Category: SaaS Billing

Traditional B2B software that require on-site servers, specialized IT staff, and constant maintenance are becoming a thing of the past.

They are being replaced by cloud-based B2B software applications that don’t require expensive on-premise hardware and can be easily accessed by anyone with an internet connection.

In this article, you will discover how B2B SaaS works, examples of high-flying B2B SaaS companies, and how you can leverage relevant SaaS products to improve your business.

Let’s get started.

TL;DR

• B2B SaaS is a business model where a software company offers access to its cloud-based software applications to corporate customers over the Internet. 
• B2B SaaS companies can offer one of seven SaaS pricing models to customers, and the model adopted by each company depends on the needs of its customers and the peculiarities of its industry. 
• There are tens of thousands of B2B SaaS brands on the market, including reputable brands like Stax Bill, Salesforce, Slack, Hubspot, and Microsoft 365.

What is B2B SaaS?

The term B2B SaaS is a combination of two acronyms, B2B (business-to-business) and SaaS (Software-as-a-Service). 

B2B describes companies that sell their products and services to other businesses (corporate customers), instead of selling to consumers. 

SaaS describes software vendors that allow users to access their cloud-based software applications through a web browser instead of downloading and installing the product on their computer.

When you combine the definitions of both terms, B2B SaaS is a business model where a software company offers access to its cloud-based software applications to corporate customers over the Internet. 

Cloud-based means the software company’s applications are hosted in remote data centers connected to the global internet, which allows users from all over the world to access and leverage the features of the software tool on any device.

The Evolution of B2B SaaS

The B2B SaaS market has grown exponentially since Salesforce launched as the first SaaS product in February 1999, and it’s projected to grow to $702.19 billion by 2030.

Below we will explore the key milestones in the development of B2B SaaS from the early years when it was seen as a mere fad to its widespread adoption today.

The 1960s: the time-share era

Computing in the early 1960s took a lot of time and the only way to share data stored on one computer with another was to record it onto a magnetic tape and send it to the site of the other computer via post.

The impracticality of this system led to the introduction of time sharing. The method was developed at MIT and it was the first version of the modern internet. It used multiprogramming to allow multiple individuals at different terminals to use a small portion of a single computer at the same time. 

The 1970s to 1990: the personal computer and on-premise software era

Improvements in computer hardware technology over the decades led to smaller and less expensive computers. Software development also advanced and early SaaS software was packaged in CD-ROMS to be installed physically on each computer.

However, the need for constant software updates and hardware maintenance made on-premise software costly and inefficient for enterprises who used them at scale. 

The early 1990s: the rise of the global internet

Tim Berners-Lee’s invention of the World Wide Web at CERN in 1989-1990 spurred the Web 1.0 era in which the Internet became more widely available to the public. The first set of popular internet-based companies like Yahoo and Netscape emerged during this era.

Netscape developed the Secure Sockers Layer (SSL) Protocol in 1995 to ensure data integrity when information is transmitted on the internet. Soon companies like Amazon and AuctionWeb (eBay) leveraged that technology to launch online platforms where people can buy and sell products online, without fear of their data being compromised. 

The late 1990s: the rise of online cloud and SaaS

The growing ubiquity of the internet made it feasible for software companies to store their applications on remote servers and offer them to users anywhere via the internet.

Salesforce with its cloud-based CRM software was the first to utilize the B2B SaaS model as an alternative to on-premise software. The platform soon achieved record growth, but there were still many business owners at this stage who weren’t convinced about the utility of SaaS platforms.

The 2000s to present: the widespread adoption of SaaS platforms

The internet continued to evolve and bandwidth limitations were lifted, which made cloud services faster and more reliable. SaaS platforms gained more traction and soon, household traditional software brands like Microsoft and IBM started to move their software applications to the cloud.

Today, there are B2B SaaS products for most business applications, and new ones are being introduced each year. 

How B2B SaaS Works

Any small business or enterprise interested in using a cloud-based software application will have to pay a subscription fee to access the online platform.

That fee will grant access to the SaaS platform for a defined period, and the business customer must pay a recurring subscription, monthly or yearly to retain access to the software application. 

This is in contrast to traditional on-premise software where you purchase the license to the software and own it in perpetuity. 

B2B SaaS companies usually offer flexible payment plans to their customers, and the model adopted by each company depends on the needs of its customers and the peculiarities of its industry. 

There are seven primary SaaS pricing models and we will explore each of them below.

(NOTE: There are also hybrid pricing models that combine the features of two or more of the pricing models we will explore below. This is done to offer more flexibility to customers.)

Freemium pricing model

This model gives users a basic version of the software solution for free with the option to subscribe to a paid plan for access to more robust platform features.

The advantage of the freemium pricing model is that it lets you test the software platform to see if it meets the needs of your business before making any financial commitment. 

Tiered pricing model

It’s the most common SaaS pricing model and users are allowed to pick from multiple pricing plans, each with its own package of features and services. 

The beauty of this model is that it gives you the flexibility to select the pricing plan that best fits your budget. You will also avoid paying for features that are not needed at this current stage of your business.

Flat-rate pricing model

This model offers a single price for access to all the features and services available on the software platform. There is no tiered pricing or optional add-ons. 

This model can be beneficial if you have a large team, and each user must access the platform individually. 

When you are paying a fixed sum, you can have as many users as you want on your account without having to pay any extra fee. 

Pay-per-seat pricing model

In contrast to the flat-rate model, the pay-per-seat model charges a fee for each user who accesses the software through your account. The more users in your team, the higher your subscription fee.

This model benefits organizations who want transparency into their costs as they scale the size of their team.

Pay-as-you-go pricing model

This model charges customers based on their usage of the software tool. It’s often used by communications platforms (messages and calls) and hosting providers. 

The advantage of this model is that you only pay for what you consume, which ensures you are getting full value for your money.

Credit-based pricing model

In this model, customers buy credits upfront from the SaaS provider that they then use to pay for digital products, services, and features on the SaaS platform.

This model works when the SaaS company offers a product that doesn’t require continuous use. That way customers can buy the product or service with their credit without any pressure to use it immediately before the subscription plan runs out.

For example, Audible members must purchase credits to buy permanent access to popular, bestselling audiobooks. Each book costs one credit. 

Custom pricing model

This billing model allows each customer to negotiate a subscription price with the SaaS provider based on their specific needs.

The advantage of this model is that it lets enterprise customers get a subscription package with features tailored to the unique needs of their business. They will also be able to save costs by negotiating for a lower price per user. 

Example Companies in the B2B SaaS Space

There are tens of thousands of B2B SaaS brands on the market, but we will only be able to cover 10 high-flying SaaS companies in this article.

1. Stax Bill

Stax Bill is an automated recurring billing and payment SaaS solution for subscription-based companies. 

It takes charge of repetitive manual accounting and financial processes like invoicing, billing, and collections so you can have the time to concentrate on big-picture strategy. 

Stax Bill can drastically increase your billing efficiency by up to 80% and save you about 40 hours a month. 

Case Study

bitHeads, inc, a custom enterprise software developer and Backend as a Service (BaaS) provider for the gaming industry, leverages Stax Bill (formerly Fusebill) to automate billing for its complex usage-based pricing model.

Stax Bill seamlessly calculates each customer’s charges based on their usage and pricing plan and bills them automatically. This automated bill collection has increased revenue recovery by 5-10% and given the company clarity on how much it earns from its many products and pricing plans.

2. Salesforce

Salesforce CRM (customer relationship management) is a suite of cloud-based software applications that help businesses automate sales and marketing processes. It also offers a large number of third-party integrations.

Case Study: Grammarly uses Salesforce’s Einstein Account Insights to identify high-quality leads and automatically assign them to the best-qualified salesperson. This has helped to shorten the time it takes to close leads from 90 to 30 days.

3. Shopify

This Canadian company offers an all-in-one eCommerce platform that lets users with no coding experience build and launch online stores in a few hours. You can list as many products as you want and sell them via any channel on the Internet.

