Applying Three Part Tariff Pricing to SaaS

In the post entitled ‘A Structural Pricing Competitive Advantage in SaaS – The Three Part Tariff‘ Tomasz Tunguz writes about the three different pricing structures in behavioral economics and how they apply to SaaS pricing.

1. Linear Pricing: Pricing fluctuates solely on use. (Per seat basis.) 

2. 2-Part Tariffs: Base fee + usage fee. 

3. 3-Part Tariffs:  Base fee + free usage up to certain amount, then usage fee after exceeding free usage amount.

The author references Professor Yong Chao’s  game theory simulation of two competitors using the three different pricing structures.  This research was based on cell phone consumers. However, the author does a good job drawing conclusions based on this research that are applicable to SaaS.


SaaS Conclusions

– 3-Part Tariffs are always more profitable for SaaS than Linear Pricing or 2-Part Tariffs.

– 3-Part Tariffs work to deter competition in commodity markets, but increases competition in markets with differentiated markets.

– Customers end up using more of a service with a 3-Part Tariff.

The author concludes by saying: 
“Modern behavioral economics suggest that the most effective way of increasing prices in to structure a logical three part tariff. In addition to achieving more effective value based pricing, 3-part tariffs reinforce competitive advantage and potentially lead to more satisfied customers who may use the product more.” 

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