Keys to mastering the 5 main SaaS ERP subscription models

Usage-based pricing

With usage-based pricing, also known as pay-as-you-go pricing, companies only pay for the services they use. Usage-based pricing offers more flexibility and control over spending. Typically, this model is best for cloud storage services, data services and recurring billing services.

"Usage is consumption of resources," said Nick Brigman, vice president of digital strategy and client enablement at CompuCom, an IT managed services company based in Fort Mill, S.C. "Usage could be based on storage and it could be triggered by petabytes, terabytes, etc. We're also seeing time-dependent usage, which is the emerging element of the market where I might be charged by the minute, so it's really about how long [the service] is active and actually consuming resources."

The problem with usage-based pricing from an enterprise perspective, however, is that it's hard for companies to predict their costs for budgeting purposes, according to Matt Klassen, vice president of product marketing at Cherwell Software LLC, based in Colorado Springs, Colo.

"Most companies want to know when they sign a contract what they're going to be paying -- at least they want a maximum," he said. "And if usage-based says, 'hey, it's only going to be up to x, but it could be less,' that's a good thing. But if it's x-plus, that's a bad thing for most organizations."

Per-user/per-seat pricing

Per-user or per-seat pricing is among the most popular pricing models because it's easy for buyers to understand: the more users they add to their accounts, the more they pay.

According to a recent survey by the KBCM Technology Group, 36% of 212 companies surveyed opted for this model, while 29% chose usage-based pricing.

While popular, this pricing model might not be advantageous for every enterprise considering SaaS ERP. If a company is trying to push out a platform to the entire organization, having it be limited by the number of seats -- or having the costs be incrementally higher by the number of seats -- isn't advantageous, said Seth Lippincott, an analyst at Boston-based Nucleus Research.

"If it's a point [product] and they're looking to empower just one department or one area of the business, it makes more sense for them, from a marginal costs perspective, to have it be by number of seats," he said.

Per-active-user pricing

With per-active-user pricing -- a variant of per-user pricing -- organizations can add as many users as they want and they'll only be billed for active users. This pricing model works well for large enterprises, according to experts.

Tiered pricing

A tiered pricing model offers different plans -- usually three, such as basic, pro and enterprise -- with different features and prices.

"With tiered pricing, you have some metric that is based on company size, revenue [or] complexity in terms of how the product is priced," said Ranga Bodla, head of industry marketing at Oracle NetSuite, a SaaS ERP vendor based in San Mateo, Calif.

Tiered pricing is the traditional SaaS pricing model, according to Klassen.

"It's the tried-and-true model," he said. "I've worked for about five or six enterprise software companies that have offered SaaS models and I would say the leader, in many instances, or at least the company that was perceived as the most aggressive growth company in the market offered a very simple tiered model."

The key with the tiered model is the number of tiers and what's included in the tiers, Klassen said.

Freemium

The freemium pricing model offers basic SaaS ERP that's free to use and could include one app, such as CRM. This model is then supplemented by paid versions.

For example, a vendor could offer subscription pricing for an enterprise version at $25 per user, per month billed annually, plus the costs of additional features, to get customers to upgrade to the paid plan.

Flat-rate pricing

Flat-rate pricing is the simplest way to buy a SaaS ERP application: The vendor offers one product with one set of features -- and, therefore, no customization -- at one price. Typically, the service is billed monthly or annually, with vendors offering discounts on annual or longer-term subscriptions.

"Flat-rate pricing has no other charges either for additional users or additional consumption," Brigman said.

According to Klassen of Cherwell Software, flat-rate pricing comes up occasionally because it has the benefit of being extremely simple.

This pricing model also means there is a cost for a certain service for a given time period, typically annually. However, some vendors offer discounts to customers that sign three-year contracts, although they bill them annually.

"Flat rate would be the closest thing to what used to be enterprise licensing," Klassen said. "[Vendors] like Microsoft are famous [for] doing enterprise licensing, and they still do even with SaaS because the world really is hybrid. There are a few companies that live in the cloud, especially smaller companies, but the enterprise is messy and hybrid."

However, most vendors that sell SaaS licensing don't offer flat-rate pricing, or they do it very infrequently, he said.

Bottom line

From a vendor perspective, SaaS pricing is usually a combination of different pricing strategies, Bodla said.

"For example, it could be a base fee plus users and the cost goes up as you add users," he said. "You might also have a user-based pricing model, but then for certain types of functionality that are add-ons, or for add-on modules, it's a flat rate."

From a user perspective, it is important to consider what the pricing will look like as the organization evolves, he said. The challenge is to consider what costs will look like in three to five years.

Enterprises also need to think about what's included in per-user pricing.

"Even on day one, you might not use all of that functionality; you might use it six months or a year down the line or even 18 months down the line. And if the cost of the functionality is included [from the beginning], you're not incurring any additional costs as you grow," Bodla said.