A pricing model is how a business decides to charge for what it sells. Pricing models can include a one-time purchase, a subscription, usage-based charges, or custom plans such as tiered pricing. The goal is to ensure the price reflects the value, keeps customers interested, and can compete in the market.

Below, we’ll explain the most common pricing models, how you can choose the right one for your business, and possible challenges when you develop a pricing strategy.

What’s in this article?

• How do businesses choose the right pricing model?
  
• What are the most common pricing models?
  
• What are the biggest challenges of creating a pricing strategy?
  

How do businesses choose the right pricing model?

Pricing helps businesses stay profitable and shapes how customers think about product value. There’s no one “right” pricing model: the best one fits how customers think, supports the business strategy, makes financial sense, and is flexible enough to change.

Here are some questions businesses can consider as they choose and refine their pricing models.

How do customers expect to pay for your product?

People have instincts about what feels “normal” when they pay for something. They might expect to pay for a software tool with a subscription fee, while a high-end gadget makes more sense as a one-off purchase. The pricing model has to match how people already expect to pay for that type of product.

What price will feel right to customers?

There can be a gap between what a product is worth and what customers will actually pay. Businesses test, adjust, and sometimes ask customers what price they’re willing to pay. The best price lands in that sweet spot where it feels fair and drives revenue.

What’s the business’s growth plan?

Pricing sets the trajectory for the business. A company that’s chasing growth might use a freemium model or underprice products initially to attract users. A more profitability-focused enterprise might prioritise high-margin pricing or enterprise deals. Some organisations need steady, predictable revenue (e.g. from subscriptions), while others run on flexible, one-off transactions. The best model depends on where the business is heading rather than just where it is now.

Do the maths hold up?

The price has to cover costs and acquisition expenses and enable profit. Some models look great on paper but make cash flow a constant problem. For example, a company might underprice a subscription but realise later that customer support costs are damaging its margins. Smart businesses do a stress test to ensure their pricing supports long-term sustainability.

Is the pricing still working?

Pricing isn’t static. The market shifts, competitors change their strategies, and customer expectations change. What worked one year ago for a business might be holding it back today. Conduct regular tests and make adjustments as needed.

What are the most common pricing models?

Pricing is one of the most powerful levers a business has. Here’s how the most common pricing models work, where they’re often used, and their pros and cons.

Flat-rate pricing

With flat-rate pricing, companies charge a single price for a product or service. This pricing model works best when the product is straightforward and customers all receive about the same level of value.

Pros

• It simplifies sales and marketing because there’s no need to explain different pricing options.
  

Cons

• You might miss out on possible revenue. Some customers might have been willing to pay more, while others might find it too expensive and walk away.

• It doesn’t adapt well to different usage levels: light users might feel overcharged, while heavy users might get more value than they’re paying for.

Tiered pricing

With tiered pricing, businesses create different levels, usually with increasing features or usage limits. For example, a software-as-a-service (SaaS) company might offer Basic, Pro, and Enterprise plans, with each successive level costing more than the last to enable more functionality.

Pros

• Tiered pricing serves multiple customer segments without requiring a custom quote for each one. People can pick the option that feels like the right fit.

• When it’s done well, tiered pricing nudges people to spend more without feeling pressured.

Cons

• If the differences between tiers aren’t made clear, customers can get confused and hesitate to commit.

• If the lowest-priced tier is too generous, customers might never upgrade.

Usage-based pricing

With usage-based pricing, customers are charged based on their consumption: the more they use, the more they pay. This model is common in industries such as cloud computing (e.g. Amazon Web Services), utilities (e.g. electricity, water), and services driven by application programming interfaces (APIs).

Pros

• It feels logical and fair. Light users pay less, heavy users pay more, and customers know they’re being charged only for the value they receive.

• It scales naturally with customers’ growth. For instance, if a company’s data storage needs double, its bill doubles too.

Cons

• Customers don’t always know how much they’ll owe, which can create anxiety and indecision. Many companies solve this by offering price caps, discounts after a certain threshold, or hybrid models that combine a base fee with usage-based charges.
  

Subscription pricing

With subscription pricing, customers pay a recurring fee (typically on a monthly, annual, or weekly basis) for ongoing access to a product or service. This model is popular across several industries, including streaming, software, e-commerce, fitness, and more.

