Choosing the best subscription pricing model for your startup is like playing blackjack. You want the friendly gambler next to you—your customer—to win.
At the same time, you don’t want to lose. And it is a guessing game. But you can either fly blind or get probability on your side.
Sell with the wrong pricing model and you’ll either end up losing buyers or leaving money on the table. You could charge per seat and then realize your customer only needs five seats to make millions of dollars off your product. Or your team decides to price based on API calls, only to learn that your top enterprise prospect only accepts RFPs with per-user pricing.
In this article, we’ll share how you can develop or refine your subscription pricing model to improve customer acquisition without missing out on revenue.
What is a subscription-based pricing model?
A subscription pricing model is a monetization framework that allows customers to continuously use your products or services at a set price by paying for them on a recurring basis—typically monthly or annually.
Subscription pricing is most commonly used by software-as-a-service (SaaS) businesses and presents a win-win scenario for buyers and sellers:
- Buyers don’t have to keep repurchasing a solution they need and have the flexibility to cancel their subscription once it comes to an end.
- Sellers get a somewhat predictable source of revenue and don’t have to hunt down their customer base to renew all the time.
That doesn’t mean revenue teams are off the hook. Budgets are low, competition is high, and buyers are always shopping around. Which makes proving and growing your value only more important. It’s 6-7x more capital efficient to retain existing customers than acquire new ones.
Subscription pricing keeps incentives aligned. Businesses have to make customers happy in order to boost retention, increase customer lifetime value, and drive product referrals. Customers don’t have a reason to leave as long as they’re happy and don’t have a bad experience.
As Tien Tzuo, Founder and CEO of Zuora, puts it, “Subscriptions are the only business model that is entirely based on the happiness of your customers. Think about it—when your customers are happy, then they’re using more of your service, and telling their friends, and you’re growing.”
What to know before picking a pricing model
With pricing, doing your homework before the test pays off. There are three questions every subscription business should answer before determining its pricing structure.
1. Customer segmentation and packaging
The first question is about matching customer segments to product features. How do different types of customers get the most value out of your product?
Salesforce has over 150,000 customers. If they offered the same pricing plan and features to everyone, that number would likely look a lot smaller.
Startups aren’t looking for enterprise features from their CRM like 24/7 support. That’s why there’s a pricing plan tailored to each group of customers’ needs.
Buyers eyeing the essentials plan only need the bare minimum to get started on managing their sales process. They either don’t need or can’t afford more advanced features right away.
On the other hand, a prospect that’s willing to pay $150 per user upfront knows they have a use case for collaborative forecasting or workflow and approval automation functionality.
Each plan is designed for buyers that fit into different groups based on their stage of maturity and willingness to pay for certain features. A good market segmentation strategy helps you package your product correctly, regardless of which pricing model you decide to go with.
2. Value metrics and propositions
The second question is easy to ask but hard to answer. What value does your product deliver for customers?
By understanding your role in generating customer outcomes, you can capture the most amount of revenue. Chili Piper vs. Calendly is a good case study.
Calendly’s pricing is $8-$16 per seat because their product solves for easier scheduling. Their product is horizontal and caters to a lot of different use cases, from recruiting to sales.
On the other hand, Chili Piper charges $15-$30 per seat, along with a tiered platform fee based on the number of submitted inbound leads. Their vertical product solves for scheduling, lead routing, and form conversions.
It’s designed for marketing and sales teams that rely on a complete inbound solution to book demos and convert leads into customers. More demos and higher conversions mean yacht loads of money, whereas scheduling only generates boatloads.
That’s why Chili Piper can get away with charging so much more. They know their product provides a serious lift for revenue teams, so much so that they put this ROI calculator on the website.
3. Competitive landscape
The last question makes us face a tough reality. Which pricing models are typical in the market you’re serving?
If you’re a category incumbent, a competitor likely shaped the way your buyers are used to seeing pricing for your product already. Significant friction is created when you introduce a completely radical way of structuring your commercial terms.
Especially as you move upmarket, you’ll find that enterprise companies can be rigid in the way they buy. Here’s how Jeanne DeWitt Grosser, Head of Americas Revenue & Growth at Stripe, explains it:
“If you're going to do something differently, either your product has to be 10X better so that no one's really debating whether or not there's a relative comparison. Or you've got to know that if your product has a comp in the market and the market broadly prices fundamentally differently, you're probably going to wind up having to reverse engineer your pricing model into the existing construct”.
Sometimes you have to find a way to force-fit your pricing model into a company’s RFP process or risk losing the deal.
Subscription pricing models and examples
Most pricing experts split pricing models into two camps: SaaS-based and usage-based.
SaaS-based pricing refers to how typical software companies used to charge—through a flat-rate, per-user, or tiered pricing model.
Usage-based is relatively new due to the rise of apps and API-driven products, but really just boils down to volume-based and pay-as-you-go pricing. The more you use it, the more you have to pay.
In total, there are five different subscription pricing models that come up most often. Let’s discuss the pros and cons of each model so you can decide which one works best for your business.
