4 types of subscription pricing models
The four common subscription pricing examples for subscription companies are flat rate, tiered, per-user, and usage-based. Each pricing model works best in different situations and scales according to different factors. Choosing the right model can make or break your profit margin.
1. Fixed / flat-rate pricing model
Fixed pricing stays simple: a single product, a fixed set of features, and a fixed monthly price.
Basecamp offers flat-rate pricing on its project management software.
Flat-rate pricing is easier to communicate and easier to sell; if you're adding valuable features, simply raise your rate. If you add additional products, the fixed price goes on top of your base fixed rate. It's been used by several streaming services and is at the core of the dollar shave club's initial success.
But while flat-rate subscription pricing might be easy for potential customers to understand, it often means leaving money on the table for SaaS companies. Keeping prices low means missing out on additional revenue from larger companies and vice-versa; smaller companies might be priced out of higher-cost tools.
2. Tiered pricing model
Tiered pricing allows companies to offer multiple packages with different features and product combinations available at different price points. The number of packages can vary, but most subscription companies offer two or three pricing tiers.
Sprout Social's tiered pricing model offers different combinations of features across their three packages.
Social media management tool Sprout Social designs its tiers around the needs of different customers, whether they're professionals who need "essential tools" or companies looking for advanced tools "at scale." By catering to multiple buyer personas at multiple price points, Sprout Social can maximize how much revenue they can extract from each customer while providing an easy upsell opportunity for long-term users as companies outgrow each tier.
Beyond two or three options, however, things start to go downhill - offering too many choices leads to indecision and lower sales. It's easy to try appealing to customer types with varying budgets by adding more tiers, but this leads to 'analysis paralysis' and lost sales.
3. Per unit/user model
Per-user pricing is the go-to subscription business model for the majority of companies. Pricing scales evenly along with the number of users - the more users, the more you can charge.
Buffer prices each tier of their social media management tool by the number of users.
Per-user pricing is easy for potential buyers to understand, simplifying the sales process. It also makes forecasting monthly recurring revenue (MRR) straightforward since revenue scales in direct proportion to the number of users.
Charging for each new user does have downsides, though. For example, charging per seat can lead to users sharing logins across teams, cutting into your potential revenue.
4. Usage model
Usage-based pricing is somewhat less common among SaaS businesses - it's mainly used by telecommunications companies and IT services. Users are charged based on how much of a product or service they consume: download 4GB of data in a month, for example, and you'll be charged for exactly 4GB.
Data enrichment tool Clearbit charges based on the number of API requests each month.
Tying pricing to usage makes it easier for small companies to get started with your product while avoiding the high upfront monthly or yearly fees charged by some subscription companies. On the other end of the scale, it also accounts for additional costs incurred by heavy users, charging them fairly based on the extra time and resources they consume. Charging based on usage does, however, make it much harder to predict revenue since billing can vary dramatically each month.