Case Study: Abode Living, a luxury bed linen store, uses Shopify Plus to offer customers a unique online shopping experience and expand to international markets. It managed to increase its average order value by 25% since its switch from WooCommerce to Shopify.

4. Dropbox

Dropbox is a cloud storage solution that lets users store their files, images, and videos. You can access your files on Windows, macOS, Android, and iOS devices, and collaborate with your colleagues to edit your content.

Case Study: InVision is an online whiteboard and productivity tool used by companies to turn static designs into powerful prototypes in minutes. The remote company leveraged Dropbox Business for smoother collaboration between its teams based across multiple time zones.

5. Slack

This messaging and collaboration platform has transformed the way teams communicate in the workplace. It lets users set up channels where team members can have group or private discussions, and share files.

Case Study: Flatiron, a health-tech company with several cancer centers, uses Slack to create detailed profiles for each of its 1,200-plus employees. This provides employees with critical information about their remote teammates, empowering them to work better together even though they don’t share a physical office space. 

6. Xero

Xero is a cost-effective accounting software solution optimized for the needs of freelancers, startups, and small-and-medium-sized businesses. It helps business owners accept payments, pay bills, manage payrolls, track expenses, and more so they can spend more time growing their businesses.

Case Study: IKPE Ltd is a UK-based construction company that uses Xero for seamless invoicing and to track business performance in real time. The company has drastically reduced its paperwork and increased year-on-year profits since it started using Xero.

7. Hubspot

Hubspot is an all-in-one marketing automation platform that helps businesses attract leads, track sales pipelines, and manage customer care channels. The company developed and popularized the inbound marketing strategy that underpins its approach to digital marketing. 

Case Study: WeightWatchers, a weight loss and weight management app builder, used Hubspot to visualize and automate its existing sales pipeline. Now, Hubspot helps the company’s sales teams to easily identify quality leads with a clear path to revenue.

8. Adobe Creative Cloud 

The Adobe brand is a household name among creative types and its suite of design tools are the gold standard for photo editing and digital art. Its Creative Cloud platform is the new online home for its popular on-premise design software tools, including Photoshop, Illustrator, InDesign, and others. 

Case Study: Design teams at Globant, an IT and software development company with an international workforce, use Adobe Creative Cloud to bridge the geographical divide and collaborate securely across time zones.

9. Microsoft 365 for business

Microsoft cornered the desktop office productivity software market for decades and Office 365 is its response to Google’s cloud-based Workspace apps stealing a portion of its customer base. The online 365 suite includes popular Office tools like Word, Excel, PowerPoint, Outlook, Teams, and more.

Case Study: L’Oreal, the French beauty and personal care giant, leverages Microsoft Teams to foster communication and co-creation among its global workforce. Hybrid work has become the norm since the adoption of Teams, and it’s used for virtual factory visits and inclusive meetings. 

10. Google Workspace

Google Workspace is a suite of online-only productivity apps for small businesses and large enterprises. The package includes Google Docs, Sheets, Slides, Gmail, Google Drive, Sites, Google Chat, and more. 

Case Study: AKRON is a company in the oil and gas sector that uses Google Workspace tools to facilitate real-time collaboration between frontline workers and employees in the corporate office. This has led to less paperwork and a 25% increase in sales.

B2B SaaS Industry Outlook 

Current trends shaping the B2B SaaS industry

Below are the key drivers of change in the industry in year 2024:

AI-powered task automation

SaaS companies are integrating AI and machine learning into their platforms to offer better user experience, automation, and advanced analytics.

Vertical SaaS

The increasingly popular Vertical SaaS model focuses on meeting the needs of businesses in a super-specific niche, instead of the one-size-fits-all-approach taken by established SaaS platforms like Salesforce, Microsoft, Google, and others.

B2B omnichannel operations

The lockdowns imposed due to the Coronavirus pandemic forced many B2B companies to switch to virtual sales models and that online shift has remained in place. 

SaaS vendors recognize this change and they are increasingly offering tools that help their users provide personalized buying experiences to customers online and in-store. 

Open integrations

More SaaS platforms will offer open APIs to ensure seamless connections with the existing systems customers use to run other aspects of their business. Greater integration increases efficiency and makes their platform more valuable to users.

Enhanced cyber security

Persistent data breaches have made cybersecurity top of mind for business owners. SaaS companies are now offering Identity and Access Management (IAM) solutions and adopting the zero-trust security model to provide holistic security for their customers’ data.

Challenges and opportunities ahead

The rapid growth and low barrier to entry of the sector has attracted several new players which has led to stiff competition. Venture capital funding is also drying up, making it harder for a SaaS business to access capital.

Economic fluctuations and the costs of over-regulation can also serve as a strain on profitability and growth.

Fortunately, market consolidation offers an opportunity for dynamic companies to retain their competitive edge. 

When companies merge, they can quickly offer a more complete suite of tools to a wider audience, while avoiding the costly and time-consuming process of developing new features in-house.

Things To Consider When Selecting a B2B SaaS Provider

Below is a step-by-step process to help you identify the right SaaS vendor for your business.

Step 1: Identify the needs and goals of your business

Map out your existing business workflows to identify the features you will need from the SaaS solution. List out the current pain points in your processes you would like to improve upon, then highlight your core priorities. 

This will help you quickly identify potential SaaS providers once you start researching your options.

Step 2: Identify relevant SaaS products

A simple Google Search with the right keywords will give you a list of relevant SaaS companies offering solutions and tools that may meet the needs of your business.

Collate review articles and customer case studies on each SaaS provider. Then use the information to create a dossier on each SaaS provider.

Step 3: Evaluate the features of each SaaS product

The list of requirements you made in Step 1 and the dossier you compiled in Step 2 will make it easy for you to create a shortlist of platforms with features that best align with your peculiar needs. 

Step 4: Assess user experience

Check out customer reviews to see if current customers are commenting on the platform’s user-friendly interface. 

Do this customer experience assessment for each platform on your shortlist. 

A free trial period will be helpful here, since it lets you check out the platform yourself. 

Step 5: Check for integration with your existing ecosystem of apps

Seamless integration streamlines your business operations and increases efficiency, which leads to cost savings. It’s crucial that your new SaaS platform plays nicely with your current systems.

Step 6: Consider scalability and customization options

Your business may grow over time (that’s the dream of every business), and your SaaS platform must be able to scale and adapt to your evolving needs. Getting this step wrong can force you to switch to another provider down the line at great cost.

Step 7: Evaluate cyber security measures and compliance with industry standards

The security of your data is of utmost importance, and your provider must offer data encryption and best-in-class security protocols. The provider must also comply with all relevant industry regulations, especially, when it comes to handling sensitive customer data. 

Step 8: Review service level agreements (SLAs)

Examine the provider’s uptime and customer support commitments. You want to limit your choice to a company that offers 99.9% uptime since significant downtime for maintenance or any other issues can severely impact your business.

Step 9: Calculate the total cost of ownership

Start with the recurring subscription fee over a period of years (e,g five years), then add other related expenses like training fees, integration costs, and possible customization fees.

Write down the number you get, then consider the projected ROI of the SaaS solution. A purchase decision will depend on whether buying the platform will help your business gain higher extra revenues than the projected cost of the investment.

Step 10: Gauge the provider’s reputation on customer review sites

Sites like Trustpilot, Capterra, TrustRadius, G2, and GetApp contain reviews from current and old customers that can give you valuable insights into the provider’s performance and reliability.

It’s a massive red flag if a provider is getting lots of negative feedback from customers across multiple review sites.

Tips for maximizing the value of B2B SaaS investments

The ideas below will help you maximize the ROI from your SaaS platform.

Opt for an all-in-one solution

Selecting a robust SaaS solution that combines multiple relevant applications on the same platform will help you save resources that would have been spent purchasing individual tools to perform each task.

