Last Updated on July 23, 2026 by Jason Andrew
What's the difference between a pricing strategy and a pricing model?
Pricing strategy and pricing model sound like the same thing, but they are not, and confusing the two is one of the most common mistakes Founders make when setting their price.
Your pricing strategy is the principle that guides you to a price point. It comes down to whether you charge based on what your SaaS costs to run, what value it delivers to customers or what your competitors are already charging.
Your pricing model is how you package and format that price. Will you charge a single flat fee for every subscriber, or build in different prices based on usage, user numbers or feature access?
Get the strategy right first. The model you choose should simply be the vehicle that delivers it.
Pricing strategies
Cost-plus pricing
This is the simplest way to price anything, including your SaaS. Add up your costs, development and design time, salaries, and the software services you rely on to run your own platform, then add a margin on top.
The appeal is obvious. It is easy to calculate, and as long as your margin is realistic, every sale is profitable on paper.
The problem is that cost-plus pricing ignores two of the three things that actually matter: the market and your customers. What something costs you to build has no bearing on what a customer is willing to pay for it. If your delivery costs are low but the value you provide is high, cost-plus pricing leaves money on the table.
It is also a poor fit for a subscription business. Cost-plus pricing works well for physical products, where customers expect prices to shift with inflation. Subscribers do not expect their price to move every few months, so as your input costs rise, your margin quietly shrinks.
That is not a hypothetical for 2026. With the national minimum wage increasing again from 1 July 2026, any SaaS business with a support or development team on award linked pay will see payroll costs rise. If your pricing is based on cost-plus, it is worth rerunning the numbers rather than assuming last year’s margin still holds.
Cost-plus pricing is still a useful starting point. Just do not treat it as your long-term strategy.
Competitor-based pricing
This strategy sets aside your own costs and uses what your competitors already charge as the benchmark. It is a sensible option if you are new to the market and do not yet have the data to justify pricing any other way.
Once you know what competitors charge, you can decide to:
- Price below the market, a good way to win customers and gain share quickly, if not to maximise profit
- Price at the market rate, also known as price matching
- Price above the market, in which case you need to prove your SaaS offers more than the competition
If you are entering a crowded market and want to avoid looking out of place, pricing somewhere between the cheapest and most expensive option is usually the safest starting point.
The risk with this strategy is that you are relying on assumptions about how your competitors reached their price. If their costs are different to yours, or they made a pricing mistake of their own, you inherit that mistake. It also assumes your product is similar enough to theirs that the comparison holds, which is not always true.
Competitor-based pricing works well for new entrants finding their feet. As you learn more about your market and your own value, you should move towards a pricing strategy that reflects what makes your SaaS different.
Penetration pricing
Penetration pricing means entering the market at a deliberately low price to capture as much market share as possible before raising prices to a sustainable level.
Done well, this strategy locks in a large base of subscribers early. If they see enough value in your product, they stay on once prices rise. Done poorly, it hurts your revenue in the short term, makes your service look cheap and can trigger churn when customers feel like the price increase was a bait and switch.
Like competitor-based pricing, penetration pricing can help new players get a foothold. It is not a strategy you want to rely on indefinitely.
Value-based pricing
Value-based pricing uses the perceived value your service delivers to customers as the benchmark for your price, rather than what it costs you to provide.
This is arguably the most sustainable pricing strategy available. If your service is not delivering value at a price customers are willing to pay, your SaaS will not survive long regardless of how you price it.
Many Founders reference the 10x rule here: whatever you charge, you should be delivering at least ten times that amount in value to the customer.
The downside is that value-based pricing takes time and data you may not have when you first bring your SaaS to market. The only way to know what customers are actually willing to pay is to ask them, understand how your service benefits them and test how they respond to different price points.
It can also increase your costs, since delivering a premium offering that justifies a premium price often means investing more in the product itself.
If you can prove you deliver more value than your competitors, value-based pricing is the strategy to aim for. Because of its complexity, it tends to be where you end up once you have built some goodwill in the market, not where you start. Review your pricing strategy every six months or so, and adjust as your market position evolves.
