The Ultimate Guide to Software Pricing Models

Choosing the best pricing model is one of the most important things a small or midsize Software-as-a-Service (SaaS) company will ever do. However, not many SaaS providers put a lot of thought into pricing and subscription models. 

Without a team of dedicated analysts weighing the pros and cons, small and midsize SaaS providers often settle on a pricing model similar to what their competitors use. This approach can be detrimental to long-term profitability since what’s good for one SaaS company is not necessarily right for another. If your company plans to enter the software development or SaaS market, don’t make this mistake. Before settling on a software license fee structure, understand the different kinds of software pricing models.

A software pricing model provides the structure for how much a customer pays and how often they will pay for the right to use your software. 

Before the SaaS model became popular, customers typically paid a one-time, upfront software license price for an individual application. It was also common for enterprise applications to charge an annual software license fee. SaaS applications typically offer more flexibility, with several different pricing models.

Here are the different types of software pricing models and what you need to know about each approach:

Named user pricing model

The named user pricing model requires all users who might use an application to have their own login, with billing based on the number of users. In this model, every named user can log in to the app simultaneously.

Concurrent user pricing model

The concurrent user pricing model allows a fixed number of users to log in to the application simultaneously. With this model, the customer can create any number of user accounts within the application, but only a certain number of users can log in to the app at once. 

For instance, if the customer purchases a license for 25 concurrent users, they can have 50 user accounts created in the application but will be limited to a maximum of 25 of those users logging in at any given time.

Monthly pricing

Software licensing models with monthly subscriptions bill customers every month for either a fixed number of named or concurrent users or for unlimited users. Some customers prefer this model over annual pricing since they can pay a smaller amount per month.

Annual pricing

Annual pricing follows the same principles as monthly but allows the customer to save on yearly licensing costs by paying upfront. The annual price usually reflects a discount over the monthly price over the course of a year.

For example, monthly pricing might be set at $100 per month for unlimited users—a total of $1,200 per year. Annual pricing might be set at $1,000 per year, saving the customer $200 annually if they pay the yearly price upfront.

Package-based pricing models

Package-based pricing models offer customers a price break for licensing multiple applications at once. If your SaaS company has multiple applications, you might encourage customers to license some or all of them by offering a package-based discount.

Consumption-based pricing models

Consumption-based pricing models are based on a customer’s usage of certain resources, such as bandwidth or time spent in an app.

If your company offers a SaaS app that customers use to upload and download documents, a consumption-based pricing model is probably a good fit. In this case, you could charge a rate as per processed megabytes. A video conferencing app could also use a consumption-based pricing model, with the customer paying for the time spent in each session.

However, consumption-based pricing models are often better suited to Infrastructure-as-a-Service (IaaS) products. An IaaS firewall, for example, might be billed based on the network traffic processed. Cloud storage, with pricing based on the total gigabytes used, is another IaaS example where consumption-based pricing makes sense.

With so many options available, you have much to consider before settling on a software pricing model. It’s important to think about your audience's wants and needs so you can attract as many customers as possible. At the same time, you have to calculate the amount of revenue required to make your app profitable and determine which pricing model will help you meet your goals.

Named user pricing is enticing to smaller organizations but might become costly for larger teams. You might consider a concurrent user pricing model if your target customer base is large enterprises.

Make sure your annual pricing is attractive compared to your app’s monthly price. Even though your SaaS company will generate more revenue over the course of a year with monthly-based pricing models, you will gain more upfront revenue with annual pricing that customers see as a worthwhile discount.

Package-based pricing is also a great way to generate more revenue while gaining more exposure for all the apps your company offers. However, take care when setting the price for these packages so that you still allow for adequate profit on each app included in the package.

To choose the best software pricing model for your app, study the available options as described above and then follow these steps to help you choose:

• Do market research: Study the market conditions for your product and gauge the number of potential customers it might attract. Perform revenue estimates with the various models to see which lines up best with your business goals.

• Check out the competition: Look for software in the same category as yours and look at their pricing models. This will give you a good indication of what customers in your market prefer.

• Gather feedback: Ask existing or potential customers which pricing model they prefer via surveys or on social media. This will give you valuable insight into how customers are willing to pay for your product.