Seat-Based Pricing: Is It Still the Right Choice for SaaS businesses?

There are more and more stories of companies switching from seat-based pricing to usage-based pricing, just as we did at Livestorm back in 2022.

This post from Help Scout's CEO also illustrate the main reasons why they decides to ditch their seat-based model to switch to a usage-based pricing model.

There has also been a big push from usage-based pricing model in the past months, in the the wake of the emergence of AI-based SaaS businesses.

But does that mean seat-based pricing is due to disappear? This seat-based pricing model actually does present a lot of advantages for certain types of SaaS businesses.

In this article, we will explain which businesses benefit most from this seat-based pricing model. We'll highlight its main advantages, and we will show where seat-based pricing falls short. Finally, we'll cover key product impacts to consider when implementing this model.

#1 Seat-based pricing: why it emerged as the go-to pricing model

“Monetizing the cloud”

The "seat-based" pricing model emerged as a natural way to monetize the cloud's benefits.

With software moving from on-premise to the cloud, businesses enjoyed significant advantages: no installation required, continuous updates from tech teams, and access to on-demand business models.

More importantly, this shift allowed all team members to access a product effortlessly. A simple link shared by one user replaced the hassle of installing licenses on individual devices.

Software companies saw this seamless onboarding as an opportunity. Their thinking was simple: “If customers can easily add more team members, let’s charge per team member.”

Very Predictable Revenues

Seat-based pricing delivers highly predictable revenue.

Each month, you know how many users each customer has, making next month’s revenue easy to forecast. This holds true regardless of how much individual users engage with the platform.

For VC-backed companies, predictable revenue is invaluable. It simplifies fundraising, as investors value consistent, reliable growth.

Driving Net Negative Churn

Net negative churn occurs when MRR grows without acquiring new customers. This happens when upselling (e.g., adding more seats) exceeds the revenue lost from churned or downgrading customers.

Net churn rate is calculated as:

(Churned MRR - Expansion MRR) ÷ (MRR at the beginning of the billing period)

If Expansion MRR > Churned MRR, you achieve net negative churn.

This metric is highly valued by VCs as it demonstrates strong growth potential within the existing customer base with a product that can scale its use case to a wide variety of users.

Easy to Understand and Implement

Seat-based pricing is straightforward. It’s built on a single, easy-to-grasp parameter: the number of users.

While there are specific challenges in UX and billing architecture for this model, implementing it is relatively simple. Modern SaaS-focused billing software has made this process even smoother.

#2 Seat-based pricing: Best-Fit Companies

Collaboration-Focused Products

If your product’s core value is enabling collaboration through features like document sharing, live editing, and user roles, its value grows with the number of users.

Simply put, more users mean more collaboration and greater utility.

Seat-based pricing is essentially a subset of usage-based pricing, where the billable metric is the number of users collaborating.

Examples like Miro, Notion, and Whimsical illustrate this: the more people working together in a workspace, the easier it becomes to collaborate and drive projects forward.

Miro is an example of a SaaS that fosters collaboration

Tools like Zoom or Whereby enable remote video communication.

Their pricing, based on the number of hosts, reflects how the product scales: the more hosts, the greater the benefit to the team exchanging remotely.

Products Delivering a service for a Broad Range of Employees

These products focus on delivering value to a wide array of team members rather than facilitating communication.

For example, 1Password, a password management tool, helps employees securely store and manage passwords—offering value across the entire organization.

Similarly, HR-focused products like Leeto (employee benefits) or Swile (meal vouchers) provide services applicable to everyone in the company.

Niche services for specific teams generally don’t work as well.

Even if the team grows with the company, it’s unlikely to ensure negative churn.

Broad applicability is key to maximizing value and retention.

#3 Seat-based pricing: Product requirements

UX in Seat-Based Pricing Products

To enhance user experience in products with a seat-based pricing model, consider adding the following features:

1. User Management Dashboard

   Include a clear dashboard in account settings to track the number of team members in the workspace. Add features that allow to easily handle team member invitations and role management. Provide options to assign or edit roles where applicable.

   For example, in Notion, you have a nice task board that enables you to visualize all your team members and also edit their roles

   
   

   

   
   

   
   

   
   

2. In-Product Member Addition and Removal

   Enable adding team members directly where collaboration occurs. Use intuitive features like share links or "add member" buttons. In Whimsical, you can add a team member on the document you're working on.

   
   

   

   
   

Security requirement

In some seat-based models, users may attempt to share generic accounts (e.g., sales@mycompany.com) to reduce costs. This behavior indicates potential issues with the pricing model, notably if you don’t fall into one of the two categories listed above (”Collaboration-Focused Products” or “Products Delivering a service for a Broad Range of Employees”).

To address this, implement security measures to flag accounts logging in from different IP addresses using the same credentials.

Billing Best Practises

Accurate billing in a seat-based model requires:

1. Upgrade/Downgrade Handling

   Ensure seamless updates to billing when team members are added or removed.

2. Pro-Rated Charges

   Charge proportionally for seats added mid-billing cycle. For instance, adding a user halfway through the billing period should result in half the standard charge for that period.

Billing systems should support these calculations automatically.

Pricing Page Essentials

There are few specific requirements that your pricing page should have if you have a seed-based pricing mode.

1. Providing a definition of a seat

Provide a clear explanation of what a "seat" means, particularly if roles vary (e.g., editor vs. read-only). Use tooltips or visuals, like Productboard’s tooltip for defining a "maker."

For instance, Productboard’s pricing page make sure prospects can easily visualize the definition of a maker via a tooltip.

Productboard provides a definition of the seat (the “maker” role) via a tooltip within the plans

2. Interactive Pricing Slider

Incorporate a slider to calculate costs based on user count, especially if per-user prices decrease with volume. This helps prospects visualize costs effectively.

3. Transparent Upgrade/Downgrade Mechanism

Clarify how upgrades or downgrades work with examples. FAQs should explain pro-rata charges when seats are added during an ongoing billing period.

With these features, your pricing page will simplify decision-making and build trust with prospects.

#4 Key Shortcomings of Seat-Based Pricing to Consider

Before adopting a seat-based pricing model, evaluate these potential drawbacks to ensure it aligns with your business goals:

Misalignment with Costs

Seat-based pricing doesn’t reflect actual usage, which can lead to revenue loss from highly active users.

For example, in SaaS products with AI-based features, increased usage significantly raises costs. A user consuming 10x the resources costs you 10x more, but their price remains the same.

Recommendation: If your product is AI-powered, avoid seat-based pricing. Usage-based models provide better control over margins.

Customer Dissatisfaction from Unused Licenses

Even with dashboards to track active users, many customers fail to monitor usage regularly.

Over time, customers may notice they’re paying for unused licenses, leading to dissatisfaction and increased churn.

Solution: Proactively encourage license monitoring or consider pricing models that adapt to actual usage.

Limited Expansion Potential

Products tailored to niche roles or specific customer segments face challenges scaling revenue.

The number of potential users within a customer’s organization is capped by the size of the target team.

Implication: Expanding average revenue per account becomes difficult in these scenarios.