Set up adequate training and onboarding programs for your staff

Provide ample training opportunities and ongoing support to your employees to ensure they master the new SaaS platform. Failure to get their buy-in will lead to reduced user adoption and low ROI.

Monitor key performance indicators (KPI)

Track key performance metrics that measure usage patterns, system uptime, productivity improvement, revenue growth, cost savings, and risk reduction to ensure you are getting full value from your SaaS investment.

Start Implementing B2B Solutions In Your Business

We have covered everything you need to know about B2B SaaS platforms in this article, and you now understand why several businesses are leveraging cloud-based SaaS offerings to automate manual tasks and expand their market reach.

You can’t afford to be left behind and now is the right time for you to identify relevant SaaS solutions that can help take your business to the next level. Learn more about how StaxBill can help you do just that.

FAQs about B2B SaaS

Q: What is B2B SaaS?

B2B SaaS is a software delivery model where applications are hosted remotely and accessed by businesses over the internet.

Q: How does B2B SaaS differ from B2C SaaS? 

B2B (business to business) SaaS focuses on software solutions designed for companies and organizations; meanwhile, B2C (business to consumer) SaaS targets individual consumers with applications intended for personal use.

Q: What should businesses consider when choosing a B2B SaaS provider? 

Key considerations include the software’s security features, compliance with relevant regulations, integration capabilities with existing systems, and customer support.

Q: How does data security work in B2B SaaS platforms? 

B2B SaaS providers typically implement robust security measures such as data encryption, regular security audits, and compliance with standards like GDPR, PCI-DSS, and HIPAA to protect user data.

Imagine if you could increase your monthly recurring revenue (MRR) without putting a single cent toward new customer acquisition. No ad spend to raise brand awareness. No financial or time investment in generating or warming up new leads.  Oh, and your conversion rates will be higher. In this scenario, you’re up to 14X more likely to sell.

Yep, you guessed it!

Your current customer base is a gold mine of unrealized opportunity—the chance to provide more value and increase monthly recurring revenue, AKA. expansion MRR.

With many businesses’ budgets tightening this year, expansion MRR—rather than new MRR—is understandably sitting front and center. So, let’s explore the ways a SaaS business can add expansion MRR, and how its recurring billing software can build, facilitate, and advance both strategies.

Upsell vs cross-sell SaaS strategies

Upselling and cross-selling drive one of the most vital types of revenue: expansion MRR. Many SaaS businesses aim for a target rate of between 20 and 30%, with higher numbers being absolute rocket fuel for business growth.

Essentially, these strategies are suggesting relevant products at the right time to the right people, with a few key differences.

Similarities

Although they are different strategies, upselling and cross-selling have a lot of similarities which means the terms often get confused.

For example, both sales strategies:

• reduce customer acquisition costs by selling to your existing customer base,
• aim to provide added value (or a more comprehensive solution) to existing customers,
• are intended to increase LTV,
• may be initiated by the customer, sales team, or customer success team, and
• can occur on the pricing page, at renewal, or at any point in the customer journey—although that may have other implications (more on that in a minute).

Despite their vast similarities, a few key differences set the two activities apart.

Key differences

• Cross-selling refers to selling extra features or complementary products to the customer’s initial purchase, whereas
• an upsell is when a customer moves to an upgraded or enhanced version of your product.

Think of cross-selling as offering add-ons, and upselling as moving to a larger, higher-end, or premium subscription package (at a greater cost).

• Cross-selling is a product development exercise. You’ll need to constantly innovate and test additional features, functionality, and products to tempt customers, whereas
• upselling is more of a sales and marketing exercise, convincing your customers to spend more money with you as their own business grows.

A correlation between your own growth and your customers’ growth helps foster loyalty and increase expansion MRR.

Why is expansion MRR important?

Expansion MRR is important because of its positive links with these other vital growth-focused metrics:

• Customer acquisition cost (CAC)
• Customer lifetime value (LTV)
• Customer churn

It’s well-known that selling to your existing customers is not just easier and more profitable, it’s cheaper too. That’s because there is no CAC—you’ve already acquired the customer!

Expansion revenue growth from upselling and cross-selling means your customers are spending more money with you each month. Naturally, this should increase how much they spend over their lifetime with you (LTV) and improve your bottom line—provided they don’t churn.

The good news is that cross-selling and upselling actually limit churn. If customers are choosing to spend more money on premium products or additional features, you’re solving more of their problems. And in B2B SaaS, that means you’re most likely providing value across more areas of their business.

Aside from that, expansion MRR is an indicator of

• customer happiness and loyalty,
• revenue sustainability, and
• positive response to new products or features.

Of course, you have to acquire first to upsell later. So, expansion MRR becomes increasingly important as a SaaS company matures. This is because the gaze shifts to nurturing customer relationships and developing larger accounts. This natural progression is known as land-and-expand.

The land-and-expand strategy

Consciously or not, you’re almost certainly practicing a land-and-expand strategy already.

The premise of land-and-expand is straightforward. We can break it down into four main stages.

1. Land new customers (this could be a paid sign-up, a sale, or even a free trial)
2. Deliver delight (blow their minds with your fantastic product features, support, and value)
3. Deepen your connection (assign customer success managers to strengthen relationships)
4. Expand (leverage your solidified relationship to identify upsell and cross-sell opportunities to provide more value)

How you choose to expand will depend on how each unique customer uses your product. However you approach it, the aim is always to compound your monthly recurring revenue (MRR) by gaining users, establishing trust, and upping their paid services over time. You don’t want to hit them with cross-sells and upsells the second they sign up—this could have the opposite effect, reducing trust and causing churn from frustration.

Land-and-expand for upsells

There are plenty of examples of successful land-and-expand strategies ‘in the wild’. Some of the biggest names in SaaS, like Slack, HubSpot, and product-led pioneer Zoom, absolutely mastered this method of scaling and now produce annual recurring revenue (ARR) in the hundreds of millions.

Zoom, in the billions—$4B ARR to be more precise. And despite breaking records for being the fastest-growing SaaS company in history, it spends around half of what the average public SaaS company does on sales and marketing (25% vs. 50%). Much of this could be attributed to the product being the perfect solution for COVID-era problems. But its growth continues post-pandemic, pushed forward now by enterprise clients at a trailing 12-month net expansion rate of 123% —an ideal example of upselling and expansion MRR at work.

So, once you’ve landed a customer, how do you convince them to spend more of their precious cash with you? Especially in cases where users are enjoying a freemium version of your product.

You could limit access to your product—or certain features of it—with a trial period. After all, opt-out free trials (that require payment info upfront) have a pretty attractive conversion rate of 60%. Zoom’s 40-minute meeting limit is a prime example of restricted usage for freemium users, who are upsold with automated in-app upgrade prompts.

Upsells can also happen naturally over time. As the customer’s business grows, they’ll need more capabilities. This could mean more users, more detail in reports, or more advanced features offered in the premium version of your subscription product.

The key is in getting users to see your product’s value. Maximize the organic networking effect by landing one person, team, or department. The first users will help spread your solution across the organization or across projects. Then, prioritize the product at an account level (rather than at user level), building long-term relationships with decision-makers so you can identify further upsell opportunities with their genuine business interests at heart.

Land-and-expand for cross-sells

Growth-focused SaaS companies must constantly improve their offering to stay ahead of the competition. So, cross-selling fits natively into that process. When you launch a new feature, expansion MRR measures the uptake and stickiness. Qualitative feedback from the feature’s new users also makes cross-selling an intrinsic part of continued product development.

Cross-selling is a great tactic when a customer is reaching the limits of a lower-tier plan but is not yet ready to make a full upgrade. An add-on product can help bridge that gap.

While it’s common for users to self-serve when choosing add-on products, the responsibility usually falls to one of two key teams, which is brings us to…

The CS vs. sales team debate

Who should be handling your expansion MRR? Sales have the right skill set but may put a customer’s guard up. When a customer is contacted by sales, they know they’re about to be asked for money.