1. Flat-rate pricing
A flat-rate subscription pricing model charges all customers a fixed price for the products or services they use.
Buyers typically get access to all features and are charged monthly or annually. Some of the popular ones include streaming subscriptions like Netflix and Amazon, or flat-rate shipping from FedEx.
As a buyer, you pay one fee and don’t have to worry about overages. It’s a buffet.
The benefit of this model is its simplicity and predictability. Customers can easily budget for what they’re subscribing to and feel like they’re getting a good deal. They’re likely to be more satisfied and loyal over time, which adds revenue stability for businesses.
Flat-rate pricing can also be a differentiator. If everyone else has complex, a-la-carte pricing models and you show up with a single price, it removes friction during the buying process.
Still, there are many flaws in the flat-rate pricing model.
In the software world, flat-fee pricing has recently fallen out of favor. Customers derive value in different ways from software products, which makes one price rigid in the value it can promote or capture. There’s also the problem of being able to cover server costs, which can be drastically different between a startup and an enterprise customer.
Expansion revenue accounts for over 30% of total sales for top SaaS companies. That’s nearly impossible to generate with flat-rate pricing because there are no cross-sell or upsell opportunities when you’re offering an already higher price for unlimited usage. You’d need to build and sell new products to make expansion revenue.
Also, if your product requires customer support or other add-ons, flat-fee pricing brings on a lot of risk. Imagine an enterprise company signing a five-year agreement for a flat fee, but then expects you to dedicate an exorbitant amount of resources towards implementation without paying for it. That’s an easy way to go out of business.
Flat-rate pricing example
Basecamp is a business management software that baked flat-fee pricing into its core philosophy. The founders decided per-user pricing would lead to focusing on their biggest customers instead of treating everyone equally.
“The problem with per-seat pricing is that it by definition makes your biggest customers your best customers. With money comes influence, if not outright power. And from that flows decisions about what and who to spend time on,” said David Heinemeier Hansoon, Co-Founder and CTO of Basecamp.
So instead of charging per user, they created an all-inclusive package for $299/month.
The only time flat-fee pricing makes sense is when your product solves a specific pain for one type of buyer, and your package thoughtfully limits access to features that come with variable costs.
Apple charges me a $3 monthly fee for iCloud+ storage. Both the buyer and seller have a predictable cost, and the service solves a common problem for lots of people. A flat fee makes sense here.
2. Per-user pricing
In the per-user pricing model, customers pay a set price for each license they subscribe to. Every new user costs an additional fee.
This framework is fairly straightforward for buyers and comes with a low barrier to entry. Instead of paying a large upfront cost, a customer can purchase a few licenses to test the waters and then add more as they see value or experience growth.
The “per unit” basis also enables businesses to scale as they onboard new users. If Salesforce lands an enterprise deal, they get paid for signing up lots of users and can continue to expand within the account.
Adopting the per-user pricing model also comes with many hidden costs. Similar to sharing your Netflix password with your friends, employees often share logins, which leads to lost revenue.
Also, per-user pricing doesn’t always correlate to the value metric of your solution.
Take Baremetric’s Recover product as an example. They charge based on a customer’s MRR because their product helps companies recover tons of revenue per month.
What if they charged $10 per user per month? 5 users could still recover the $26,100 in lost revenue, but would only be getting charged $50 per month by Baremetrics.
As a business, that leaves a massive amount of money on the table, which is why it’s dangerous to go down the path of per-user pricing without knowing your value metric.
Finally, many investors today look at an increasing average revenue per user (ARPU) as a guiding metric to determine future profitability. It’s hard to increase this number when you’ve set a price per user. In fact, per-user pricing de-incentivizes customers to produce daily active users, which can hurt your product’s stickiness.
Per-user pricing example
Figma’s pricing page is a good example of per-user pricing. They charge for each individual editor.
Per-user pricing makes sense for startups and businesses that don’t know the outcomes a customer can generate with your product, or the value metric varies significantly across businesses. Think Miro, Slack, and Asana.
It’d be difficult to say that Miro drives $X amount of revenue by allowing users to collaborate on a project because it can be used in many ways. That’s why they charge a per-user price with multiple tiers, also known as tiered pricing.
3. Tiered pricing
The tiered pricing model is a way of packaging or bundling products or services at different price points to serve the needs of unique groups of customers.
Typically presented as per-user pricing options, the model includes progressive pricing tiers and packages with different features.
This is the most common definition on the Internet, but you’ll often hear tiered pricing or tiered discounting referred to as volume-based pricing. We’ll cover that next.
If you visit 100 websites with subscription offerings, I’ll bet you’ll notice that tiered pricing is the most prevalent. That’s because it’s flexible.
Tiered pricing can be based on number of users, volume, or a combination of both. As a product manager, marketer, or sales leader, you can easily test and customize pricing and packaging based on customer segments and stages along their journey.
This is where market segmentation comes in extra handy. By understanding what service tiers customers need at different parts of their journey, you can easily align your pricing strategy to the value a customer is getting out of your product at that time. This structure forges a good path for growing alongside your customer base and developing long-term relationships.
