Bessemer’s SaaS Pricing Strategies Notes

Bessemer Venture Partners has a great new white paper up on Software-as-a-Service (SaaS) pricing strategies. Pricing is something that entrepreneurs labor over on a regular basis and there’s always multiple quality answers. Besides the standard advice that products should initially be priced higher than what you think it’s worth since it’s better to have push back and easier to lower prices, there’s a good bit of gray area on the different types of pricing options.

Here are the four categories Bessemer identified:

• Freemium (Dropbox, Asana, Skype) – Basic services at no charge and then fees for premium features. This is further sub-divided into capacity-based freemium, feature-based freemium, time-based freemium, and use-case freemium.
• Consumption (Amazon Web Services, Twilio, ZipCar) – Pay-as-you-go pricing based on usage, similar to buying electricity.
• Tiered (Salesforce.com, Pardot) – Pricing tied to value and usage (e.g. a combination of functionality and quantity) and is often found in enterprise software as well as SaaS.
• Perpetual License (Oracle, Microsoft) – Initial payment followed by a smaller annual maintenance and support contract. Typically, annual subscription pricing is 3 – 5 years the cost of a perpetual license.

As expected, some companies do a hybrid of the four categories listed above.

The authors do a good job diving into the details and trade-offs of each of the approaches as well as case studies of SaaS companies employing each pricing strategy. If you’re interested in SaaS and pricing, go read the report.

What else? What are your thoughts on SaaS pricing strategies and Bessemer’s white paper?