Updated: Jan 12, 2021
Given the massive adoption of SaaS solutions, it’s important to make the right choice from amongst the many SaaS pricing models for optimizing costs and eliminating waste.
SaaS (Software as a Service) is not new but in recent times, businesses of all sizes are rapidly adopting SaaS solutions, especially solutions served via the cloud.
73% of businesses plan to make all their systems SaaS by 2020 (bettercloud.com)Bettercloud.com
The maturity and richness of cloud services has levelled the infrastructure playing field and has provided equal opportunity to more and more ISVs (independent software vendors) to create cloud-based SaaS solutions for easy consumption.
What is SaaS
Software as a service (SaaS) is a software distribution model in which software vendors host and maintain the servers, databases and code that constitute an application.
Typically, the fully managed service is offered via an SLA (Service level agreement), which guarantees performance, security and reliability of the customer’s data.
Characteristically, the customers/users don’t need to deploy any hardware or manage/maintain any resources. They consume the service over the Internet.
Since SaaS makes the software available to you as an ongoing subscription as against you purchasing the software license and deploying it on your own infrastructure, the pricing models are radically different.
In this article, we attempt to present the most popular SaaS pricing models and the benefits of each to help you make the correct choice that aligns to your business needs.
As a business, you may end up consuming multiple SaaS solutions from different vendors. Consequently, some pricing models may be more suitable than the other in specific situations. This would primarily depend on the solution you are purchasing and its width of use within your organisation.
Components of the SaaS Pricing models
Before we get into the popular pricing models, lets first understand the components of pricing for SaaS solutions.
The SaaS pricing model will define WHAT you are buying, and HOW you are paying for that.
This is the WHAT and defines all the chargeable elements of the solution such as users, storage, access, api calls, features, etc. Essentially dimensions define the units along which the usage of the SaaS solution is measured.
These are pre-selected, pre-configured aggregate set of dimensions to make it easy for you to purchase and consume. Plans typically will have limits to each dimension. E.g. a “Basic” plan of an email solution may charge per user/mailbox (dimension) and allow 2 GB of storage (dimension) per user, with unlimited email transactions (dimension).
C. Payment agreements
This defines HOW you pay for your chosen plan/dimensions. Typical options are monthly or annual in advance or in arrears at the end of the month. Annual in advance payments may attract a small discount.
The SaaS Pricing Models
Using a combination of the 3 components of a SaaS pricing model, quite a few pricing models can be evolved (and are also in play by a lot of vendors).
However, we took this opportunity to cut the clutter and distil the combinations down to their essence with their core benefits to you as a customer.
So our pick of the three most suitable SaaS pricing models:
SaaS Pricing Model option 1 – Fixed Plans, Choose one
Here the vendor predefines a set of plans, each comprising a bunch of dimensions with specified limits and allows you to choose one. Thus, this one chosen plan will apply to your entire organisation, all the users.
Above is an example of a company offering 3 plans and offering you to choose one which best suits your need.
Classically, in such layouts, the next higher plan builds on the earlier one and offers more dimensions and/or more within each dimension.
In such purchases, you would typically start with the lower most plan and upgrade as your need grows.
Here is another example of a fixed plan service, where for all your users, you can choose any ONE of the plans specified. An upgrade will apply to all the users.
Suitability of Fixed Plans
These types of plans are most suited to (specialised and) localised services, which are to be consumed by a small set of users within your organisation.
Characteristically, they are simple, straightforward and easy to understand with a totally predictable cost to your company.
However, this option of choosing only one plan, can become quite rigid when it comes to purchasing a generic solution that will be consumed by a large user base in your organisation. Look at the example below:
Since you can choose one only plan for all your users, and if you have users in your team who need varying levels of features depending on their role, you may end up buying the highest plan for all your users. Therefore, not very cost optimized.
Payment agreements for Fixed plans
Characteristically, most vendors who provide a fixed plan pricing model, will charge monthly or annually in advance for your chosen quantities.
Pricing ModelSuitabilityPaymentsFlexibilityCost ImpactFixed Plans, Choose oneLocalised/ Specialised use of the solutionMonthly/Annual in advanceFairly RigidNot so optimal if applied widely
SaaS Pricing Model option 2 – Fixed Plans, Mix as per user role
Some solutions allow you to mix plans in your purchase depending on the roles/requirements of your user base.
A good example of this is a generic solution like business email provided to almost all users in an organisation. Your user base may have a set of very basic email users, who can use only the web client and their usage volume is low. And you may have a set of very heavy users who would need more storage and capability to handle more volume of email. And you may have a set of users who need all the frills in terms of application features.
So, if there are various plans offered and if you can purchase a count of each plan as per the number of users in each group, this will highly optimize your costs.
