The Pricing Strategies of Inc. 5000 SaaS Companies [Report]
- How SaaS companies on the Inc. 5000 structure their pricing
- Which pricing models/tactics are most common
Pricing a SaaS product is a fundamental aspect of a software company’s overall strategy—and one of the most pressing issues that a founder and executive team will have to decide on.
To understand how some of the best performing SaaS companies price their products, our team analyzed 409 SaaS companies on the Inc. 5000 list of fastest growing companies. Some of the questions we answered include:
- What portion of the fastest growing software companies are SaaS?
- How transparent are SaaS companies about their pricing?
- Which pricing models do SaaS companies employ?
- How often do SaaS companies bill their clients?
- How common are free trials and freemium products?
Read on to see what we found.
Note: The information contained herein is not meant to be conclusive about the software industry as a whole or prescriptive in any way. Instead, the information is intended to help founders evaluate their own pricing strategy against the backdrop of a diverse pricing landscape made up of successful software companies.
What portion of the fastest growing software companies are SaaS?
Of the companies on the Inc. 5000 list, 551 were categorized as software. While SaaS has become the predominant model for running a software company, not all companies in the software category are true SaaS.
By our definition, a SaaS company is any whose primary revenue driver is cloud-based software paid for on a subscription or usage-based model (as opposed to on-premise software paid for up front). We do not classify as SaaS any company who primarily offers software development or consulting services, even if the company has some pre-built software they offer to their clients on a subscription basis.
Based on this definition, 409 of the 551 software companies on the Inc. 5000 were SaaS companies. That nearly three quarters (74%) of the fastest growing software companies are SaaS is not surprising, considering that contract renewals provide a platform on which a SaaS company can grow its revenue year after year.
How transparent are SaaS companies about their pricing?
A discussion as old as SaaS is whether or not to be transparent about pricing. For the present, naysayers seem to have prevailed.
- Of the SaaS companies on the Inc. 5000 list, only 44% had a page dedicated to discussing pricing in some form.
- Of the 178 companies with a pricing page, 62% included specific dollar amounts.
Of course, pricing transparency likely varies based on industry, audience, and the size of the price tag, among other factors. A general pattern we noticed was that companies that charged on a per-seat basis (instead of on a flat-rate or usage basis) were more open to listing specific dollar amounts:
* If you’re wondering why these percentages are all higher than the 62% average, it’s because not all companies’ pricing details provided enough information to classify under one of the three above pricing models (see the next section for more details). So, in effect, there’s a fourth group of companies whose pricing model was unclassifiable. Not coincidentally, the number of unclassifiable companies that published specific dollar amounts on their pricing pages was exactly 0, pulling down the average.
In many cases, a SaaS company will have an option on their pricing page for web visitors to request pricing, either for an "enterprise" plan or for all plans. Of the companies that had a pricing page, 49% had an option to request pricing. Of all SaaS companies (with or without a pricing page), 27% had an option to request pricing.
Which pricing models do SaaS companies employ?
Of the 178 companies who published a pricing page, we were able to classify 76% of their pricing models as either a per-seat, flat-rate, or usage model.
Our classification was based on how the SaaS company priced its product relative to the purchasing entity, i.e. the enterprise. See the following definitions of each classification.
Per-seat pricing is when a SaaS company’s pricing is influenced by the number of licenses allocated to sub-entities that will be using the software within the enterprise. Some applicable sub-entities include software users, locations, etc.
Flat-rate pricing is when a SaaS company charges a flat rate for the entire set of software or a specific feature set to the enterprise as a whole. Pricing is not influenced by sub-entity users of the enterprise.
Usage pricing is when a SaaS company’s pricing is influenced by the number of units consumed within the software. The enterprise can pay either proactively based on estimated usage or retroactively based on actual usage. Common usage units include storage space, server hours, API calls, or financial transactions.
In cases where a company had multiple plans that would be classified differently, we selected either the plan that the company indicated was most popular or the introductory plan.
