetime value (LTV) of your customers. But there’s a key distinction between these concepts:

  • Pricing Strategy: Your business develops a pricing strategy internally based on its goals, the competition, and the expectations of potential customers. Your pricing strategy influences which pricing model(s) you select, and it also helps you determine the best price point for your products or services.
  • Pricing Model: This refers to the format or template you use for your prices. The pricing model is externally facing. Although you may use different price points, the same model applies to all of your products and services. You may charge a different price for a new product, for example, but you will use the same model as you do for your other products.

Your pricing strategy will affect the pricing model and the price points that you select. Your strategy will outline the metrics you want to hit, and then, your pricing model will help to ensure you hit those metrics.

For example, the most common SaaS pricing strategy is a subscription-based pricing model. This gives customers the perceived value of constant access to your software at a predictable set price every month. At the same time, it provides a higher-than-average gross margin. KeyBanc reports that while the total gross margin of SaaS companies was 73% over the last two years, and the median subscription gross margin was 77 to 80%.

The 10 most common pricing models

To hone in on the right strategy, you need to consider a wide range of questions. What do your customers want? What is the competition doing? What prices can the market bear? What prices do you need for growth? You can’t just focus on a dollar amount alone. There are all kinds of different ways to price a product, and if you want to be as profitable as possible, you need to understand the different types of pricing models.

Cost-plus pricing

This pricing model starts with the cost of developing and maintaining your SaaS, and then it adds on a certain margin. For instance, if it costs $20 to make a widget and you want a 20% profit margin, you would charge $25. To put it another way, you would mark up production costs by 25%. This is also called markup pricing.

This pricing model isn’t ideal for SaaS companies as their products tend to provide significantly more value than the cost of producing them. Businesses that sell physical products tend to use cost-plus pricing the most.

Competitive pricing

With competitive pricing, you don’t consider the cost of production or consumer demand. Instead, you base your prices around the competition’s prices. You may select prices that are the same or lower than the competition, or you may price your offerings slightly higher in exchange for offering more value or better features.

Competitive pricing works best in highly saturated industries where consumers have a lot of choices between similar products.

Penetration pricing

Penetration pricing is when you start with a low price to attract customers, even if it initially loses your business money. Businesses pick this pricing model when they want to disrupt the current marketplace and take as many customers as possible from the competition. This option can be especially effective for startups, but it’s not sustainable.

Ultimately, once you build your customer base, you will likely need to raise prices to stay profitable. If you want to explore this option, you need to keep that caveat in mind while building your pricing models and profit projections.

Penetration pricing can work for nearly any industry, and it’s most appealing to businesses that are just getting started or are trying to break into a new market.

Premium pricing

Your target market doesn’t necessarily want the lowest prices. Most often, they want value, and they’re willing to pay a high price for it. Premium pricing relies on the rule that the best price isn’t always the lowest price. It taps into the idea that solving a very specific problem better than anyone else allows you to charge a higher price.

SaaS businesses that use premium pricing often leverage their unique selling points to charge higher prices. This pricing model is very common in mid to late-stage SaaS companies who have achieved product market fit and have a competitively differentiated product offering.

Freemium pricing

In some cases, the most competitive price is $0. Offering free trials or basic versions of your product lets customers test out your offerings. Freemium pricing shows your customers what you can do for them, and it builds trust. Offering a free version also creates awareness of your product in the marketplace—this approach is most common among product-led SaaS companies.

Although it may seem counterintuitive, freemium pricing can greatly help to grow your market share and enhance your profitability. For instance, SaaS companies that offer a robust free product often recover their customer acquisition costs in about 75% of the time that it takes companies that don’t offer free trials.

Freemium pricing also allows SaaS companies to build out their initial user base before executing cross-sell and upsell tactics. SaaS companies often use this strategy, but businesses across all kinds of industries often give up freebies as a marketing hook or in exchange for new customers as well.

Flat-rate pricing

Flat-rate pricing is a set price for access to your SaaS product. Customers pay a certain price for your service plus set amounts for any add-ons. The price itself is often influenced by the cost of providing the service, but it’s even more closely tied to the value of the service.

For example, business professionals such as attorneys and accountants often charge flat rates for different types of services, but SaaS companies that provide streaming services or different types of software providers also use flat rates on a subscription basis.

Value-based pricing

What is your customer willing to pay? How much value do they place on the service you are providing? Answering these questions is the most important part of a value-based pricing strategy. With this pricing model, you base your price on the value of your product to your customers, not on your production costs.

This requires you to study your target market very closely. You must get to know them to determine exactly how much they’re willing to pay. Businesses that use this pricing model could often choose to charge more, but they build loyalty by charging rates that align with their customer’s desires and expectations. The challenge of value-based pricing is that you have to be very in tune with your customers, and you must stay aware of changes in the marketplace.

