Pricing a software-as-a-service (SaaS) business can seem like a mixture of math, psychology, and guesswork. If you don’t charge enough, customers might assume you offer a low-value product. However, if you charge too much, they might hesitate to buy or leave for a competitor. Pricing strategies shape how customers perceive the product, when they upgrade, and how revenue scales over time.

There were an estimated 30,800 SaaS companies globally in 2024 that served millions of customers. Below, we look at the most effective pricing models and strategies for software companies, along with ways to fine-tune them for growth and respond to common challenges.

What’s in this article?

• How do software companies determine pricing?
  
• What are the most common software pricing models?
  
• What are the biggest pricing challenges for software companies?
  
• How SaaS companies can improve software pricing
  

How do software companies determine pricing?

Software pricing should match what customers are willing to pay. It should also perform well against competitors and align with long-term business models. Here’s how software companies typically set their pricing:

Comparing cost-based and value-based pricing

There are two major models for pricing:

• Charging based on the cost to build and run the product

• Charging based on the product’s value to customers

Cost-based pricing is straightforward. Businesses tally their costs for development, hosting, support, and other business needs, then add a margin for profit. This type of pricing ensures the business covers costs, but it doesn’t reflect how much customers are willing to pay. If the product delivers value, a cost-based strategy could lower revenue.

With value-based pricing, companies charge based on the impact the product has on customers. For example, if the software helps companies close million-dollar deals faster, $500/month USD might be an easy sell, even if costs are relatively low. This pricing structure requires research, but it can maximize revenue and tie price to perceived benefit.

Looking at competitors and customer expectations

Just as customers compare their options, businesses should consider many factors when making pricing decisions. Companies can position themselves in a few ways:

• Charge less than competitors to persuade budget-conscious buyers

• Match pricing and compete on features, experience, or support

• Charge more but offer better performance, premium features, or brand reputation

Beyond direct competition, companies should also consider customer expectations. For example, if most companies charge per user, but one company offers a flat-rate plan, that might confuse customers—even if it’s technically a better deal. In addition, if similar products range from $30–$100 a month but one company charges $300, the company should justify that price with a compelling reason.

Using pricing psychology to shape decisions

How a company presents its prices affects how customers perceive them. Here are a few pricing strategies to consider:

• Anchoring: The first number customers see could leave a lasting impression. For example, if the pricing page lists the $300/month plan before the $100/month plan, $100 feels more reasonable. But if the cheapest option is $30, that same $100 plan might feel too expensive.

• Decoy effect: Adding a mid-tier option can make the most expensive one appear to be a better deal. For example, pricing Basic at $20, Pro at $50, and Premium at $55 makes the Premium tier an easier upsell.

• Magic of 9: Pricing a product at $99 makes it feel cheaper than $100, even though it’s just a dollar difference.

• Bundling and discounts: Companies can offer a discount for paying annually instead of monthly. This makes customers feel like they’re getting a better deal.

Testing and adjusting over time

Businesses should test and adapt pricing, including:

• A/B testing different prices on the website

• Offering discounts to gauge customers’ sensitivity to price

• Watching churn rates for signs that pricing might be too high

• Introducing price increases to new customers first before adjusting for everyone else

What are the most common software pricing models?

The software pricing a business chooses influences customer expectations, buying decisions, and revenue. Here’s an overview of the most common models and how they work:

Per-user pricing

This is the standard SaaS pricing structure. Providers charge a fixed rate per user per month (or year) and let customers scale up to match their growth. This model is popular—Slack and Salesforce are examples—because it makes costs predictable for businesses and revenue predictable for software companies. It’s simple, scales well, and allows finance teams to budget without much effort.

However, the cost can add up fast for large teams. Some companies try to work around rising costs by sharing logins, which can cause functionality issues.

Tiered and feature-based pricing

This model charges based on access to features. Many companies use a tiered system, in which:

• Basic plans have limited features and are often considered a “starter” plan

• Pro plans have full functionality and are usually the best fit for most customers

• Enterprise plans have custom pricing, premium support, or a service-level agreement (SLA)

This approach allows customers to start small and upgrade when needed. It also nudges businesses toward higher tiers by keeping important features behind paywalls.

This model is best for products with clear value differences at different levels of use (e.g., email marketing platforms, design tools, products with collaboration features, etc.). If the pricing tiers don’t align with how customers use the product, upgrades can feel like a forced upsell rather than a natural next step.

Usage-based and pay-as-you-go pricing

Customers pay based on how much they use the product. This works well for cloud computing (e.g., Amazon Web Services, Google Cloud, etc.) and analytics tools (e.g., Mixpanel, Amplitude, etc.). Customers pay for what they use, which feels fair and intuitive, and pricing scales with business growth.

However, this model can be unpredictable, especially for businesses that require cost stability. Some customers might underuse the product to keep their bills down.

Freemium models

With “freemium,” the core product is free, but premium features cost extra. Examples include Dropbox, Notion, and Zoom, which are functional at the free tier but have limits that encourage upgrades. The free product is valuable enough to add new customers but limited enough that upgrading feels necessary.

SaaS companies might struggle with low conversion rates if the freemium product is too valuable, making upgrading feel unnecessary.

What are the biggest pricing challenges for software companies?

Pricing software means balancing what customers are willing to pay, what competitors are charging, and what makes the business profitable. Challenges can arise at any time—costs go up; the market changes; or the current model is no longer suitable at scale. Here’s a closer look:

Determining what customers will actually pay

The real challenge with pricing is moving past assumptions and understanding what people will pay. Some companies rely on surveys or industry benchmarks, but those don’t always tell the whole story. Instead, companies can experiment: A/B test different prices, introduce changes to new customers first, or bundle features to see what encourages upgrades. It’s important to remember that pricing is about what a product does and what customers think the product is worth.