On the other hand, the customer success manager/customer relationship is based on trust and the belief that the customer success manager (CSM) will only make genuine recommendations in the interest of their business. It could be a softer sales approach. Then again, CSMs are unlikely to have the time to invest in building sales skills and learning effective upselling and cross-selling techniques. It’s safe to assume their conversation rates would be lower.

Once a CSM asks a customer for money, there’s also the danger it could damage the dynamic of the relationship. With customer success being an increasingly vital aspect of SaaS—reducing churn and driving expansion MRR—it may not be worth the risk. According to research by Microsoft, 58% of customers will switch to a competitor because of poor customer service.

It’s a hot debate in some SaaS circles. Ultimately, though, there’s no objective “right” answer—the best team for handling expansion MRR varies from business to business.

How can modern billing software help your business upsell and cross-sell?

Implementing a upsell or cross-sell strategy (or both) can get pretty complex in the world of subscription-based service. Ultimately, your success doesn’t just depend on your sales or CSM efficacy. It’s absolutely vital to have flexible, modern billing software that forms part of a solid tech stack and facilities your efforts.

Reporting capabilities

MRR reports by customer show you how much revenue is coming from each customer. This is essential to understand who has room to expand their usage or add features. You can target customers with precision, saving your sales and CS team valuable time.

Flexible product catalog

Upselling and cross-selling don’t always happen conveniently at renewal. And pro-rating subscription fees mid-contract with spreadsheets is simply an unreasonable amount of manual work that’s prone to errors, interrupting your cash flow and affecting your bottom line.

A flexible product catalog allows your team to migrate customers between plans (or include add-ons) with ease, with the added benefit of accurate automated billing and invoicing.

Aside from that, comprehensive subscription management software acts as a single source of truth (SSOT) for accurate data and more simple cross-departmental communication, improving operational efficiency.

The bottom line

Ultimately, cross-selling and upselling are essential strategies to power growth. Having a bottoms-up sales playbook that lets you maximize every cross-selling and upselling opportunity is key to driving expansion MRR for your long-term business health.

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FAQs about Upselling and Cross- selling in SaaS

Q: What is the difference between upselling and cross-selling in SaaS?

Upselling in SaaS refers to offering customers an upgraded or premium version of the product which is at a higher price point, while cross-selling refers to offering complementary products or services related to the initial purchase. Both strategies aim to maximize revenue using an existing customer base, cultivating customer loyalty, and increasing long-term customer value.

Q: How can a SaaS business implement effective cross-selling and upselling strategies?

Effective cross-selling and upselling in SaaS businesses require a deep understanding of customer needs, a wide range of quality products and services, and a well-trained sales or customer success team. Implementing a land-and-expand strategy is often a successful method, starting with securing a new customer (the “land”) and then organically growing that relationship by consistently providing valuable solutions and meeting their evolving business requirements (the “expand”).

Q: What role does a billing platform play in upselling and cross-selling strategies?

A flexible and modern billing platform is crucial for successful upsell and cross-sell strategies. It can provide valuable insights through visuals like MRR (Monthly Recurring Revenue) reports, which indicate potential expansion opportunities. Further, it allows automated migrations between plans, ensuring accurate invoicing and simplified cross-departmental communication, thus increasing operational efficiency.

Q: What are some examples of successful upsell and cross-sell strategies in the SaaS industry?

Companies like Slack, HubSpot, and Zoom have mastered upselling and cross-selling strategies, driving their annual recurring revenue (ARR) to impressive figures. The key to their success is understanding their customers’ needs and creating value across multiple domains within their customers’ operations, thereby fostering customer loyalty and maximizing revenue.

Q: How do upselling and cross-selling impact Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV)?

Upselling and cross-selling reduce the customer acquisition cost since won customers are more likely to buy additional products. These strategies are known to enhance customer lifetime value as they involve selling more to existing customers, thereby increasing the amount customers spend over their lifespan with the company.

Q: What team best handles upselling and cross-selling strategies?

There’s no objective “right” answer for this as it varies from business to business. Sales teams have the right skill set but may create a perception of transactional intention, while customer success managers (CSMs) build trust and rapport with customers, making recommendations from a place of genuine interest in their business success.

Q: How do cross-selling and upselling contribute to combating customer churn in SaaS?

These strategies limit churn by offering more value to existing customers. If customers find value in premium products or additional features, they are more likely to stay, reducing churn rates. The key is to offer genuine solutions that solve customer problems, increase efficiency, or deliver more value to their business.

Q: How does expansion MRR contribute to a SaaS business’s growth?

Expansion MRR (Monthly Recurring Revenue) plays a vital role in a SaaS business’s growth as it’s linked to key growth metrics like customer acquisition cost, customer lifetime value, and customer churn. Upselling and cross-selling strategies drive expansion MRR by increasing the revenue from existing customers, which is a more profitable and cost-effective approach than acquiring new customers.

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It can be intimidating for SaaS business owners to implement any pricing changes. They worry about scaring off existing customers, plummetting acquisition rates, and the intensity of work involved in rolling out such major core adjustments.

Who even knows what the best price model is, anyway? There’s so much contradictory information on B2B SaaS pricing, and what works for one business may not work for another. So where to begin?

If you’re in B2B SaaS, the simple solution is to ‘begin’ at all. Your current price almost definitely isn’t optimal, and even if it is—it may not be next year. Or even next month.

Pricing is not an area of your business you can afford to set and forget.

If you’re continually evolving your SaaS product, adding new features, upping your service levels, and delivering more value, your pricing should reflect that. In fact, many customers even expect a price change. After all, other industries (like retail or food) seem to be ramping their prices at a rate of knots, especially given the evolving economic climate. And SaaS giants like Salesforce even have a built-in 7% annual increase.

Despite that, the average SaaS startup spends an average of just 6 hours (ever!) on its pricing strategy. And yet 98% of SaaS companies that make changes to their pricing strategy see positive results.

The evidence all points towards optimized pricing leading to maximized revenue. Let’s explore a few of those success stories.

1.  Podpage’s money-making price change

Podpage is a website builder designed for podcasters. Raising prices resulted in a whopping 28.5% increase in annual recurring revenue—all while retaining current customers and driving new subscriptions.

The plan

Before making any changes, Podpage began by defining clear metrics. Knowing how you’ll measure success is vital early on. Otherwise, you run the risk of twisting the numbers—whether consciously or not—in favor of the campaign’s success.

In the case of Podpage, those metrics were recurring revenue and new customer subscriptions. This allowed the team to see the instant revenue increase as they acquired new customers and existing customers upgraded plans.

Since Podpage is an early-stage startup, it made sense to compare numbers with the previous month.

The pricing strategy change

Interestingly, Podpage didn’t lose any customers after its pricing change. Not a single one.

In fact, nobody even questioned the price update. Qualitative signals actually showed that customer loyalty improved—supporting the idea that business owners’ fear of driving customers away with a price increase is often unfounded.

The lesson

So, what lessons can we extract from this?

Firstly, don’t forget to establish the metrics you’ll use to measure success. This will ensure you carry out a data-focused, objective analysis of results.

Secondly, we should take note of Podpage’s customer-centric approach to pricing strategy. In your own pricing conversations, make sure to include real customers’ opinions. Brenden Mulligan, founder of Podpage, doesn’t look to competitors for guidance on product development or pricing strategy.

He explains, “It’s a cliche but I don’t think about competition too much.” Mulligan prefers to spend more time speaking to his customers directly via the Podpage Facebook page. Why hypothesize your customers’ reactions to a pricing change when you could find out their honest thoughts directly? This kind of feedback is like gold dust.

“If you’re not talking to your customers, you’re wasting your time” —Brenden Mulligan, Podpage founder.

2.  How Klipfolio refined its pricing strategy

Klipfolio is a powerful analytics and business intelligence platform. In 2012, it created a pricing model based on the number of users a customer wanted on the software. Fast forward a few years, and the business refocused its objectives and began targeting SMBs rather than larger companies or enterprises.