This pricing model is ideal for a SaaS business that is tuned in to the needs of its customer base and is able to generate a significant ROI for their users.

Tiered pricing

The tiered pricing model uses different price points for different features or subscription levels. This allows you to provide unique offerings at different price points based on the needs of your target customers. It also builds inherent opportunities to upsell over time.

A new customer will often start on the lowest tier. This could even be a freemium offering. Then, once they need more functionality or a different set of features, they can just jump up a level. Your offerings take customers through various stages of the customer lifecycle.

SaaS companies often use tier pricing when creating their subscription pricing, but you also see this pricing model from companies that offer food delivery, cable TV services, and consumer goods.

Per-user pricing

This pricing model charges based on the number of users. Customers pay a set fee for every person that’s going to access the product. When determining the fee, businesses take into account cost, value, competition, and many of the other concepts discussed above.

Consumers like this model because they only have to pay for what they need. If they only have one active user, they pay a lot lower price than if they have multiple users. Businesses gravitate toward this model because it’s easier to calculate the target price. It’s also easier to make revenue predictions when compared to usage-based pricing.

Per-user pricing is very popular with software companies, but it’s also found at amusement parks, movies, and throughout the entertainment industry.

Usage-based pricing

With usage-based pricing, the price depends on how much the customer consumes. The more they use or consume, the more they will pay. Customers often prefer this pricing model because it’s linked directly to the value they’re receiving in return.

However, there are two main challenges with this pricing model. Ray Rike sums them up as:

  • Forecast management: “How does the vendor accurately predict the usage?”
  • Customer reaction to overuse: “When [the user] exceeds their projected usage levels and has not adequately budgeted for the actual usage levels.”

If you adopt this model, you have to consider both of those elements as well as all of the other dynamic market factors that affect demand. Many software companies use this model, and it’s long been the standard for utility companies.

Considerations when selecting a pricing model

With so many pricing options, it can be hard to even know where to start. Ultimately, there is no one-size-fits-all solution. The best pricing strategy varies based on your business model and goals. 

A small business providing consultancy services to a handful of clients, for example, may have a vastly different pricing structure than a manufacturer who sells millions of products to millions of people. Similarly, SaaS companies need to use a different pricing structure than companies that focus on tangible products or traditional services.

You also have to take into account your target market and look at what the competition is doing. In particular, you should consider the following in your decision-making process.

  • Buyer persona: Who is going to buy your product? What do they want? What are they willing to pay? Ideally, your product should solve a problem for your target buyer, and it should have a price point that appeals to their desire for value, luxury, or other intangibles.
  • Competitor pricing: Even if you don’t use a competitive pricing model, you should research your competitors’ prices. Then, look behind cost and think about the elements that differentiate you from the competition.
  • Messaging: Your messaging shapes how your customers interpret your prices, and it can be even more important than the actual price itself. According to Bryan Belanger, “Any consternation on these types of [pricing] changes is largely due to the rollout messaging, not the actual changes.”

Should you choose a basic markup strategy for your products? Should you choose a flat rate for your services? Should you embrace tiered pricing for your SaaS pricing models? Choosing the right template can be challenging. 

You need to look at the competition and think about what your target market expects, but then, in some cases, you may want to disrupt expectations or offer something better than the current trend. To strike the right balance, you need a partner that allows you to offer various pricing models based on your needs.

Pricing models in summary

There are all kinds of different pricing models. Some are closely based on your production costs, the prices your competition use, or the value perceived by your customer base. Others are tied to objectives. For instance, penetration pricing helps you break into a market, while the freemium pricing model helps you build your customer base by proving value early on in the user relationship.

There are also different ways to assess prices based on how people access your products and services. You may charge a flat rate, a per-user rate, or a rate based on usage. You may also charge different prices for different tiers or levels of features or services.

To hone in on the optimal prices, you need to develop a pricing strategy based on your business goals. Then, you need to select a pricing model that supports your strategy, and you need to identify metrics that allow you to assess if you have reached your goals.

This process requires you to assess multiple elements both inside and outside your business. Then, of course, you have to reassess, adapt, and fine-tune constantly. On top of all that, you need to develop a brand image that supports your pricing model and develop messaging to bring it all together.

That can be a lot, but we’re here to help. At Maxio, we bring order to financial chaos. We help you offer your customers an optimal pricing model at price points that are just right. We can also help you automate your billing, subscription management, collections, and reporting.

We provide financial operations solutions for SaaS companies so that they can focus on what’s important—scaling their business. To provide the best services possible to our clients, we always stay up to date on the latest trends and best practices in this space. 

Want to learn more? Reach out now to schedule a demo.

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In partnership with The SaaS CEO and RevOps Squared, we surveyed 490 SaaS professionals to better understand how usage-based pricing fits into a B2B SaaS monetization model. In this report, we share the data we gleaned along with commentary from SaaS across the industry.

