
Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
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Join companies like Zoom, DocuSign, and Twilio using our systematic pricing approach to increase revenue by 12-40% year-over-year.
In today's cloud-first world, SaaS companies face critical decisions about how to structure their cloud infrastructure costs when serving their customers. Two dominant pricing approaches have emerged: the pass-through model and the markup model. The strategy you choose can significantly impact your margins, customer relationships, and long-term business sustainability.
Before diving into specific pricing models, it's important to understand what we're discussing. Cloud infrastructure costs represent the underlying compute, storage, networking, and other resources that power SaaS applications. These costs are typically incurred from major providers like AWS, Azure, Google Cloud, or similar services.
As a SaaS provider, you must decide: do you simply pass these costs directly to your customers, or do you mark them up as part of your revenue model?
In a pass-through pricing model, SaaS providers bill customers for the exact amount charged by cloud providers, without adding any markup. Think of it as a direct transfer of costs.
Databricks, a data analytics platform, employs this approach. According to their 2022 pricing documentation, they separate their software licensing fees from the underlying AWS, Azure, or GCP costs, which customers pay directly or through Databricks at cost. This gives customers complete visibility into their infrastructure spending.
Under the markup model, SaaS providers add a percentage on top of their cloud costs before billing customers. This markup becomes part of the provider's revenue stream.
Snowflake, the cloud data warehouse company, implements a markup model. According to a 2021 analysis by Andreessen Horowitz, Snowflake's gross margins of approximately 65% indicate they mark up their underlying cloud costs significantly while providing value through their optimized data platform.
The pricing model you select has far-reaching implications beyond simple accounting decisions.
Pass-Through Model:
Markup Model:
According to a 2023 survey by Flexera, 82% of enterprises have initiatives to optimize cloud costs. This reality affects how customers perceive your pricing model.
Pass-Through Model Benefits:
Markup Model Benefits:
Your optimal pricing strategy depends on several factors:
Companies with strong differentiation or unique IP can more easily sustain a markup model. According to Gartner research from 2022, SaaS providers with high differentiation scores commanded price premiums 30% higher than those with commodity offerings.
Enterprise customers with dedicated cloud expertise often prefer pass-through models for control and transparency. SMB customers typically favor simplicity and predictability, making markup models more attractive to them.
The pass-through model requires excellent cost allocation capabilities and customer education. Markup models demand sophisticated cloud resource optimization to protect margins.
Innovative SaaS companies are increasingly adopting hybrid models that combine elements of both approaches:
The choice between pass-through and markup pricing models reflects your fundamental business strategy and value proposition. Neither approach is inherently superior—success depends on alignment with your company's strengths, customer expectations, and long-term objectives.
The most successful SaaS companies ensure their infrastructure pricing model supports their core value proposition. If you provide unique optimization technology, a markup model may properly value that IP. If your strength is flexibility and transparency, a pass-through model might better showcase those advantages.
As cloud infrastructure continues to evolve with new pricing structures, sustainability considerations, and regional variations, revisit your approach regularly to ensure it remains competitive and aligned with both market expectations and your strategic goals.
Join companies like Zoom, DocuSign, and Twilio using our systematic pricing approach to increase revenue by 12-40% year-over-year.