Why do SaaS Companies Still Charge by the User?
You don’t need to look very hard to find advice warning you against charging on a per user basis. Per user or seat-based pricing can disincentivize adoption, which may lead to lower retention rates and reduced opportunities for expansion. This pricing system does not clearly link to the value delivered by most products. It creates all sorts of gaming and nickel-and-diming behavior among customers. Plus, it’s a relic of the 90’s that’s surely showing its age.
Yet, for three consecutive years running, per user pricing remains dominant at SaaS startups according to a study recently released by Pacific Crest. In fact, companies including Slack and Salesforce rely on the model. Earlier this year OpenView also found per user pricing to be dominant among public SaaS companies and unicorns, appearing on half of the pricing pages we analyzed.
So why is this? Admittedly, per user pricing has a few things working in its favor. Everybody understands it, it’s predictable to budget for and buyers know exactly what they’re paying for. Per user pricing has become the default metric in several software categories ( CRM, communication, networking, collaboration, help desks), which makes it tough for new entrants to implement new models.
Even so, in too many cases SaaS companies have blindly followed others and selected per user pricing rather than fully considering the alternatives. In the words of Patrick Campbell, CEO of Price Intelligently:
“The reason per user pricing exists is because it’s a legacy of the old license model for perpetual seats. The problem with most per user pricing is the experience for anyone who logs into the product is actually pretty similar and the value that’s being given is not on a per user basis. If you can get the exact same experience no matter what log in you use it’s a good litmus test that you probably shouldn’t be using per user pricing.”
Think Before You Select Per Using Pricing
We need to hold per user pricing to the same standards that we hold other metrics. Before selecting per user pricing, consider whether it best reflects the value created by your product and the purchase behavior of your target buyer personas.
We’ve created the following checklist to help you decide whether per user pricing makes the most sense for your SaaS startup. The more of these conditions are true, the better per user pricing will work for your business. Take Slack as an example. Each user receives differentiated value from Slack, companies want to standardize on one networking platform and the product has built-in network effects. Per user pricing is a very strong fit for Slack. If most of these conditions are not true; however, you should reconsider.
Incorporating Usage into Your Pricing
Despite the continued reliance on per user pricing, there was a bright spot in this year’s Pacific Crest study: Usage-based pricing seems to finally be surging in popularity. 29% of SaaS startups in the study incorporate usage into their pricing, up 5 percentage points from 2015 and now a close second behind per user pricing. Examples of usage-based pricing include the number of transactions, number of videos, number of marketing contacts or number of visitors to your website.
A usage-based value metric has a better shot at reflecting the unique value perceived by customers for your specific product. It tracks well with a land-and-expand business model: New customers can start at an affordable price, and then pay more over time as their needs become more sophisticated or as the product becomes more embedded in their business.
Look at Wistia, the video marketing platform for business. Wistia’s 300,000 customers use the platform to host videos and deploy those videos to engage different audiences, generate new leads and understand how their audiences interact with their content. Imagine if Wistia charged their clients on a per user basis. Since most businesses have only a limited number of video marketers on staff, Wistia would be stuck selling lots of one and two user deals. What’s worse, a startup that’s new to video and only has a couple of professional videos would be charged the same price as a more established company with hundreds of assets and who use video to drive thousands of leads.
Wistia has honed in on a per-video value metric instead, and their different pricing packages come with an increasing number of videos that a business can store on the platform. In addition to more videos, higher tier packages unlock value-added features such as white label branding, advanced integrations, account management and priority support. These features probably matter more to a video-savvy business than one with only a handful of videos.
Zuora, the subscription billing, commerce and finance software, similarly incorporates usage into the pricing for some of its products. As Zuora’s VP of Marketing Monika Saha explains, this type of pricing aligns much better with the value that Zuora provides compared to the typical per user pricing. That said, even though a usage-based pricing model makes sense strategically for Zuora, there was a non-trivial amount of work that needed to happen to enable sales and buyers to accept this new way of paying.
“We chose to price based on transaction volume 8 years ago. At the time we got a lot of pushback from the target market because buyers were used to paying for accounting or CRM software on a per user basis. We learned early on that you have to be very mindful about training the folks who are selling the software to articulate it the right way.”
When you are in an early stage of your growth, you have tremendous flexibility to experiment with different value metrics and pricing structures. Your pricing model could be as much a part of your innovation as your product offering. Think carefully about whether per user pricing really is the best value metric for you, or if it will impede your growth prospects. Perhaps there’s a better alternative you’ve yet to discover.
Have you recently changed your value metric? Do you still charge per user? Let us know in the comments, we’d love to hear from you!