In the world of Software as a Service (SaaS), pricing strategies play a pivotal role in shaping the success and growth of a product. Among the myriad of pricing models available, a few stand out for their versatile approach, offering flexibility, scalability, and value to both SaaS providers and their customers. In this article, we will dive into the intricacies of pricing models, exploring various approaches such as volume, tiered, bucketed, and flat rates. As a reminder, we have examined the distinction between subscription-based and consumption-based models in a past glossary post.  Understanding these distinctions, as well as pricing poodles, will help SaaS businesses make informed decisions that align with their goals and customer needs.

Understanding Pricing Models:

By structuring pricing plans into multiple tiers or levels, you can cater to the diverse needs and budgets of customers.  This methodology provides options for both entry-level users and enterprise clients. Let's explore some common pricing models:

• Volume-Based Pricing: This model offers pricing tiers based on usage volume, such as the number of users, transactions, or storage capacity. Customers pay based on the tier that corresponds to their usage level, with higher tiers unlocking additional features or higher usage limits.
  
  

• Tiered Pricing: In this model, pricing plans are structured into distinct tiers, and the per unit price depends on the quantity purchased within each tier.  A unique feature of tiered pricing model is that once you jump into the second tier, the per unit price changes, usually lower, with each additional quantity. This is radically different from volume pricing, where the per unit price is based on the total usage level.
  
  

• Bucketed Pricing: Bucketed pricing combines elements of volume and tiered models by grouping usage into predefined buckets or categories. Customers are charged based on the tier with no element of price times quantity. The total price is the tier price.
  
  

• Flat Pricing: Flat rate pricing offers a single, all-inclusive pricing plan with unlimited usage or access to all features. While simple and straightforward, flat rate pricing may not suit all customers' needs, especially those with varying usage levels or requirements.

Examples

Examine the tiers below for XYZ Analytics company and then we will take a look at how the calculations for Volume versus Tiered Pricing.

Volume Pricing:

Assuming the client had 225 users and was looking to sign a 1 year contract, the pricing calculation would be as follows:

225 (users) * $100 (per user per month) = $22,500 per month (MRR) or $270,000 per year (ARR).
The average price / user = $100 / month

Tiered Pricing:

Assuming the client had 225 users and was looking to sign a 1 year contract, the pricing calculation would be as follows:

100 (users) * $200 (per user per month) = $20,000 + 
100 (users) * $150 (per user per month) = $15,000 +
25 (users) * $100 (per user per month) = $2,500
= $37,500 per month (MRR) or $450,000 per year (ARR)
Average price per user ≈ $166.67

Helpful tip: After you cross into the second tier, Tiered Pricing will be more expensive for the customer than Volume Pricing.

Bucketed Pricing:

This is a unique pricing model where the total price is not a calculation of price times quantity.  Instead the total price depends solely on the bucket.

Assuming the client had 225 users and was looking to sign a 1 year contract, the pricing calculation would be as follows:

225 (users) = $100 per month (MRR) or $1,200 per year (ARR).

Flat Pricing:

Flat pricing offers a single price for all users or usage levels. Here's an example of how XYZ Analytics could apply flat pricing:

Assuming the client had 225 users and was looking to sign an annual contract, the pricing calculation would be as follows:

225 (users) * $10 (per user per month) =  $2,250 per month (MRR) or $27,000 per year (ARR)
The average price per user = $10 / month

Conclusion:

Tiered pricing models offer SaaS businesses a versatile and scalable framework for monetizing their offerings while catering to the diverse needs of customers. Whether opting for volume-based, tiered, bucketed, or flat rate pricing, understanding the nuances of subscription-based and consumption-based models is essential for designing pricing strategies that drive growth, customer satisfaction, and profitability in the competitive SaaS landscape.