However, the tiered pricing model can also lead to analysis paralysis for new prospects hitting a website, causing them to go with a competitor. Even worse, a newly converted customer could end up picking the wrong plan and deciding the product isn’t right for them. That’s churn waiting to happen.
Tiered pricing example
A common misconception is that tiered pricing is always structured per user. It’s not.
Zapier leverages tiered pricing but its model is volume-based. In their team plan, customers get unlimited users but have a cap on the number of tasks they can run in a given month.
Honestly, it’s hard to think of a business that couldn’t benefit from tiered pricing. If you have a complicated product, it might make sense to simplify pricing with one option instead of different tiers.
If you don’t have a deep understanding of your customer segments yet or think they might overlap, then a simpler per-user or flat fee structure might make sense.
4. Volume-based pricing
Volume-based pricing models offer price reductions when customers reach specific thresholds, such as hitting a certain number of users. This model is typically reserved for customers who expect a deal when they buy in bulk.
The best part about volume-based pricing is that it incentivizes larger purchases. If a customer pays $10 per license for the first 250 licenses but only $7 for the next 250, getting your full team onboarded feels like a bargain.
For the same reason, it can be a competitive advantage.
Smaller customers might not be too happy about this, however. If they’re stuck at under 250 licenses and have to pay the full list price while their larger peers are paying significantly less, they’re going to be upset.
Margins also decrease as customers add more licenses.
Tiered pricing example
My favorite case study of a company that implements volume-based pricing well is Atlassian. They do an amazing job of explaining how their model works on their website and making it simple for customers to understand.
For the first 250 users, customers pay $4/user. But for users 251 to 1,000, they only pay $3/user, which puts to the total average per user per month cost at $3.25.
This pricing method is meant for companies moving upmarket or focusing on the enterprise space. In general, discounting is a race to the bottom that reduces your product’s perceived value.
But a volume-based pricing structure could help push huge deals to the finish line and still allow you to keep pricing transparent.
5. Pay-as-you-go or usage-based pricing
Pay-as-you-go pricing models, often described as usage-based, charge customers based on how much they use a product or service.
All usage isn’t the same, however. Elena Verna, a PLG expert for B2B SaaS companies, offers two ways to think about usage:
- Input-based, which is charging for some “unit of usage” like number of users, API calls, or sent emails; and
- Output-based, in which customers pay for what they achieve with the product, like revenue, respondents, and booked demos. Pricing based on outputs makes it much easier to charge customers more.
Charging customers based on how much they use is a great way to scale alongside them. Going back to the showdown between Chili Piper and Calendly, you increase the value of your product by aligning closer to their outcomes.
Pay-as-you-go pricing works well for customers because they only pay for what they use. There’s a low barrier to entry.
On the flip side, companies that go with this model run the risk of onboarding new customers without making a dime. They also struggle with revenue forecasting because it’s not easy to predict a customer’s future usage.
Customers may not always be able to predict their costs either because it fluctuates with usage. They’re essentially incentivized to use less because they have to pay more. Unless you’re able to significantly profit from this model, showing bad product usage numbers like low weekly active users (WAUs) can scare investors away.
Usage-based pricing examples
Let’s take a look at a few examples to color in the concept.
Courier’s developer plan below is completely input-based because developers pay $0.005 for each notification. On the other hand, their business plan’s pricing model is based on the output, which is the number of monthly tracked users (MTUs).
It’s a smart way to split out pricing, because individual developers may not be ready to pay based on outcomes like MTUs, but still want to use Courier for notifications.
Businesses want to be able to send unlimited notifications to each user because their goal is to serve and grow their customer base. They’ve graduated from notifications being their value metric to it being users.
Stripe’s pricing model is also output-based with pay-as-you-go pricing. Their pricing structure is simple—they just tack on a small percentage and flat fee on every successful credit card charge.
However, there’s complexity and risk on the backend. Stripe only gets paid when their customers are getting paid. Pay-as-you-go pricing makes time to value and customer success a core component of a winning strategy.
Pay-as-you-go pricing makes the most sense for businesses that cater to a wide variety of customers. The model is attractive to small startup customers who want to be able to enjoy the same products as their enterprise counterparts at an affordable price point.
It also makes sense for products that don’t require high-touch onboarding because there’s an inherent risk that comes with taking on new customers.
Create quotes for any pricing model with Dock
As with all questions related to product, marketing, and sales, the answer to finding the best pricing model for your business is that “it depends”. You have to optimize for flexibility, revenue capture, and customer outcomes to improve your bottom line.
By understanding your buyers, the growth levers your product enables, and the competitive landscape, you can pick the best pricing model for your subscription business.
One challenge with tiered, volume-based, and usage-based pricing is creating price quotes during the sales process.
Dock’s Quotes and Order Forms help you implement any of the pricing models shared above in just a few clicks. Push deals past the finish line faster by sharing pricing quotes and helping buyers sign order forms in a few clicks. No more messy spreadsheets or complex (and insanely expensive) CPQ platforms.
To learn how to create your first five quotes and order forms for free, get a demo of Dock here.