Was its old pricing strategy still a good match? As you may have guessed, probably not.

The problem

Having changed direction, the team at Klipfolio quickly realized the old pricing model wasn’t suited to its new audience. Not only that—Klipfolio’s pricing strategy wasn’t aligned with its strategic objectives. The key to Klipfolio’s growth strategy was market share and massive user adoption. But its pricing model, based on limited seats, was actually inhibiting user growth.

The pricing strategy change

Before making any solid price changes, Klipfolio ran A/B tests. The team compared numbers from new signups using the old pricing model (based on users) vs. the new one. The new, higher prices were based on the number of resources and features customers choose.

The idea was that by allowing more users, SMBs would see more value in the tool and have a better opportunity for collaboration and, ultimately, success.

The test ran for over two months. The first obvious difference was with the average starting subscription value, which was significantly higher under the new model. And, there was no significant difference between conversion rates—so far, so good.

Klipfolio also saw an increased number of users per account. This was a major win as strong user growth is critical to the business’s strategy.

The cherry on top? Cancelations remained relatively unchanged, and revenue expansion increased.

The lesson

The main takeaway here is the importance of aligning your pricing model with your growth strategy. Fit your pricing to your target customer (persona) and you’re on track for success.

We can’t ignore the magic of A/B testing, either. This reduces the fear and uncertainty of making big changes, as you can:

• roll out changes to a small, select group,
• monitor customer behavior, and
• use real numbers to back up your final decision.

The role of A/B testing in successfully executing pricing changes should not be understated.

To do this, you’ll need a comprehensive subscription management system with the functionality to run pricing tests on different customer segments. Even then, there’s always risk involved when you roll out a price hike—but as we’ve learned from these examples, it often pays off.

“I think there’s a lot to be said for thinking bigger and taking more risks.” —Allen Wille, Klipfolio founder.

3.  Why Front tests new prices every three weeks

Front is a help desk software and a communication hub. By embracing price experiments (at least one per month!), this SaaS start-up has gone from strength to strength, attracting big-name investors and achieving a recent valuation of $1B to $10B.

The problem

When Front started out, it opted for pricing similar to that of many B2B SaaS start-ups: a freemium model. Then, over the course of two years, it made three price changes.

The problem with this was every time new pricing was introduced, the Front team had no idea how customers would react. Nor did they know whether to increase prices for the higher-ticket 20% of the market, or price lower for the masses (i.e. the remaining 80% of its customers).

That meant that sometimes Front would roll out price increases across the board, see a drop in metrics and then hastily change it back. Not a great look for a new company wanting to establish brand trust and customer loyalty.

So, what changed?

It was clear there was a better way to do things. Mathilde Collin, Front Founder put it quite simply. “We needed to find a way to improve pricing more quickly and with less risk.”

The answer lay in price experiments. Collin and her team realized “iterating on pricing more frequently would give us more data on what works and what doesn’t.” It allowed a glimpse into the future.

Front went from iterating on its plan price points once per year to making it a regular process every three weeks. Now, with flexible software in place, Front tests price changes on small cohorts and only rolls it out to its full customer base if the results indicate improvement in metrics like lifetime value (LTV) and customer acquisition cost (CAC).

The main benefits of these frequent incremental price increases include:

• fewer repercussions for messing up price changes,
• getting a better sense of what your customers really want (refining buyer persona), and
• gradually achieving better price elasticity, i.e. aligning price with value.

All of this brings Front closer to finding the optimal price for its SaaS product—gradually, steadily, and with less of a gamble.

The lesson

The key lesson here is that new pricing shouldn’t be an annual event (or in some cases, even less frequent!).

Smart SaaS companies revisit their pricing almost constantly—at best every month, if not every second month or so. That doesn’t mean you hit your customers with massive price changes all the time. It’s about creating an effective feedback loop, analyzing data, and testing pricing changes on small cohorts first (ideally specific customer segments or even sub-segments).

“To build your own experimental pricing strategy, you need more than just numbers and spreadsheets. You need to focus on behavioral and revenue data and find a way to group and compare that data over time.” —Mathilde Collin, founder of Front.

An ideal way to do that is with comprehensive subscription management software that allows for granular reporting, A/B testing, and accurate automated billing, and has great catalog flexibility.

Done right, price changes won’t scare existing customers away

In summary, don’t be scared to play with your pricing—but make sure you have the right tools in place first.

Then,

1. roll out pricing changes incrementally,
2. control and monitor response (for example, you could use an email survey), and
3. be careful to communicate openly throughout the process (send an email announcement with plenty of notice. Offering a transition discount could also be helpful).

Transparency is important. Giving your customer base basic information like the reason for the changes, and whether they have the option to remain on legacy pricing, will help a price increase (or decrease) go much more smoothly. Have a solid communication plan in place.

Ultimately, optimizing prices should result in more revenue generated from the additional value you deliver. More money means you can invest more into your SaaS product, marketing, services, and support. You could expand the locations in which you sell your services. Or, just enjoy the extra profits.

In any case, staying on top of your prices spells a win-win for both you and your customers.

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FAQs about Pricing Strategy Changes

Q: Why should SaaS business owners carefully consider their pricing strategies?

Pricing strategies can highly influence the revenue and growth of SaaS businesses. Failing to regularly optimize these strategies can result in lost opportunities for maximizing revenue.

Q: What measures should be taken before implementing pricing changes in SaaS businesses?

Before implementing any pricing changes, businesses should define clear metrics of success, such as recurring revenue and new customer subscriptions. Running customer surveys, consulting with the customer base, and conducting A/B tests can also help inform the decision-making process.

Q: What are some success stories of SaaS businesses benefiting from pricing strategy changes?

Examples include Podpage, Klipfolio, and Front. Their pricing strategies resulted in an increase in annual recurring revenue, user adoption, and improved evaluation metrics like lifetime value (LTV) and customer acquisition cost (CAC), respectively.

Q: How often should SaaS businesses consider reviewing and changing their pricing strategies?

Pricing strategies for SaaS businesses should be reviewed often—ideally every six months. However, major changes should be backed by substantial data and customer feedback.

Q: What are some key lessons learned from these SaaS businesses changing their pricing strategies?

Key lessons include the importance of setting clear metrics, considering customer feedback, ensuring the alignment of the pricing model with the business growth strategy, frequently testing pricing strategies, and transparent communication with customers.

Q: How necessary is it to align the pricing model with a business’s growth strategy?

Aligning the pricing model with the business’s growth strategy is crucial as it directly influences market share and user adoption, thereby affecting the overall growth of the company.

Q: What is the importance of A/B testing in changing pricing strategies?

A/B testing allows businesses to understand the potential impacts of pricing changes before implementing them broadly. It helps reduce uncertainties and risks associated with major adjustments.

Q: How can SaaS businesses mitigate potential customer backlash due to pricing changes?

Transparent communication, advanced notice of changes, providing reasons for the adjustments, and offering options like transitional discounts or legacy pricing can help mitigate potential customer backlash.

Q: Can frequent changes in pricing strategy impact customer loyalty?

Business experiences vary. For instance, Podpage didn’t lose any customers after its pricing change. However, sudden and frequent price changes without clear communication can also harm customer loyalty.

Q: How do pricing changes contribute to overall business revenue?

Optimized pricing strategies can help businesses garner additional value from their services or products, thereby increasing their overall revenue.

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As another eventful year draws to a close, it’s not just the festive season that awaits us. With global inflation soaring, it feels like a waiting game, counting down the moments until the impending recession hits. Some argue it already has. And along with the looming recession comes some tough decisions for business owners. They’ll have to decide if—and how much—they should raise prices in the coming year.

But inflation is nothing new, and while some big names in SaaS (like Slack or Salesforce) increased their prices this year, many didn’t. So why might this year be the time to change? Morad Elhafed, Forbes council member and general partner at Battery Ventures, points out that it’s been a long time coming—it just wasn’t always as obvious to us.

