Why do SaaS Companies Still Charge by the User?

Kyle-Poyar by

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.

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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.

SaaS Pricing Value Metrics

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.

Per User Pricing Checklist

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.

Wistia Pricing

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!

  • Great article Kyle. I wonder what role social sign-on will play in the (eventual?) decline of per-user pricing. Whenever I see a per-user pricing model, I cynically assume that multiple users are sharing the same login. I’m pretty sure we’ve all shared a Salesforce seat at some point, but that only worked when you had a unique username and password. I can’t imagine being asked to hand over the keys to my social accounts just to save a licensing fee.

    I guess the point is that your value metric can impact traction/adoption just as much as revenue.

  • Dave

    What’s your thoughts on per device pricing? We have software that the end user installs and can uniquely track each device it’s installed on. Thanks great article!

    • Kyle Poyar

      Thanks, @disqus_7KsIYF5M8M:disqus . Sounds to me like per device may track well with value to customer in your case. Where are you in the process of experimenting with this? Have you talked to customers about it yet?

  • Ben Baumann

    From my experience one of the potential issues with transaction based pricing is around scalability. From the vendor’s perspective if you get a ton of transactions you can make a ton of money which would of course be great. However, if your competitors are not operating on this same model your offering could be priced out of the market at these higher ends of usage. Thoughts?

    • Kyle Poyar

      Good point, @disqus_7iQQHUQ2Hs:disqus. A couple of thoughts. First off, it depends on the target customer the vendor is going after vs. their competition. A transaction-based pricing model would be a great way to attract smaller or medium-sized customers, but I agree would be tougher for large customers to swallow. Second thought, this is where tiering could come into play. There could be a certain volume threshold that’s effectively “unlimited” to compete with the other vendor.

  • Chris Beall

    Thanks Kyle – excellent advice. We switched to consumption pricing a few years ago and got one additional benefit -it forced us to transform customer success from being adoption focused to being value focused. Aligning value received with price has simplified our pricing discussions as well, and also encouraged our customers to do their part in keeping the system in good shape to deliver maximum value for each unit (in our case, a navigated B2B dial) consumed and paid for.

    • Kyle Poyar

      That’s a great point. Thanks for sharing, @chris_beall:disqus!

  • Adam Barger

    I think there are still many SaaS applications who can benefit from per user pricing. We’ve never done per user pricing at Webstarts and sometimes I wonder if we’re missing the opportunity to generate revenue.

  • Dan Hanrahan

    At Sigstr, we charge in a per user model, but our marketing buyer is used to paying on impressions (cpm) or clicks (cpc) In other channels like email marketing, Adwords, LinkedIn ads, or retargeting. We know the average employee sends 10,000 emails per year and generates 50 clicks on Sigstr CTA’s which are appended to email signatures in Gmail / Outlook, so it’s pretty simple math to translate per user to CPC or CPM models. Perhaps it’s time to experiment…Thanks for the post!

    • Kyle Poyar

      Thanks for sharing, @dan_hanrahan:disqus. Another option you could consider is a tiered per-user model where the impressions or clicks are a fence to move up to a higher tier. For instance, a Basic user could get up to 25 clicks; Standard user could get up to 50 clicks; Premium user could get up to 100 clicks. This is effectively the HubSpot model. Food for thought.

  • Michael Jones

    I’ve tried several variable pricing models and invariably, the customer consumes services that will double and triple their budget resulting in some very difficult discussions. Customers are looking for boundaries that control spend and shutting down services based on consumption is also a failure. User based pricing provides customers with a predictable cost model.

    • Kyle Poyar

      Fair point, @disqus_qEwFzvJ2JY:disqus. I think the budget predictability is a big plus for certain buyer personas. That said, usage based pricing doesn’t necessarily need to be linear (i.e. 2x the usage = 2x the price). There could be tiers, caps, volume discounts, etc. Think data plans with Verizon or AT&T.

      • Michael Brass Jones

        Kyle, non-linear usage pricing doesn’t solve the budget control issue. Buyers require caps on spending for any meter based pricing, be it on transaction volume, users or some other metric. Exceeding the customer’s budget is always a painful discussion and many times damages the relationship. I’ve done SaaS pricing at 5 different companies and in every case the customer’s budget was exceeded or their metric cap was reached resulting in missing data, inability to log in or stopping services, or sending a giant bill, the relationship was damaged. Many times, the companies I worked for ended up crediting thousands of dollars in services consumed by the client’s massively expanded usage of services. From your telephone example, I’ve had friends where their AT&T or Verizon data bills were massive exceeded based on an application using data in the background. They were very upset even thought they knew their plans. Unexpected consumption of resources always happens.

  • Completely agree.
    At AXLR8 we sell mainly to SMEs in vertical niches.
    Before buying, they look at increasing overheads in the coming years.
    We passed on much “land and expand” from per user pricing as we would in many cases have lost the sale and we would have been in a flower pot (maybe just a few users) instead of growing throughout their entire organisation.

    We have traded that for:
    (1) New business volume and
    (2) Expanded usage within those businesses (making AXLR8 more sticky).

    Then love them and we keep innovating. So we have new facilities to add on and we win a fair proportion of our new business from recommendations. Recommenders get new stuff and discounted services.
    Apart from anything else, it seems fair to me.

    • Kyle Poyar

      Very interesting, @rickmarengo:disqus. I love the analogy about how being stuck with a few user deal = being in a flower pot instead of growing throughout the organization!

  • MickSavant

    At Device42 we arrive at an annual subscription fee based on number of IT assets managed vs users. Many IT organizations are looking to operate as an internal service provider with zero based budgeting, so allocating costs to various P&Ls based on usage is important to them. Charging per seat is often a default mechanism to do this. One of the reasons we are able to use other quanta of pricing than per seat is that our preferred metric can easily fit into their chargeback mechanisms–in many cases even easier than per seat.

    • Kyle Poyar

      Thanks for sharing, @MickSavant:disqus. Great point about how your choice of metric should align with how your customers need to budget & pay. If an org can’t bill back for your services, they sometimes won’t pay for it no matter how much they value it. I’ve seen this in other spaces as well – companies selling into law firms & consulting firms come to mind as their customers want to bill back services to their clients.

  • Gregg Freishtat

    100% agree with thinking here. The pendulum has swung too far toward per seat pricing as compared to traditional enterprise pricing that ruled the day just 10-15 years ago. When you paid an enterprise licence and agreed to maintenance, you created leverage on the upside for good technology investments. In years 4-10, the cost remains the same even as you grow. Now growth (number of folks in company needing SaaS apps) and cost are linear and leverage is largely gone. At SalesWise, we think the pendulum is starting to reverse and we charge based on size of total enterprise so that the incentive is to provide everyone the access and data required to be more productive. We do pass nominal cloud and storage fees through with a cap. This shift away from per seat pricing and being able to reduce cost while expanding access to key data is very well received….

  • There are at least eleven (11) tests to better evaluate each possible / potential pricing value metric … and make better informed decisions. I won’t go into each of those here, but some quick thoughts ….
    — What matters most … is not personal preference … but what performs best.
    — If a customer did not *value* an additional user, why would they want to add another?
    — Do not assume what works for someone else … will work for you.
    — Don’t get too clever, many examples of co.’s regretting what seemed like a great idea (e.g., acquisition, retention, renewals, referrals, upgrades)

    More I could say, but leaving it there for now.