Product led growth (PLG) is emerging as a powerful GTM model for today’s SaaS players, and it’s easy to see why. We usually think of successful B2B SaaS companies as growing 30% to 40% per year, but some PLG companies are now soaring to new heights, achieving growth rates of 100% or higher. And many of these PLG companies are achieving this growth with lower relative CAC compared to sales-led growth companies.

Companies that can show off that kind of growth are much more attractive to investors and boast sky-high valuations. Take a look at Atlassian, which was bootstrapped in 2002, and famously had no sales team. They achieved an almost $5 billion valuation. 

A recent report from Gainsight and RevopsSquared found that 58% of SaaS businesses had a PLG model in place, and 91% were planning to increase their PLG investments. 

Still, using a PLG model brings challenges, too. Recently, I met with Technology & Services Industry Association chief Thomas Lah for an episode of his popular TECHtonic podcast, and we dug into the key things today’s SaaS businesses need to do in order to unlock the power of PLG. 

Stay flexible to drive growth

For early-stage SaaS companies, achieving disciplined growth means striking a balance between flexibility and complexity: scaling monetization strategies without sacrificing the ability to pivot quickly in an ever-changing market.

That’s where product-led growth comes in. PLG drives growth by bridging the gap between free trials and robust customer engagement. Instead of closing sales-negotiated contracts to bring in new revenue, product-led companies give their customers a easier point-of-entry into their product and can upsell them over time.

However, adopting a product-led motion can be challenging, especially if you’ve previously optimized financial operations around a sales-led strategy. 

For SaaS businesses, the key to driving expansion is alignment around your GTM strategy. Especially when implementing PLG, all employees must recognize the importance of reducing friction, shortening the path-to-value for customers, and leaning into PLG to unlock scalable growth. 

Empower your sales team

To succeed with a PLG strategy, your sales team should be some of your biggest advocates. With a well-managed PLG function, your product (with the help of supporting software and analytics) effectively tells you who’s using which parts of your product. That’s a data gold mine for your sales team. They can reach out precisely when a customer is most receptive, armed with customer-specific usage data to inform their pitch and help them craft a compelling and customized ROI thesis designed to boost sales, retention, and upsell opportunities.

An old CEO once told me “happy customers buy more stuff.” The customers you win through PLG will become your most loyal, as they’ve already ensured your products and features align with their real-world use cases. Trust me, these self-selected customers (who are getting a lot of proven value from your product) will be eager to learn about premium options or other products your company offers in the future. 

Move fast without losing control 

I used to fly fighter jets in the Navy. Those things go fast—really fast. The key to staying alive while flying an A6E Intruder at 500 MPH and 200 feet above the ground (at night) is keeping focused on the instruments. You don’t go with your gut when flying a jet. The radar which tells you where the mountains are, so you can fly safely through the valley. 

Today’s high-growth SaaS companies need a “growth radar” to stay laser focused on the goal.The more focus you bring into your company, the faster you can move without the risk of crashing and burning.

For SaaS companies, a FinOps stack is the radar that lets you soar and dominate the airspace while staying fully in control. By tracking the right KPIs in real time, you can manage your sales-led and product-led functions to optimize for sustainable growth and keep your whole team flying in the same direction.

Want more insights on the productled vs. sales-led debate? Check out our recent ebook, Sales-Led or Product-Led – Which is Best for Your SaaS?, to learn more.

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What would happen if SaaS companies tapped the brakes on the growth train and re-prioritized monetization?

In a study of 512 SaaS companies, Profitwell found that a 1% increase in pricing yielded an 11% increase in profit. Those numbers don’t lie. Monetization has the largest impact on your bottom line by far when compared to acquisition and retention.

By implementing a monetization strategy, you can capture the full value of your SaaS and uncover hidden revenue opportunities in your organization.

Here are the five key components you need to build a successful SaaS monetization strategy.

What is a SaaS monetization model?

A monetization strategy is a plan that aims to generate revenue from your products and services. This definition is perfectly fine on its own, but it doesn’t provide much context on how to go about building a monetization model to support your revenue goals.

To enable your monetization strategy, you need to build a solid model to support it.

Components of a Monetization Strategy

Let’s break down the hierarchy of the monetization model:

  • GTM model: how you acquire customers (product-led vs. sales-led) 
  • Pricing model: how your product is sold (subscription vs. usage-based pricing, etc.)
  • Pricing strategy: the amount you’ll charge (premium vs. competitor-based vs. penetration pricing) 
  • Billing model: your chosen billing methods (self-service vs. invoice), frequency (monthly vs. quarterly), and contract terms (up-front vs. in arrears) 
  • Payment methods: how your customers pay (credit cards vs. ACH)

These are the building blocks that prop up your monetization strategy and allow you to capture the full value of your SaaS. Here’s how they work.