Pricing for different types of customers

Startups, mid-size businesses, and enterprises all have different budgets, priorities, and willingness to commit to a fixed monthly or yearly cost. A price that feels reasonable to a 10-person team might be an insignificant amount for a Fortune 500 company—or completely out of reach for a freelancer. That’s why many companies use some version of tiered pricing. However, even with a tiered model, companies have to find the right approach. If the cheapest plan is too generous, customers won’t upgrade, and if the premium tiers don’t feel worth it, businesses will struggle to compete.

Raising prices without losing customers

At some point, most companies realize their original pricing no longer works. Costs might increase, or the product might evolve, making the old plans unsuitable. But raising prices can be tricky. If done poorly, it can spark backlash, cancellations, and bad press. Here’s how a business can strategically raise prices:

• Grandfather in existing customers while charging new ones more

• Clearly communicate with customers about why prices are increasing and link it to real improvements

• Gradually introduce increases to see how customers react

Competing without excessive price reductions

There’s often a cheaper option on the market. A business might try to match the lowest price, but that can reduce margins and devalue the product. Instead of getting dragged into a pricing race to the bottom, companies can compete on:

• Better features: If a product clearly outperforms the competition, price becomes less of a factor.

• Superior service: Strong customer support, reliability, and ease of use all justify a higher price.

• More flexible pricing: Usage-based models or adaptable plans can feel more fair than a flat subscription fee.

Keeping pricing simple to maximize revenue

Customers often prefer simple pricing, while businesses tend to prefer a pricing model that adapts to different needs. It’s important to balance the two. If pricing is too simple, customers who use the product often get a great deal while others pay more than they should. If pricing is too complicated, customers can get confused or might assume they’re being cheated. The best pricing feels effortless, with precise plan details, logical upgrade paths, and full transparency.

Adjusting pricing as the business grows

Pricing that works for a startup won’t necessarily work for a mature company. At some point, the model has to evolve. This can entail:

• Switching from flat pricing to per-user or usage-based pricing to better reflect how customers use the product

• Introducing enterprise plans for larger customers with more complex needs

• Adjusting freemium models if too many free customers aren’t converting to paid plans

Managing pricing across different countries

A reasonable price in one country might not be effective in other markets. Some companies adjust for local buying power by charging lower prices in certain countries. Others charge the same everywhere, even if that means pricing out certain regions. Each model has tradeoffs:

• Localized pricing makes software more accessible but requires more operations overhead.

• Flat global pricing simplifies finances but risks cutting off potential customers.

• Charging in local currencies avoids exchange rate issues but can make billing more complicated.

How SaaS companies can improve software pricing

Pricing is also a product decision—it shapes who buys, how much they use the product, and whether the business can effectively scale or must constantly fight for margins. Optimizing pricing means designing a system that works for the product, customer, and business in the long term. Here’s how companies can improve their pricing:

Don’t price for an “average” customer

Many pricing mistakes occur when companies try to settle on a number that works for everyone. But SaaS customers fall into distinct groups—small businesses, mid-market companies, and enterprises—all of which have different budgets and expectations.

With mid-range pricing, two things can happen: smaller customers will think it’s too expensive, and larger customers get way more value than they’re paying for. Instead, companies should segment their pricing by tier. If a single price point applies to every type of customer, it’s probably wrong for most of them.

Charge for what the product actually does

Much of SaaS pricing is structured around lists of features (i.e., one tier gets A and B, and the next tier gets C and D). However, customers tend to care less about features than what the product actually does for them. That’s why some of the best pricing models tie cost to value. For example, email marketing platforms might charge based on list size, while cloud providers might charge based on usage. These models scale so customers feel they’re getting more out of the product in line with the cost.

Make it obvious when and why to upgrade

Effective pricing doesn’t force customers into an upgrade—it reminds them at the right time. Good upgrade triggers include:

• A free plan with useful but limited functionality so customers naturally reach a limit

• Usage-based pricing that scales as customers’ needs increase

• Feature unlocks that match real business needs

Less effective triggers include:

• Restricting core functionality just to push a sale

• Making customers switch plans before they actually feel the need to

• Burying all the best features in the highest-priced plan

Rethink discounts on annual plans

The standard SaaS strategy is to offer a discount for annual billing. It’s common because it works well, but many companies don’t think beyond that default. Consider other ways to handle discounts, including:

• Offering higher discounts for larger plans to secure high-value customers

• Using discounts selectively (e.g., only for customers who have reached a certain engagement level but haven’t converted)

• Providing added value for annual plans, such as exclusive features, better support, or early access to new tools

Give enterprise customers the value they want

Larger companies need different levels of support, payment security, and integration. If SaaS pricing treats an enterprise client the same as a 10-person startup, that model might not be effective. When setting enterprise pricing, consider offering:

• Flexible usage-based models (e.g., more seats, application programming interface [API] calls, data storage)

• Modular pricing that allows companies to pay for what they need instead of forcing them into preset plans

• Custom contracts that reflect real enterprise concerns

Build a pricing page that answers questions

If a customer has to think too much about a pricing page, the company might be making purchasing unnecessarily difficult. A great pricing page helps customers self-select into the right tier. If they need a sales call to figure it out, it’s probably too complicated. Businesses should clearly list the difference between plans and not force customers to do complicated mental math.