Pros

• Subscriptions create predictable revenue and build long-term customer relationships.

• Instead of constantly chasing new customers, businesses focus on keeping existing ones happy.

Cons

• If customers don’t feel they’re receiving ongoing value, they can cancel. Businesses that use subscriptions have to keep engaging users, adding features, or making the product feel necessary.
  

Freemium

• With a freemium model, a company offers a free version of its product with limited features in the hope that users eventually upgrade to a paid plan. Examples include Spotify (ads vs. premium), Zoom (free meetings with time limits), and Slack (limited message history).
  

Pros

• This model is a great way to attract users.
  

Cons

• If the free tier is too good, people won’t upgrade. But if the freemium product is too restrictive, they won’t see the value in converting. You need to provide just enough value in the free version to get users invested, but not so much that they never feel the need to pay.
  

Hybrid pricing

Many companies choose to mix and match pricing models for hybrid pricing. SaaS companies often blend subscriptions with usage-based fees (e.g. charging a base price plus additional charges for more users or features). E-commerce brands combine one-off purchases with subscriptions (e.g. Amazon Subscribe & Save), and streaming services offer subscriptions with pay-per-view add-ons (e.g. film rentals on Amazon Prime Video).

Hybrid pricing allows businesses to serve different types of customers while maintaining diverse revenue streams. It also provides flexibility, so if one part of the model isn’t working, the business can adjust another.

What are the biggest challenges of creating a pricing strategy?

Pricing is one of the most difficult aspects of running a business. The wrong price can decrease sales, attract the wrong kind of customer, or miss out on possible revenue. Here are some challenges of creating a pricing strategy.

Finding the right price

If the price is too high, you risk scaring off potential customers. If the price is too low, you might struggle to stay profitable or signal that your product isn’t valuable or well-made.

How to handle it

Test what the market will bear with A/B pricing, customer surveys, and competitor comparisons. Know your product’s value and ensure the price reflects it.

Keeping up with the market

Competitors, market trends, and economic shifts all play a role in pricing. If a competitor suddenly drops prices, customers will probably notice. If inflation pushes up costs, keeping prices the same could decrease profits.

How to handle it

Track competitors’ pricing and adjust only when needed. Consider repositioning a product as a premium instead of lowering prices.

Choosing the right pricing model

The way a product is priced matters as much as the actual price. Should it be sold as a one-off transaction, as a subscription, with a tiered approach, or through something else? The wrong structure can turn customers away or make it harder to scale.

How to handle it

Tie your pricing model to customer expectations for payment. If you have a SaaS company, customers are likely to expect a subscription. But if you’re selling high-end electronics, a one-off transaction probably makes the most sense. Customers are more likely to make the purchase when the sales model aligns with their expectations.

Using discounts strategically

Discounts are an easy way to boost short-term sales, but they can backfire. If customers start waiting for the next sale instead of buying at full price, that’s a problem. If a product is constantly being discounted, it starts feeling like the “real” price is the lower one.

How to handle it

Use discounts strategically. First-time customer deals, annual prepayment discounts, and limited-time promotions work better than wide price cuts. Instead of lowering the price, add value through free shipping, extra features, or bundled deals.

Structuring tiered pricing

Different customers have different budgets, but that doesn’t mean a business should have 12 different pricing options. If your pricing is too complex, your value proposition gets murkier. But if it’s too simple, the business might miss out on higher-value customers who are willing to pay more.

How to handle it

Use tiered pricing instead of a single-priced model to avoid leaving revenue behind. But ensure there are meaningful differences between each tier so customers can quickly decide which is right for them.

Managing price increases

At some point, every company faces rising costs, experiences growing demand, or simply realises that it’s underpricing products. Raising prices is necessary, but if it’s handled poorly, customers might feel like they’re being squeezed.

How to handle it

Justify price increases by adding new features, improving service, and being transparent about rising costs. Consider grandfathering in existing customers at the old price while raising it for newcomers.

Making pricing a competitive advantage

Pricing is the biggest selling point for some businesses. Budget airlines, discount retailers, and freemium software all use low prices to attract customers. But competing on price alone is risky, as there’s usually someone willing to go lower.

How to handle it

Increase perceived value through branding, customer service, stronger warranties, or exclusive rewards. Make the product feel worth the price, even if it’s not the cheapest option.