“Along with rising revenues, internal costs are growing. Even before the current inflation trend, prices rose steadily—but they were obscured by faster customer growth,” explains Elhafed.

That glorious growth can be attributed to the transition of organizations to a hybrid SaaS solution during the COVID era.

“If you look at 2014-2018, coming out of that great financial crisis, there was about 10%, 12% of the companies were in what we call a native cloud environment. Today, it’s closer to 35%.” says Robert Smith, Vista Equity Partners CEO and Founder.

But inflation was always inevitable post-pandemic. The situation was not helped by Russia’s invasion of Ukraine, which raised global prices across the energy, food, and transportation sectors. It continues to cause supply chain issues and chip shortages that affect hardware production, impacting the tech and IT industry.

Now, labor costs, talent shortages, and rising cloud storage costs are on the tip of everyone’s tongue. They’ve caused many SaaS companies to take a step back from adopting innovation; sustaining innovation will outperform disruptive or category creation in the coming year.

Whereas traditional businesses pass costs onto customers using a cost-plus pricing model, this doesn’t work quite the same in SaaS. Value-based pricing tends to be the strategy of choice in subscription-based businesses. And because of SaaS long contract periods, if operating costs go up during the customer lifetime, it puts your profits at risk. This is why inflation has the highest impact on SaaS businesses using the freemium pricing model.

Let’s spare a thought for Amazon. While still the world’s largest online retailer, it also recently became the world’s first public company to lose a trillion dollars in market value as a result of multiple factors including inflation.

As usual, there’s no clear cut answer on how to remedy inflation and whether to raise prices or stick. What works for one business won’t necessarily work for another, but these are some common considerations that will help business leaders at the beginning stages of internal pricing strategy discussions.

Learning from past recessions

Typically, businesses deal with recessions or periods of high inflation by cutting costs. For SaaS businesses, that often means their labor force ends up (quite literally) in the firing line. True to form, many big players have executed their largest layoffs ever this year, with Twitter infamously reducing their employee count by half before hiring some back in a bizarre and chaotic twist.

A move like this may seem extreme, but software CEOs are well aware of the dangers of inflation. And it seems no one in the industry is immune from the effects. Even historically steadfast Microsoft has predicted a slowdown through at least the end of 2022—despite rolling out its own price increases of 15-20%.

Twilio took a similar approach to forecast and cut their annual revenue growth targets in half, citing macroeconomic forces. But COO Khozema Shipchandler remains positive, saying “we’re still growing really fast in spite of the economic headwinds that we’re facing, and I think as the economy recovers, we’ll be one of the first out.”

That being said, the SaaS industry as a whole isn’t showing much sign of slowing down. Gartner has forecast industry growth of 20.7% to a total of $591.8 billion in 2023, its vice president analyst declaring cloud computing as a “bastion of safety and innovation”. A comforting thought in these uncertain times.

Even during the Great Recession of 2009, SaaS didn’t much falter. In fact, some businesses actually thrived. Take EchoSign, for example. It had its best quarter in history! Though a closer look at the metrics does reveal some disturbance. SMB churn increased as businesses struggled to stay afloat. And while enterprise customers still renewed, upsells became harder. Those on a per-user pricing plan were reluctant to add more seats.

The fact remains, between 2008 and 2010 over 80% of SaaS companies actually grew. And other huge SaaS names, like Calendly and Slack, were just being born. Even when times were tight, various SaaS pricing models and pricing strategies allowed customers to become familiar with the products, albeit with restrictions:

• entry level (tiered pricing model),
• upper limits (usage-based pricing model),
• reduced features (feature-based pricing model), or
• limited seats (per-user pricing model).

Once they had the customer base, then all they needed to do was upsell—much cheaper and easier than attracting new customers.

“My career has been defined by recessions, I think a lot of people’s are. Recessions have always been hard, but they’re also formative moments to focus and ultimately improve,” sums up Cloudflare’s CEO Matthew Prince.

The case for raising prices with inflation

Upon first thought, a price hike in line with the current rate of inflation seems logical and reasonable. Potential disgruntled customers aside, there are benefits to be had. The additional revenue could help account for the increased cost of labour (driven by inflation and talent shortages) that’s expected to last well into this next year. It may be what your business needs to avoid brutal layoffs.

Then there’s the issue of value perception. If you don’t raise your SaaS pricing, people may assume your product is worth less—especially when your competitors are revamping their pricing packages.

If, like 54% of SaaStr readers, you intend to raise SaaS pricing this year, here are some more advantages you can expect.

Increased MRR and ACV

Monthly recurring revenue (MRR) and annual contract value (ACV) will go up—data points that will please your stakeholders. Rethinking your SaaS pricing strategy will also improve your net revenue retention (NRR). This key metric for boards is vital for protecting and growing revenue from existing customers.

Nathan Latka adds a spin on this. His advice for businesses going into next year, also supportive of a SaaS pricing increase, is to “figure out how to get your [customer acquisition costs] CAC back instantly”. The Fouderpath founder said during a SaaStock interview, “Instant CAC payback period is way more important than a really strong LTV:CAC ratio.”

Increased profits

In recent years, SaaS profitability has taken a back seat to growth. With venture capital aplenty, businesses were more concerned with attracting an enormous user base first and monetizing later. We can clearly see this through the rise (and, now, fall) of the freemium pricing model. But as funding has become more scarce, businesses are looking for ways to generate revenue and turn a profit. Luckily, variable operating costs are usually fairly low in the world of SaaS. This means the simple act of raising prices could increase your profit margins.

Sam Blond, Partner at Founders Fund, explains more.

“In 2021 there was a lot of emphasis on top-line revenue growth, what percentage year-on-year was the business growing, and less emphasis on things like gross margins and quality of revenue,” he says. But instead, being hyper-focused on gross profit dollars can “manifest in driving behavior in the company such that you improve gross margins and ultimately improve the value of the business”.

That would be quite the achievement in the current climate, with tech valuations in stark decline at every turn.

David Sacks, co-founder of Craft Ventures, expands upon this. He says that the most important things in a downturn “are growth, burn, and margins”.

“The best way to prepare is to cut costs and extend your [cash] runway.” Basically, you have enough in the bank to avoid asking investors for more funding. It also minimizes the risk of having a down round that could damage your business’s valuation.

Harrison Rose, founder of GoodFit agrees. Talking at SaaStock 2022, he said “I’d be looking an awful lot at your cash runway. Make sure as much as possible you’ve got over 12 months.”

But it’s not just about doing what’s necessary, according to some SaaS leaders. The impending recession is an opportunity. Inaction might mean leaving money on the table.

“Properly setting prices is an untapped opportunity for SaaS providers to squeeze more value out of what they offer,” notes James Wood, Senior VP at Insight. “While this was also the case well before the current inflationary environment, now the opportunities are even greater—while the risks of not adapting your pricing are more severe.”

There may be risks, but there are also strong arguments for not raising prices with inflation.

The case against raising prices with inflation

In a recession, the price elasticity of demand goes down (how demand changes according to a change in price). This is often accompanied by an increase in cross-price elasticity (when a buyer is more likely to change supplier due to a price change). In this case, the preferred strategy is to keep prices steady and reinforce your value-based pricing model. Upsetting customers to make a quick buck isn’t worth it. Instead, double down and invest in long-term relationships.

You could put net revenue retention at risk

When you get notified of a price increase, what’s your knee-jerk reaction? Most of us instinctively look elsewhere. Even if we’re happy with a product or service, the change in cost acts as a catalyst. It’s an invitation to re-evaluate our business relationship, compare suppliers’ pricing tiers and pricing models, and see what else is out there.

Many customers will resolve to stay. But it’s likely that some will churn. The difference with SaaS is that it may take 2-3 years to see the churn in your data. Churn is a lagging indicator. This is especially true for enterprise clients because of the time it takes them to deploy software and use it sufficiently to evaluate its worth. So, you may not recognize the damage until it’s too late.