Based on these definitions:
- 42% of companies had per-seat pricing as their primary model
- 37% of companies had flat-rate pricing as their primary model
- 21% of companies had usage pricing as their primary model
In most cases, a basic per-seat, flat-rate, or usage model is too simplistic to properly price a SaaS product. As a result, almost all companies will engage in some form of price discrimination via tiered pricing or secondary usage pricing.
Price discrimination via tiered pricing and secondary usage
In order to capture customers with differing jobs-to-be-done and varying willingness to pay, companies introduce tiered pricing and secondary usage fees on top of their primary pricing model.
Tiered pricing is when a company creates different subscription plans by limiting access to features or the number of seats for lower tier plans. For a usage-based pricing model, we considered volume discounts as tiers if the enterprise paid for estimated usage up front as opposed to retroactively based on actual usage.
Tiered pricing is very common—overall, 91% of the SaaS companies whose primary pricing model we could classify had some form of price tiering.
But tiering is less common for usage pricing: while companies with per-seat or flat-rate pricing each incorporated pricing tiers 96% of the time, those with usage pricing only introduced tiers 52% of the time.
Another way in which SaaS companies engage in price discrimination is by adding usage fees on top of a per-seat or flat-rate model. Secondary usage pricing is becoming more common and is a great strategy for SaaS companies to grow revenue on top of highly predictable subscription revenue. (One example is the addition of payment processing fees in vertical SaaS.)
Of the companies with a per-seat or flat-rate subscription model, 16% had some form of usage pricing as a secondary model.
How often do SaaS companies bill their clients?
Intuitively, the frequency with which a SaaS company bills its clients will largely depend on the price tag, the nature of the software, and the type of customer the company serves. For example, a SaaS provider serving SMBs at a low price point is more likely to bill monthly than one serving large enterprises at a much higher price point.
Because SaaS providers serving large enterprises are probably more likely to sell longer-term contracts as well as withhold pricing details from public eyes, the below analysis is likely skewed towards companies serving the lower end of the market. Still, if not necessarily applicable in all cases, the information is nonetheless interesting.
Of companies that had a classifiable pricing strategy:
- 47% had an annual billing option (with 23% only billing annually)
- 56% had a monthly billing option (with 29% only billing monthly)
- 24% had both an annual and a monthly billing option
The remaining 24% represents companies who bill based on usage. These companies were not included in this analysis due to lack of available information regarding billing frequency.
A common practice for companies that have both a monthly and annual billing option is to offer a discount to customers if they opt for longer-term billing. Based on the 30 companies who offered both billing options, this discount ranged from 8% to 40%, with the average landing at 17%.
How common are free trials and freemium products?
A common customer acquisition strategy for SaaS companies is to offer a free trial or freemium product. For clarity, free trials allow customers to sample the full product for a limited time, while freemium products offer unlimited access to a limited feature set.
Note: As with the prior billing analysis, an analysis of free trials and freemium products will be skewed more towards SaaS providers serving the lower end of the market, as free trials and freemium products don’t often make sense for enterprise-grade products that are highly complex or have significant integration/implementation costs.
Free trials appear to be more common than freemium products: of the SaaS companies who listed a pricing page, 39% offered a free trial, while only 15% had a freemium product.
The length of a free trial ranged between 1 week and a full month, with 2 weeks being the most common length and the average just under 3 weeks.
Determining Your Own Pricing Strategy
How you ultimately model pricing will depend on how you deliver your software, how customers utilize that software, and how customers estimate the value your product provides. There is no best model and no pricing template that will work for everyone, but you can draw insight from observing how other SaaS companies model their own pricing in light of the insights provided here.
To learn more about the implications of the various models discussed above, take a look at our article about SaaS Pricing Models and Strategies for 2021.
Vista Point Advisors is a boutique investment bank that focuses on advising founder-led companies in the Software and Internet industries. We focus exclusively on sell-side M&A and capital raising transactions.