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Estd 4.22.2023
Introduction
The pricing model you choose for your SaaS product isn't just a financial decision—it's a strategic one that affects customer acquisition, retention, and your overall growth trajectory. Among the most common pricing structures, per-user and per-feature models stand out as primary options, each with distinct advantages and potential drawbacks. For SaaS executives, understanding these models and selecting the right pricing axis can mean the difference between sustainable growth and stalled momentum.
According to OpenView Partners' 2023 SaaS Benchmark Report, companies that align their pricing model with their core value proposition experience 15% higher retention rates and 23% greater expansion revenue. Yet many executives still struggle with determining which pricing approach best suits their product and market.
This article examines both per-user and per-feature pricing strategies, their market applications, and provides a decision framework to help you determine which pricing axis will drive the most value for your business.
Understanding Per-User Pricing
What Is Per-User Pricing?
Per-user pricing (sometimes called seat-based pricing) charges customers based on the number of individual users who access your software. This model is straightforward: each additional user costs a set amount, typically billed monthly or annually.
When Per-User Pricing Works Best
Per-user pricing tends to excel in specific scenarios:
When value scales with adoption: Products like Slack, Microsoft 365, or Salesforce deliver increased value as more employees use them, making per-user pricing intuitive.
For collaboration tools: When your product's primary benefit comes from enabling teammates to work together, charging by user aligns with that value.
When usage is relatively uniform: If most users consume similar resources and derive similar value, per-user pricing creates predictability.
According to Gainsight's 2023 Customer Success Industry Report, 67% of collaboration and communication tools use some form of per-user pricing model.
Advantages of Per-User Pricing
- Simplicity and predictability: Easy for customers to understand and budget for.
- Growth aligned with customer success: As customers grow and add employees, your revenue naturally increases.
- Easier to forecast revenue: With a direct correlation between users and revenue, financial planning becomes more straightforward.
Challenges with Per-User Pricing
- Can discourage adoption: Organizations might limit access to only essential personnel to keep costs down.
- Doesn't always reflect value: Some users may derive significantly more value than others but pay the same price.
- Competitive pressure: Per-user pricing is common, potentially making price the deciding factor in competitive markets.
Understanding Per-Feature Pricing
What Is Per-Feature Pricing?
Per-feature pricing (also known as tiered or value-based pricing) structures offerings around access to different feature sets. Basic plans include core functionality, while premium tiers unlock advanced features that deliver additional value.
When Per-Feature Pricing Works Best
Products with clear feature segmentation: When your product has distinct features that cater to different user needs or sophistication levels.
Solutions with varying value levels: If certain features deliver substantially higher value or cost more to provide, segmenting by feature better captures this value differential.
When targeting diverse market segments: If your product serves both SMBs and enterprise customers with different needs, feature-based tiers can effectively address this range.
HubSpot provides a classic example of per-feature pricing, with distinct marketing, sales, and service hubs, each with multiple tiers based on feature access.
Advantages of Per-Feature Pricing
- Value alignment: Customers pay for features they need, creating a stronger value perception.
- Upsell pathway: Creates a natural progression for customers to upgrade as their needs grow.
- Addresses diverse market segments: Can serve cost-sensitive smaller customers while capturing more revenue from enterprise clients who need advanced features.
According to a ProfitWell study, companies utilizing feature-based pricing reported 38% higher customer lifetime value compared to those using strictly per-user models.
Challenges with Per-Feature Pricing
- Can be complex to communicate: Requires clear messaging about what's included in each tier.
- Product development complications: Engineering teams must build with tiered access in mind.
- Determining feature placement: Deciding which features belong in which tier can be challenging.
Hybrid Approaches: Combining Both Models
Many successful SaaS companies employ hybrid models that incorporate both per-user and per-feature elements:
- Base tier + per-user fees: Offer different feature tiers, each with its own per-user rate.
- Feature tiers with user bands: Provide feature packages that include a certain number of users, with additional fees for exceeding that number.
According to Paddle's 2022 SaaS Pricing Strategy Report, 58% of the fastest-growing SaaS companies now employ some form of hybrid pricing approach.
Salesforce exemplifies this hybrid model effectively—different editions (Essentials, Professional, Enterprise) offer distinct feature sets, each with per-user pricing within those tiers.
Decision Framework: Choosing Your Pricing Axis
To determine which pricing model best suits your product, consider these key factors:
1. Value Delivery Analysis
Ask: How does your product primarily deliver value?
- User-centric value: If value increases as more people use the product, per-user pricing likely makes sense.
- Feature-centric value: If certain capabilities deliver substantially higher value regardless of user count, feature-based pricing may be more appropriate.
2. Customer Segmentation
Examine your customer base:
- Homogeneous needs: If most customers need similar functionality but vary in size, per-user pricing works well.
- Heterogeneous needs: If customer requirements vary significantly based on sophistication or use case, feature-based tiers allow for better segmentation.
3. Growth Strategy Assessment
Consider your growth objectives:
- Adoption-focused: If your priority is widening adoption within organizations, per-user pricing might create friction.
- ARPU-focused: If increasing average revenue per account is the priority, feature-based tiers create more upsell opportunities.
4. Competitive Landscape Review
Analyze your market:
- Established norms: Sometimes going against industry pricing standards can create unnecessary friction.
- Differentiation opportunity: In other cases, a unique pricing approach can serve as a competitive advantage.
5. Resource Consumption Reality
Evaluate your cost structure:
- User-driven costs: If each additional user significantly impacts your costs, per-user pricing helps maintain margins.
- Feature-driven costs: If certain features require substantially more resources to deliver, feature tiers can better reflect these cost differentials.
Implementation Best Practices
Regardless of which pricing model you choose, these practices increase your chances of success:
Test before full deployment: Use customer interviews and potentially A/B testing to validate pricing changes.
Provide grandfathering options: When transitioning pricing models, consider respecting existing customers' arrangements.
Focus on value communication: Clearly articulate why your pricing structure aligns with the value customers receive.
Monitor key metrics: Track conversion rates, expansion revenue, and churn closely after implementing any pricing change.
Iterate based on feedback: Be prepared to refine your approach based on market response.
Conclusion
The choice between per-user and per-feature pricing isn't simply about maximizing short-term revenue—it's about aligning your pricing strategy with your product's value proposition, your customers' expectations, and your long-term business objectives.
The most successful SaaS companies regularly revisit their pricing strategies, using customer feedback and performance data to refine their approach. Rather than viewing this as a one-time decision, consider it an ongoing strategic conversation about how your pricing can both reflect and enhance the value you deliver.
By thoughtfully evaluating the factors outlined in this decision framework and potentially implementing a hybrid approach that captures the strengths of both models, you can create a pricing structure that drives sustainable growth while maintaining strong customer relationships.
Remember that pricing is one of the most powerful—yet often underutilized—levers in your strategic toolkit. The right pricing axis doesn't just capture value; it communicates it, reinforces it, and ultimately helps create more of it for both your customers and your business.