So, increasing SaaS pricing might uplift your business’s MRR and ACV, but it will likely be short-lived. It’s a temporary fix. It could be the quick boost you need to reach a monthly, quarterly, or annual target you’d otherwise miss. But more importantly, it doesn’t help with new customer growth.

The bottom line? Don’t use a price increase to mask other issues.

The long-term consequences could be serious. Presenting loyal customers with a shock price increase will almost definitely hurt your net promoter score (NPS). The knock-on effect means you’ll lose referrals, case studies, and other valuable second-order revenues.

This is one of the reasons Nivas Ravichandran, head of marketing at Spendflo, urges SaaS businesses to “not follow growth at all costs”. The true cost of upending your pricing strategy outweighs the immediate gains.

With that rather foreboding caution, it’s worth mentioning that there are also great benefits to sticking with your pricing strategy.

Competitive edge

Jason Lemkin warns that any increase, no matter how small, will trigger customers to look at other vendors. So, use this to your advantage! Keep your prices low while competitors raise theirs. This allows you to beat them on price when their customers inevitably begin looking elsewhere.

Now’s your chance to show your customers, and potential customers, just how stable and trustworthy your brand is. Focus on cultivating long-term relationships with your buyers and customers. You may not increase MRR, but you can retain your existing customers with the option to upsell them when times are less tough in the future.

If you still want that sweet MRR bump, then instead of increasing SaaS pricing you could increase your service offering. Improve the customer experience, or add value in another area of your product. Release some new features. Using a value-based pricing model, you could make the cost increase optional and frame it as an upgrade or benefit.

Another way to get a competitive edge during an inflationary period is with a usage-based pricing model. This empowers your customers to scale back when they’re under pressure to do so, then scale up again when the economy recovers and they can be more liberal with their budget. Compare this with a flat rate pricing model scenario, where the same customer would likely churn.

Robert Naegle is vice president analyst at Gartner. He suggests CIOs critically evaluate the spending they request and optimize the assets they already have before looking at price increases. “What I think this time really represents is an opportunity for many IT organizations to fine-tune their operations and look more aggressively at, ‘Are we doing the right sort of things?'” Turn the mirror inward, first.

Having effective pricing discussions

For SaaS leaders to have effective discussions around whether or not a significant pricing raise will be effective for their business, they must consider some important things.

• Is the increase necessary: could you leverage AI or automation to save labor costs and optimize spending instead?
• How is inflation is affecting your customers’ customers?
• Is your customers’ willingness to pay (WTP) increasing or decreasing?
• How does their WTP compare to the differentiated value you provide them (and has it changed)?
• What do the segments look like when you split customers according to their behavior when faced with challenges such as price increases?
• Is their industry countercyclical, i.e. can it profit well during a recession, like the pharmaceutical or educational industries?

Armed with this information, you can open a discussion about smart pricing strategies during this period of inflation. You should also consult industry data and see what competitors are doing before designing a solid value-based pricing strategy. Having a plan ready to respond to both competitors’ and customers’ responses is essential.

Ultimately, how you act in this year will set up what you’re able to do in 2025. Pricing changes should therefore be reversible, so your business remains agile. They should not necessarily set new anchor prices. Changes to your SaaS pricing strategy also provide the chance to layer in a new growth model, from sales-led to product-led to community-led.

Whatever you decide, the key is that price increases should be targeted (per segment) and always justified.

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Quick FAQs about SaaS Pricing and Inflation

Q: What impact does inflation have on SaaS pricing?

Inflation affects SaaS pricing by increasing operational costs such as labor, cloud storage, and other overheads. These rising costs often prompt SaaS companies to reconsider their pricing models. However, due to the nature of SaaS contracts, which are typically long-term, companies may find their profit margins squeezed if they don’t adjust prices accordingly.

Q: Why are some SaaS companies raising their prices in response to inflation?

Many SaaS companies are raising prices to offset increased costs associated with inflation, such as higher wages, energy expenses, and supply chain disruptions. Additionally, maintaining a competitive edge and ensuring that the perceived value of their software aligns with market expectations are also driving these price hikes.

Q: How do SaaS pricing models differ during inflation compared to traditional businesses?

Unlike traditional businesses that may use a cost-plus pricing model, SaaS companies often rely on value-based pricing. This model considers the value delivered to the customer rather than just covering costs. During inflation, this approach allows SaaS companies to adjust prices based on the value perceived by customers, rather than strictly on increased costs.

Q: What are some common SaaS pricing strategies during a recession?

During a recession, SaaS companies might employ strategies such as maintaining stable prices to retain customer loyalty, implementing usage-based pricing to allow customers flexibility, or introducing new features to enhance perceived value. These strategies help mitigate churn and maintain steady revenue streams.

Q: How can SaaS companies navigate pricing decisions during economic downturns?

SaaS companies can navigate pricing decisions by analyzing customer segments and their willingness to pay, leveraging automation to reduce costs, and focusing on strengthening long-term customer relationships. It’s crucial to balance short-term revenue goals with long-term customer satisfaction and retention.

Q: What challenges do SaaS businesses face with freemium pricing models during inflation?

Freemium pricing models can be particularly vulnerable during inflation because they offer basic services for free, relying on upsells for revenue. If operating costs rise significantly, these businesses might struggle to convert free users to paying customers, potentially impacting their profitability.

Q: How does customer behavior influence SaaS pricing strategies in an inflationary economy?

Customer behavior, such as increased price sensitivity and willingness to switch suppliers, can significantly influence SaaS pricing strategies. Companies must monitor these behaviors closely and adjust their pricing models to ensure they remain competitive while still meeting customer needs.

Q: What are some potential risks of raising SaaS prices in line with inflation?

Raising prices can lead to customer churn, especially if competitors maintain lower rates. It can also affect the company’s Net Promoter Score (NPS) and reduce referrals. SaaS companies must carefully assess the market and customer sentiment before implementing price increases to avoid negative impacts.

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Ah, freemium! Since the term was coined back in 2006, it’s been the source of many debates. Is it the perfect pricing fix—the secret strategy sauce? Or is it a disaster in disguise, waiting to sink unsuspecting SaaS businesses?

Depending on who you ask, you’ll get wildly different responses. Canva, for example, has made history with its use of the freemium pricing model and is now one of the highest-valued startups led and founded by a woman, at a cool $40 billion USD.

Then there are the not-so-successful stories, like the LMS business Docebo which trialed a free plan back in 2014 and didn’t get one single conversion from 7,000 signups. Absolutely zero. (Don’t worry—Docebo has since found its groove and now turns $138.2 million in ARR).

It seems that many businesses are finding the cons outweigh the pros when it comes to the freemium business model. Have we seen the rise and fall of its popularity and efficacy? Are its glory days over?

Related: How to Run Pricing Strategy Experiments with Your SaaS Billing Software

What is a freemium + upsell strategy?

Freemium is a portmanteau of the words free and premium (or a “werge”—word merge—as I like to call it).

The freemium business model is simple: attract more users with free product access, then hope that enough of them will convert to paying customers once they’re hooked.

There are a few common ways to convert users:

• Withhold premium features on the free plan (how Mailchimp does with A/B testing)
• Implement a usage limit for freemium customers (like Dropbox’s 2 GB of storage)
• Offer an ad-free experience for upgrading to the paid plan (as Spotify does)

In practice, turning freemium users into paid users is tricky. Many people are happy with just the basic features—especially when they’re free. It’s one of the reasons many people view freemium as more of a marketing strategy than a revenue model. It can be great for customer acquisition, attracting many new users. But with low conversion rates, those users don’t necessarily translate to profit.

The freemium model is a numbers game. As Phil Libin, Evernote CEO says, “The easiest way to get 1 million people paying is to get 1 billion people using.”

Jason Lemkin of SaaStr has done the math, too: he reckons you need at least 50 million active users to reach $100 million in annual recurring revenue (ARR) with a freemium strategy.

Freemium or free trial?