From the example below (one of our own products providing email archiving in the cloud), mixing plans allows you to optimize costs and pay only for what you need and consume. E.g. you can select Continuity for 20 users who need only an email backup, select Tracer for 10 users who come under regulation compliance and Durability for 5 critical users and apply the Hold plan for all inactive users.
Suitability of Mixed plans
This kind of pricing model is flexible and ideally suited for solutions which have a larger varied user base of deployment, and mixing plans can help you spend optimally.
However, there is an effort required on your part to identify the list of users, divide them into groups based on their roles and then apply the relevant plans from the management console of the solution.
And, this must be kept current by regular reviews and during onboarding of new employees.
Payment Agreements for Mixed Plans
Mixed plan purchases can be charged monthly/annually in advance, and additional users onboarded during the contract period are typically charged pro-rata starting from the date of onboarding.
However, this pricing model can also benefit from a pay per use payment agreement, where you can freely use the plans, move users around, add/delete users from the plans and the system will track all this and bill you at the end of the month for the actual usage.
In Summary of Mixed Plans
Pricing ModelSuitabilityPaymentsFlexibilityCost ImpactFixed Plans, Mix as per user rolesWider use of solution with varying need for features and/or resourcesMonthly/Annual in advance OR pay per use monthly in arrearsFlexible (flexibility enhanced with the “pay per use” payment agreement)Optimal costs
SaaS Pricing option 3 – No Plans, Decomposed Granular unit pricing, Consume first, Pay later
In this pricing model, SaaS vendors don’t create any aggregate plans and instead allow you to use any of the resources, capabilities of the solution to whatever extent possible.
This usage is tracked on a defined pro-rata, which could be seconds of use, hours of use or days of use of each dimension offered by the solution.
E.g. if the solution offers the dimensions of users and storage and it pro-rates by day, you can add users on demand during the month and you will be billed for the number of days for the users from the day you add them to the end of the month. Similarly, if the solution offers storage as a dimension, and it is pro-rated on a day basis, the solution will track your storage usage at a single point during a day and send you an aggregate bill at the end of the month.
The major benefit of this model is that it tracks growth and shrinkage of your usage and adjusts the bill accordingly as per the supported pro-rata period.
Here is an example of the AWS S3 storage pricing, which is typically billed by the hour.
The above example is about an IaaS platform. Here is an example of this from the application space. Our own email product, Mithi SkyConnect is priced along two dimensions viz. users and storage. The usage is tracked on a daily pro-rata and billed to you at the end of the month.
This pricing model is characterised by rates which are per second, per hour or per day (pro-rata period)
Suitability of Pay per use
The best part of this model is that there are no contracts, no upfront payments and no min purchase (typically). This means that you can start with Zero and as your usage grows (and shrinks), you pay only for that usage.
This is also great to support experimentation of solutions to determine fit for your use case. You can do this at an extremely low cost and quickly.
This model is best suited for organisations whose usage tends to vary (almost daily) and who don’t want to deal with the complexity of managing subscriptions, tracking licenses and putting operations on hold while additional resources are purchased.
This kind of model has only one payment agreement, which is pay per use after consumption. The system tracks your usage by the defined pro-rata and sends you an itemised bill at the end of the month.
Consequently, to keep control on the costs, you may want to keep a daily watch on the usage and set up alerts (if the solution permits) to send you alerts when the usage crosses some pre-defined thresholds.
Learn more about how Pay per use works.
In Summary of Pay per user
Pricing ModelSuitabilityPaymentsFlexibilityCost ImpactDecomposed pricing, consume first, pay laterExperimentation, consistent varying usage, don’t want the rigidity of a contractPay per use, Pay as you go, monthly in arrearsExtremely Flexible and granular.Highly Optimal costs
Putting it all together for the SaaS Pricing Models
As you may have observed, that there is no one size fits all. SaaS solutions are here to stay and it’s a new of consuming IT services. So the requirement is to figure out how to leverage SaaS without having a cost overrun.
You as an organisation will end up consuming multiple SaaS solutions for different work loads in your organisation.
Thus, to optimize costs, you can choose the SaaS pricing model, along:
The width of deployment of the solution
The varying needs of users based on their roles
Flexibility to accommodate frequent variations in load
Ready reckoner for making the right choice amongst the SaaS pricing models
Pricing ModelSuitabilityPaymentsFlexibilityCost Impact1. Fixed Plans, Choose oneLocalised/ Specialised use of the solutionMonthly/Annual in advanceFairly RigidNot so optimal if applied widely2. Fixed Plans, Mix as per user rolesWider use of solution with varying need for features and/or resourcesMonthly/Annual in advance OR pay per use monthly in arrearsFlexible (flexibility enhanced with the “pay per use” payment agreement)Optimal costs3. Decomposed pricing, consume first, pay laterExperimentation, consistent varying usage, don’t want the rigidity of a contractPay per use, Pay as you go, monthly in arrearsExtremely Flexible and granular.Highly Optimal costs