What is a Pricing Model and Why It Matters

Pricing discussions start with the wrong question. Most product leaders ask, "what should we charge?" before they have answered, "how will we charge?".

A pricing model isn't your price point. It's the structure beneath it: per user, per feature, usage-based, tiered, or flat subscription. Your model determines who pays, for what, and when.

In this piece, we will unpack how to define the right pricing model for your product, then connect it to the four pricing strategies from this guide and the broader product pricing framework you may already be using.

TL;DR:

• A pricing model is the structure of how you charge.
• It is different from both pricing strategy and your overall pricing framework.
• The wrong model can hurt revenue, and positioning even if your price points look “right.”
• This article shows you how to define a pricing model that fits your product, customers, and existing pricing work.

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Common Pricing Model Types: What Is a Pricing Model for Your Product?

What is a pricing model? It's how you structure what customers pay for. Not the amount on the invoice, but the structure behind it. When you build a pricing model, you're deciding whether customers pay for seats, usage, features, or something else entirely.

Most software companies use one of five core models. Each one changes how customers think about cost and value. Picking the right model ensures that your product pricing becomes a competitive advantage.

Subscription-Based Pricing Models

A subscription model charges a fixed recurring fee. Monthly or annual. Same price, every cycle. Customers pay for access, not for how much they use.

Netflix charges a fixed amount each month, whether you watch 2 hours or 200. Spotify does the same. You get the whole catalog for a flat fee. Predictable revenue for the business and predictable cost for the customer.

This pricing model example works when variable costs stay low relative to subscription revenue. The model makes sense when serving one more customer doesn't significantly change your cost structure. But if usage directly drives your expenses, flat subscription pricing can hurt revenue.

Usage-Based Pricing Model

Usage-based models charge for consumption. More activity means higher bills. Less activity means lower bills. Customers only pay for what they actually use.

AWS charges for cloud resources used, like compute and storage. Twilio charges per API call. OpenAI charges per token processed. The meter runs, and so does the bill.

This product pricing approach aligns cost with value. Heavy users pay more because they get more. Light users pay less. But it also makes revenue unpredictable. If your customers cut usage by 30%, so does your revenue.

Tiered Pricing Models

Tiered pricing bundles features into packages at different price points. Starter, Pro, Enterprise. Each tier unlocks more capabilities or higher limits.

HubSpot offers Professional, and Enterprise tiers. Each tier adds features like advanced automation, better analytics, and dedicated support. Salesforce does the same on some of its products. Customers pick the tier that fits their needs and budget.

How to build a pricing model with tiers? Start with three. More than five and customers get confused. Each tier should target a different customer segment with clear upgrade triggers.

Freemium Pricing Models

Freemium offers a free baseline with paid upgrades. Users start for free and upgrade when they hit limits or need premium features.

Notion gives you unlimited pages for free but charges for advanced permissions and version history. Slack has a free tier with limited message history, then paid tiers unlock unlimited history, advanced workflows, AI automations and enterprise features.

The risk? Most free users never convert. If your free tier costs too much to serve, you're subsidizing users who will never pay. The upside? When free users do convert, they're already hooked on your product.

Per-User (Per-Seat) Pricing Models

Per-user pricing charges for each person who uses your product. Add a team member, pay another seat. Simple to understand, easy to calculate.

Figma charges per editor seat. GitHub does the same for team members. The model scales with team size and needs, which often correlates with value. Bigger teams get more value, so they pay more.

The upside? Revenue grows naturally as your customers grow. When a startup goes from 5 people to 50, your revenue grows with them without any selling effort. The downside could be that per-user pricing may punish growth: Think the case of a customer wanting to add 10 more people, realizing it costs them quite a lot, and deciding against it.

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Which Pricing Model Fits Your Product Pricing Strategy?

The right pricing model depends on your cost structure, how customers use your product, and what value metric makes sense to them. Usage-based works when consumption drives costs. Subscription works when usage doesn't make a big difference to the costs incurred. Tiered works when different segments need different capabilities.

Most companies combine models. A tiered structure with per-user pricing inside each tier. Or a subscription base with usage overages. The pricing strategy you choose should match both your business model and how customers perceive value.

What is a pricing model that fits your customers? Look at usage patterns first. If some customers use your product 10 times more than others, flat subscription pricing would not work for you. If everyone uses it roughly the same, per-user pricing might just slow down adoption.

Ask where customers feel the value. Do they value having more team members in the tool? Per-seat pricing makes sense. Do they value the output, like API calls or reports generated? Usage-based pricing aligns better. Spotify learned this early. Users don't value "number of song plays" individually. They value unlimited access. Flat subscription pricing matched that perception perfectly.

Start with your product pricing framework before making any other decisions. The framework gives you the inputs you need. Then choose your pricing strategy based on those inputs. Only after your strategy is clear should you pick your pricing model. Your model needs to support your strategy, and your strategy needs to be informed by your framework.

Also, don't roll out a new pricing model to everyone at once. Test it with new customers. Run it with existing customers during renewals. Model it with your existing usage data. Product pricing gets better with real usage data. You can't predict every edge case. Customers will use your product in ways you didn't expect. Some will hit limits you thought were generous. Others won't use features you thought were essential.

Set up a small beta group using the new model. Watch what breaks. Watch what confuses people. Watch your churn. Pricing changes surface all sorts of edge cases you didn't expect.

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Connecting Framework, Strategy, and Pricing Model

Let's walk through a real scenario. You'll see how the product pricing framework feeds into your pricing strategy, and how this determines which pricing model actually works.