They might sound similar, but the freemium model and free trial strategy are very separate things. Free trial users get unpaid access to a product, or part of it, for a limited time only. Freemium users, on the other hand, get free access indefinitely.

For opt-in free trials (no payment details required on sign-up), a benchmark conversion rate is around 25%. In an opt-out free trial scenario (credit card details required from the get-go), that number is even higher—up to 60%. By stark comparison, the freemium strategy offers up average conversion rates of just 2-5%.

Other differences between free trials and freemium pricing include their compatibility with go-to-market (GTM) strategies, blue vs. red ocean businesses, and target audience.

How has the industry’s view on the strategy evolved over time?

One VC firm described freemium as “dying a slow death” in 2016, only to do a 180 and tout the strategy as “cutting edge” in 2020. But OpenView isn’t the only one to change its mind.

Back in 2015, Lemkin of SaaStr said, “The pendulum has definitely swung back away from freemium to enterprise. Most of the B2B IPOs that have been successful, like Salesforce and Workday, are all enterprise-y. They’re not freemium.”

His tune changed in 2022, when he announced, “Freemium is back!” albeit with the caveat that “Freemium alone is not enough.”

Once seen as the absolutely essential SaaS model, responsible for the success of unicorns like HubSpot and Wix, it feels a bit like the Golden Age of Freemium is over. In recent years, as more and more SaaS businesses were drawn to the freemium model, failures were inevitable. The SaaS industry started to see the dark side of freemium emerge.

A major pitfall of the freemium model is its inability to bring direct revenue. Your paying customers must generate enough revenue to carry your free users.

Well, either that or you need to go running to your investors every time the cash dries up. That tends to get real old, real fast—especially in the current economic climate, as we face soaring inflation and recessionary risks. The venture capital bull market has run its course. Startups can no longer afford to lose money for the sake of growth.

Thankfully, the industry is realizing freemium isn’t the only way to successfully employ a product-led growth (PLG) strategy. Innovative solutions like no-code demo platforms have made it possible for SaaS businesses with complex or privacy-heavy products to focus on product-led growth too, even when freemium isn’t an option.

How businesses’ execution of freemium models has changed over time

Is it really “RIP freemium”? Let’s have a look at the behavior of some B2B SaaS businesses that have recently used, considered, or dropped the freemium business model.

Qualaroo removed its freemium offering entirely

Qualaroo discontinued the free version of its product after realizing it wasn’t right for its target audience. “Our free and low-cost versions were anchoring our solution at a price point that did not support our revenue growth objectives,” explains Sam Ellis, founder and CEO. “New customers are now happy to pay the higher prices because they haven’t been conditioned to think of it as a cheap or free solution.”

Ellis is right: from a psychological perspective, potential customers associate cost with value. At the other end of the spectrum, it’s why premium pricing strategies work so well.

Qualaroo hasn’t shied away from all things free, though. While the entry-level plan now starts at $100 per month, it comes with a 15-day opt-in free trial and includes a 100% money-back guarantee. This satisfaction guarantee removes the risk for an audience who is more concerned with the quality of the product and service than saving a few bucks.

If you do end up going down the freemium pricing path, the lesson here is to know your target customers and their journey through and through. Understand your user personas, what they want, and how they want to get there to ensure your offering is aligned.

Qwilr switched from free trial to freemium and back again

The folks at Qwilr have been through their fair share of freemium blunders. After rolling out their freemium product, COO Mark Tanner noticed a few things. Firstly, virality went up, and the user base increased—which initially seemed very positive.

However, as Tanner points out, “Free users are very viral for other free users. Paid users, even though their virality is maybe not always as high, are much more likely to be a referral engine for other paid users.” Qwilr’s increase in free users didn’t translate to more profit, as is often the case with the SaaS freemium model.

Another thing that happened was the sales cycle elongated from around 14 days (including a free trial period) to around 60 days with the freemium model.

“There is a little bit of magic with the 14-day trial, in that if you go on [the app] and you know that you’ve only got 14 days, the amount of time that you spend in the app […] is 50% longer on average,” notes Tanner. There was no longer any urgency. Making the cycle over 4X longer negatively impacted everything from cash flow to conversions to the sales team’s confidence.

Tanner also warns against freemium products’ influence on brand trust and reputation. “If freemium is just a downgraded version of your core product, [customers’] first impression of your product is not as good as it could be. And so I think you need to be careful about that.”

If free plans only provide access to core features, users might assume that advanced features are not available. These “missing features” could be the reason they decide not to pay the subscription fee and convert to premium users.

The future of freemium SaaS

SaaS experts have conflicting opinions about whether freemium works anymore. The general consensus is a freemium pricing model (or, more accurately, a customer acquisition model) can be successful in the SaaS world, but only when certain specific criteria are met.

For example:

• the product must be easy to deploy and simple to use,
• typically, it should be in the B2C space (though not always—think Zoom or Slack),
• the business should have been around for a few years,
• the business should have low marginal costs,
• the saas freemium model should not replace sales agents,
• it should follow a disruptive GTM strategy, and
• your platform should have the infrastructure to support a mass audience.

So, is it better to stick with the 86% of B2B SaaS businesses that prefer to offer a free trial over a freemium plan? Maybe. Or, you could ditch freemium, increase your prices by 10X, and be more profitable with happier customers than ever before!

So what about historically free apps and services, like WhatsApp, Quora, and Firefox, who have recently joined the freemium product club, then? Do they know something we don’t? Or do the same rules not apply to these large, legacy software vendors? (Hint: when you’re owned by Meta and you’ve got hundreds of millions—or even billions—of users, things do look a little different.)

As usual, there is no singular answer when it comes to what’s best for your business. The freemium trend is not dead but has evolved. Where there are successful examples, there are also terrible failures: the trick is finding the right balance for your unique business.

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Quick FAQs about Freemium SaaS Tier

Q: What is a freemium business model in SaaS?

The freemium business model in SaaS involves offering a basic version of a software product for free, with the goal of converting free users into paying customers for premium features. This model capitalizes on attracting a large user base with free access, while monetizing through upselling to premium tiers that offer additional features, higher usage limits, or an ad-free experience.

Q: What are the advantages and disadvantages of the freemium model?

Advantages include increased exposure and user acquisition, a broader customer base, and the ability to collect valuable user data. However, disadvantages can include low conversion rates, challenges in monetizing, potential brand dilution if the free version is too limited, and the risk of free users never converting to paid plans.

Q: How does the freemium model differ from a free trial strategy?

The freemium model offers indefinite free access to basic features, whereas a free trial provides temporary access to premium features. Free trials often have higher conversion rates because they create urgency and showcase the full value of the product, while freemium relies on long-term user engagement to drive conversions.

Q: What are some successful examples of SaaS companies using the freemium model?

Successful examples include Canva, which has effectively used freemium to become one of the highest-valued startups, as well as Dropbox and Slack, which have leveraged freemium to drive significant user growth and engagement.

Q: What is a typical conversion rate for freemium SaaS products?

Freemium conversion rates typically range from 2% to 5%. These rates are generally lower than those of free trials, which can reach up to 25% or more, depending on the strategy and execution.

Q: Why might a SaaS company choose to abandon the freemium model?

A SaaS company might abandon the freemium model if it fails to convert enough free users into paying customers, if it finds that the model does not align with its revenue growth objectives, or if it perceives that the free version is undermining the perceived value of the product.

Q: What strategies can improve freemium conversion rates?

To improve conversion rates, companies can carefully balance the features offered in the free version, create compelling reasons to upgrade, employ targeted marketing campaigns, personalize user experiences, and ensure that the product is easy to use and deploy.

Q: Is the freemium model still relevant in today’s SaaS market?

Yes, the freemium model remains relevant but is continuously evolving. It can be part of a successful product-led growth strategy if implemented with a clear understanding of user personas, market conditions, and competitive positioning. SaaS companies must adapt it to their specific business goals and customer needs to succeed.

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