1. Reaching ideal customers through your GTM

Your GTM model is much more than how you position your company in the market—it’s the greatest contributing factor to how you’ll monetize your SaaS. For example, many product-led SaaS companies focus their acquisition efforts downmarket and eventually introduce a sales-led motion to move upmarket and service enterprise-level accounts.

Without a GTM strategy that properly addresses your target market, your monetization efforts will suffer. After all, if your customers can’t understand how you help solve their problems, why should they purchase your SaaS?

Once you’ve decided how you’re going to engage with your buyers, you can turn your attention toward your pricing strategy.

2. Turning your pricing strategy into a competitive advantage

Your pricing strategy is the second-greatest contributing factor to your monetization model. How you price your SaaS isn’t just a way to capture value; it can also uniquely position you in the marketplace.

For example, some startups may initially set their prices low to draw in new customers—this is commonly known as penetration pricing. Or, you could take the totally opposite approach and set your list price high to signal that your SaaS is greater in value than your competitors. Naturally, this strategy is referred to as premium pricing.

Your pricing strategy should connect the dots between the amount you charge and what your customers value.

3. Choosing the right pricing model to capture value

If your pricing strategy tells your customers how you value your SaaS, your pricing model is how you capture that value.

According to James Wilton, Managing Partner at Monevate, software companies create massive value but only capture a small portion of it because there are so many revenue leaks that occur naturally in the pricing process.

The main culprit? An ineffective pricing model.

Your pricing model should be a natural extension of your GTM strategy. For example, many product-led SaaS companies include a freemium offer in their pricing plan to build their user base and upsell/cross-sell to those users later on.

4. Enabling flexible payments through billing

Your billing methods (self-service vs. invoice), frequency (monthly vs. quarterly), and contract terms (up-front vs. in arrears) all play a critical role in your monetization strategy. Specifically, your billing process determines the speed of your cash inflows and outflows.

For example, if you choose to bill customers on a monthly basis (a common practice with product-led companies), your monthly cash flow becomes dependent on them paying their invoice on time each month. With this in mind, early-stage companies should test different billing models and frequencies to see what works best for both their customers and their balance sheet.

For example, during a market downturn, a customer may want to reduce their billing frequency to ensure they’ll have enough cash in hand to continue paying for your service. This is where the lines between monetization and retention begin to blur. If you can’t meet your customers’ billing expectations, they’ll inevitably churn.

5. Providing multiple payment options to customers

Yes, even your payment options play an important role in your SaaS monetization strategy.

For example, offering in-house payments to customers eliminates the need to connect to a third-party payment provider and reduces the overall complexity of your billings and collections process. 

Offering multiple payment options also allows you to accept remittances through market-appropriate methods such as credit card and ACH. Offering ACH as a payment method is also a huge value-add for your enterprise customers who want an extra layer of security during the payments process.

The role of FinOps in SaaS monetization

Once you have all the individual parts and pieces of your monetization strategy figured out, what’s next? It’s not enough to understand what goes into building a monetization model—you need the tools to help you execute it.

At Maxio, we’re creating the first true one-stop SaaS FinOps platform—a financial operations platform that founders and SaaS executives can deploy quickly to gain visibility and control over every aspect of their company’s monetization strategy.

Now, as we continue to spread the good word about monetization, we’re highlighting one of the most powerful tools SaaS leaders can add to their monetization plan: usage-based pricing.

In partnership with The SaaS CFO and RevOps Squared, we surveyed 490 SaaS professionals to better understand how usage-based pricing fits into a B2B SaaS monetization model. In this report, we share the data we gleaned along with commentary from SaaS across the industry.

Get the full usage-based pricing report here.

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Report

Usage-based pricing benchmarks and best practices

Usage-based pricing is now an essential piece of modern SaaS monetization. How does it fit into a B2B GTM strategy?

We surveyed hundreds of SaaS leaders across the industry to find out.

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Usage-based pricing is changing B2B SaaS

In partnership with The SaaS CEO and RevOps Squared, we surveyed 490 SaaS professionals to better understand how usage-based pricing fits into a B2B SaaS monetization model. In this report, we share the data we gleaned along with commentary from SaaS across the industry.

What you’ll learn

  • Most popular usage-based strategies by GTM motion
  • How SaaS companies rate and invoice on usage
  • Best practices for implementing usage-based pricing in your SaaS

What is usage-based pricing?

Usage-based pricing is a subscription pricing strategy allowing users to pay for products based on their usage. In B2B SaaS, usage-based pricing is often used in conjunction with other pricing models (flat subscriptions, tiered pricing, custom pricing, etc.), creating a comprehensive pricing strategy to meet individual customers’ needs.

Ready to achieve sustainable growth in today’s market?