Let's walk you through a hypothetical scenario of pricing your product, TaskFlow, which is a Project Management SaaS. TaskFlow helps teams organize projects and track deliverables. You're three months from launch. You need to make three connected pricing decisions: what inputs matter (framework), where to position your price (strategy), and how customers pay (model).

Step 1: Work Through Your Product Pricing Framework

Start with the five framework components from your product pricing framework. These give you the data you need before picking anything:

1. Business Goal: You need 300 paying customers in 18 months to hit Series A metrics. Growth matters more than immediate profitability, but you can't lose money on every customer.
2. Value Metric: After 20 customer interviews, you glean that teams care about active projects the most and that the number of users varies. A 3-person team might run 15 projects. A 10-person team might run 12. Active projects predict value better than seats.
3. Willingness to Pay: You run Van Westendorp with 50 prospects. Small teams (under 10 people) cap out at $49/month for 10 projects. Mid-market teams (10-50 people) go to $149/month for 30 projects. Enterprise tops out at $499/month for unlimited projects.
4. Competitive Analysis: You map two main competitors. Asana charges $10.99-24.99 per user. Monday charges $9-19 per user. Both use per-user models. Your per-project pricing model is different enough that direct comparisons are harder. The market floor sits around $50/month for small teams. The ceiling reaches $400/month before customers expect dedicated support.
5. Cost Structure: Your fully loaded costs are $35/month per customer (hosting, support, overhead). That's your floor. You need at least 30% margin, which puts your target at $50+ for core offerings.

Step 2: Pick Your Pricing Strategy

Now use those framework inputs to choose from the four pricing strategies:

1. Cost-plus doesn't fit. Your value to customers isn't tied to your costs. Some customers would pay $200/month even though serving them costs $35.
2. Value-based could work long-term. You can eventually prove ROI through faster project delivery and fewer missed deadlines. But you're pre-launch. You don't have case studies yet.
3. Dynamic pricing is too complex. Your market isn't volatile enough to justify the infrastructure investment.
4. Competitive pricing makes sense right now. You're entering a crowded market with established price expectations. Pricing near competitors keeps you in the consideration set while you build proof points for value-based pricing later.
5. Decision: Use competitive pricing strategy for your first 12 months. Position slightly below market leaders because you're unproven. Plan to shift toward value-based pricing once you have 50+ customers with measurable results.

Step 3: Choose Your Pricing Model Structure

Your strategy narrows your pricing model options. Competitive pricing means you need a structure that's easy to compare but differentiated enough to stand out:

1. Freemium is tempting. Notion and Slack both used it to grow fast in crowded markets. But the numbers don't work here. Your cost to serve is $35/month per customer. Free users would burn cash you can't afford pre-Series A. Plus, project management already has strong free options (Monday’s, Asana's free tier). You'd need a massive free-to-paid conversion rate (15-20%) to hit your 300 customer target, and most freemium products convert at 2-5%. The math doesn't close.
2. Per-user pricing (like Asana and Monday) would make comparisons too direct. You'd compete purely on price per seat.
3. Flat subscription would leave money on the table. Heavy users would get massive value for the same price as light users.
4. Usage-based would confuse buyers in this category. Project management tools don't typically charge for consumption.
5. Tiered pricing with per-project limits fits perfectly. It's familiar (buyers understand tiers), differentiated (projects instead of users), and scales with value. This is the pricing model example that matches your strategy.

Decision: Create three tiers using a tiered pricing model. Skip freemium now, but revisit if you raise a round and can afford the customer acquisition cost.

• Starter: $39/month for 5 active projects
• Professional: $99/month for 20 active projects
• Business: $299/month for unlimited projects

You offer a 14-day free trial instead of a free tier. That qualifies serious buyers without the ongoing cost of supporting free users who never convert.

How the Three Pieces Connect

1. Framework → Strategy: Your business goal (fast growth), competitive landscape (crowded market), and value clarity (pre-launch, no proof yet) pointed you toward competitive pricing instead of value-based.
2. Strategy → Model: Competitive pricing required a pricing model that buyers could compare to alternatives but wasn't identical. Tiered with per-project limits achieved both. Freemium didn't work because your costs are too high and conversion rates wouldn't hit your growth targets.
3. Framework → Model: Your value metric research (projects matter more than seats) eliminated per-user models. Your willingness to pay data ($49, $149, $499 breakpoints) set your tier prices. Your cost structure ($35/month per customer) eliminated freemium and showed you how to build a pricing model that stays profitable.

Six months after launch, you'd revisit all three decisions. With customer data showing 30% faster project delivery, you might shift from competitive to a value-based pricing strategy. That could support raising your Pro tier from $99 to $129 while keeping the same tiered model structure. If costs drop to $8/month per customer through efficiency gains, freemium becomes viable. The framework stays the same (you're always checking those five inputs), but strategy and model evolve as your market position changes.

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How to Build a Pricing Model That Works

Pricing models can be scary at first but now you know what goes into creating a good one. Firstly, work through your product pricing framework. Define your value metric. Understand your cost structure. Know what customers actually pay for. That foundation feeds into every decision that follows.

Once your framework is solid, choose your pricing strategy. Cost-plus, value-based, competitive, or dynamic. Your strategy is where you position your price relative to competitors and perceived value. This decision shapes which models will actually work for you.

Then pick one model to start. Not three. Not a complex hybrid. One. Subscription, usage-based, tiered, freemium, or per-seat. Your model is how you charge. It should match both your strategy and how customers perceive value.

Test it. Run it past real customers. Model it with your usage data. Launch to a small group first. Your product pricing will improve faster with real feedback than months of internal debate.

The companies that get pricing right don't nail it on the first try. They start simple, watch what breaks, and iterate. Your pricing model should evolve as you learn what customers actually value.

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