The Ultimate Guide to B2B SaaS Pricing & PackagingThe pricing models of the top B2B SaaS companies, the strategies to iterate on, case studies of successful changes, and everything else you need to know
Since I began writing about pricing, I’ve gotten 2 questions more than any others:
Today’s post will answer both. Introducing Kyle PoyarWho is the world’s foremost expert in SaaS pricing? Ask 10 people, and at least 8 will tell you it’s Kyle Poyar. The mastermind behind the Growth Unhinged newsletter, Kyle has been surveying and advising SaaS companies on pricing for years. His newsletter is a must-subscribe for any fan of pricing: We’ve put our heads together to create the one-stop-shop guide for SaaS pricing models. Today’s PostWords: 6,104 | Est. Reading Time: 28 minutes
1. Inventory of pricing models and who uses themThe traditional way to talk about SaaS pricing was as a litany of different pricing model options — per user, tiered, freemium, usage, flat-rate, by active user, add-ons. But if you take a look at the top B2B SaaS companies today, all of that has collapsed to a simple picture: you sit on a single spectrum of subscription to usage based.
Let’s walk through the major groups along this spectrum. Model 1 - Subscription pricingThere are more than 150,000 subscription businesses out there in the world. It’s not a one-size-fits-all space. Some of the key variations you see are:
Number of Tiers and Add-OnsThese days, very few companies have just one paid option. Most mature SaaS companies have 3 paid tiers, along with some add-ons:
This is the classic “good-better-best.” It typically aligns to small businesses and individuals, mid-sized companies, and enterprise customers per tier.
The types of add-ons people have are usually: priority support, AI functionality, or another mini-product (eg, DevMode). Per user v User count v Active userThe second source of variation is how users get charged at each tier’s price.
The per user approach is by far the most popular option. Free PlanThe next big topic in subscription pricing is: should you have a free plan? If you love PLG like us, it might surprise you how many actually do. Per OpenView’s 2023 product benchmarking survey, only 16% of B2B SaaS companies have a free plan. Free plans actually saw a contraction the past few years, as companies like Heroku removed them. Having a freemium product strategy is still an aggressive product strategy that companies only choose when:
For most B2B companies, one of these conditions is not true, and they opt against freemium. Free TrialMost companies that offer freemium offer free trials, but a whole bunch of companies who don’t have freemium also offer free trials. In sum, nearly 2x as many companies have free trials as free plans. It comes out to 29% of SaaS companies offer a free trial. The free trial makes sense when:
Otherwise, it doesn’t have to be force-fit to every business. Stripe, Miro and Figma don’t have a free trial. And you don’t need one either. Reverse TrialThe hottest strategy on the block is reverse trial. Start everyone on premium. Let them taste the good life. Then, dial it back. But, right now, only 6% of SaaS companies offer a reverse trial. This model works well when:
Free is PowerfulFree trial, free plan, reverse trial - all 3 of these PLG concepts still aren’t widely used. But they do tend to work, for the companies and products that still use them:
Capped PricingBasecamp is often called “flat-rate pricing” in the SaaS pricing literature. But if you examine their plans carefully, it is just a variant of subscriptions with a cap:
Basecamp is really the only company that does this. Even Jason Fried’s other company, Hey, does uncapped subscription pricing. (But he is planning new products under the Once brand.) It’s an interesting, if uncommon, model that could be a way to differentiate with a cheaper product. Final note on Subscription Model: Per Product PricingAs companies build out portfolios of distinct products, they often charge separately for each. The Cloud Infrastructure providers like AWS are classic examples of this. But normal B2B subscription companies with multi-product portfolios like Hubspot and Adobe do this as well. It’s normal, like Figma did with FigJam, to spin these up one at a time and build them out over time. As Jason Lemkin says, every B2B SaaS should go multi-product by the time they reach 10,000 customers. And that ends our taxonomy of subscription-based pricing. This piece was too long for e-mail. You may want to migrate to your browser: Model 2 - Usage-based pricingNow let’s break down the other end of the spectrum, usage-based pricing. While usage-based models have long been the norm in infrastructure (ex: AWS, Azure, GCP), they’re now found in horizontal and vertical application software as well. There’s reason for this: public companies that use consumption see 38% faster revenue growth over their SaaS peers, 50% higher revenue multiples, and top-quartile net dollar retention is 120%, compared to 110% for the broader SaaS index. As a result - Usage-Based pricing seemed inevitable. Then, last year, it stalled:
Usage-based pricing growth rates overreact when businesses are spending, and when businesses cut. In a year of efficiency—2023—UBP, the model itself, also saw cuts. When you are building a usage-based pricing model, there are at least three unique models:
Value metric basedTraditional usage-based pricing is all about finding a value metric that:
For instance, Stripe's value metric is transaction volume. They charge a percentage of the transaction amount plus a fixed fee per transaction.
It’s not uncommon for pre-PMF companies to iterate several times on their value metric. Success-based pricingA special variant of value metric is a success. Intercom is one of the most well-known examples of this. A customer support technology provider, it charges per successful resolution. It’s a risk. Successful resolutions may not scale with their costs — if they aren’t resolving many queries. But, it’s more aligned to customer value. It sets the right incentives for internal teams, and encourages large customers to grow with you. The biggest users of success-based pricing are actually Facebook and Google ads, which do hundreds of billions yearly on pay per conversion and pay per click models. It scales really well. Credit DrawdownsThe final common model in usage-based pricing is to have a concept of a ‘credit’ (there may even be multiple credit types) that you drawdown. Snowflake is one of the most successful users of this model. They have 150%+ NDR based on a model that requires a 13-page PDF to fully understand. It depends on the warehouse you use, whether it’s snowspark optimized, and a whole lot more. And that’s just on the compute side. There’s also the storage side. The takeaway is: a credit drawdown program doesn’t have to be super simple, but users have to be able to learn it, and be able to take predictable steps to optimize it — if that’s their objective. And that covers the major types of usage-based pricing models. Model 3 - HybridsNow let’s move onto those Hybrid models. Hybrid are actually more common than pure usage-based pricing models. There’s three main types you tend to see:
Per active user pricingSlack is the most well-known example of active user pricing - which charges you for usage, instead of seats. But other companies use it too:
You avoid having customers to commit to a number and grow only at renewal. You can grow with them. So, it works especially well for customers whose clients are fast-growing companies. Seats + Credit DrawdownsThe next most common model you see in usage-based pricing is like what Apollo.io—where Aakash ran pricing—does:
This allows you to get the benefits of a shared value metric along with an easy to start subscription. It combines a simple, Notion-like subscription with Snowflake-like credit drawdowns. It’s quite popular. Both companies with a value metric or companies with subscription often add on the missing element. Transaction-based + subscriptionsA final common model in e-commerce oriented companies like Stripe and Shopify is the combination of transaction-based revenue and a subscription tier. This is essentially another value metric + subscription. And with that — we’ve covered the most important pricing models in SaaS! 2. Pricing strategies and approaches to iteratingMost companies in B2B SaaS test their pricing every year. Only one in five don’t do anything.
To really execute on these tests well, you need to have a strong strategy... Keep reading with a 7-day free trialSubscribe to Product Growth to keep reading this post and get 7 days of free access to the full post archives. A subscription gets you:
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