Pricing models
Flat-rate pricing
Flat-rate pricing is the simplest SaaS pricing model there is. One product, one set of features, one price for every subscriber.
There are no add-ons or tiers, and price does not change based on usage. The only real choice most customers get is whether to pay monthly or annually, usually with a discount for paying upfront.
Pros of flat-rate pricing
- Simple to communicate. One message, for every type of customer.
- Simple to understand. No overwhelming customers with options at the point of sign up.
- Simple to forecast. With only one product on offer, projecting recurring revenue is straightforward.
Cons of flat-rate pricing
- Missing revenue. Charging power users and small businesses the same amount leaves upsell opportunities on the table.
- No nuance. You only get one shot to sell your service, with no tailored option if a prospect does not see the fit straight away.
Flat-rate pricing works well if you offer a simple service with limited features, where usage does not meaningfully increase your cost to serve.
Usage-based pricing
Usage-based pricing ties cost directly to how much a customer uses your service, so heavy users pay more than light users. You can charge a base fee plus usage charges, or scrap the base fee entirely and bill purely on consumption.
You can measure usage however makes sense for your SaaS: data consumed, requests made, seats activated or anything else tied to the value delivered.
This model has become more relevant heading into 2026, as more SaaS products embed AI features with real, variable compute costs behind them. When your cost to serve moves with usage, tying price to usage keeps your margins protected.
Pros of usage-based pricing
- Lowers the barrier to entry. Smaller customers can start small and grow into higher spend as they scale.
- Reflects true cost to serve. Heavy users contribute revenue in proportion to the resources they consume.
Cons of usage-based pricing
- Harder to forecast. Revenue and expenses become harder to predict from one month to the next.
- Can discourage usage. Charging per use can push customers towards using your product less, or looking elsewhere.
- Can disconnect price from value. How often someone uses your product is not always the same as the value they get from it.
Usage-based pricing suits SaaS businesses that want to stay accessible while protecting margin on their heaviest users. Dropbox is a well known example, charging based on the storage a customer needs because that usage has a direct cost to Dropbox. If usage-based pricing feels too unpredictable for your revenue forecasting, tiered or freemium models can achieve a similar effect with more stability.
Tiered pricing
Tiered pricing splits customers into a small number of tiers, usually three to five, to avoid overwhelming them at sign-up.
Each tier unlocks different features at a fixed price. Tiers work best when each one is built around a specific type of customer, and the benefit of moving up a tier is obvious.
Pros of tiered pricing
- Appeals to a broad range of customers, from individuals through to large enterprises.
- Maximises revenue by matching price to the value each customer segment receives.
- Creates natural upsell paths as customers outgrow their current tier.
- Lets you charge more for delivery-heavy features without losing customers who do not need them.
- Keeps revenue predictable, since customers commit to a fixed price.
Cons of tiered pricing
- Too many tiers can overwhelm customers and cost you conversions.
- Choosing the wrong tier at sign-up can lead to churn rather than an upgrade.
- Your top tier still has a ceiling. If your heaviest users outgrow it, you have nowhere left to take them.
Tiered pricing is the closest thing SaaS has to a default model. If your product has a range of features that suit different types of customers, this is usually the right place to start, as Atlassian’s own growth playbook shows.
Per-user pricing
Per-user pricing is a variation of tiered pricing based specifically on the number of people using the account, rather than which features they unlock. You might set tiers at 1 to 10 users, 11 to 50 users and so on, or charge a flat amount for every additional seat.
Pros of per-user pricing
- Simple to understand. Customers add users, not features.
- Predictable revenue, as long as team sizes are relatively stable.
- Rewards adoption. More users of your product within a company means more revenue for you.
Cons of per-user pricing
- Shared logins let customers work around the model.
- Can discourage companies from rolling your product out to their whole team, to keep costs down.
- Limited adoption within an account increases the risk of churn.
- Can disconnect price from the actual value a team gets out of your product.
Per-user pricing suits SaaS products where the features are the same for everyone, and the value scales with how many people are using the platform.
Per active user pricing
This is a variation on per-user pricing. Instead of charging based on how many seats are provisioned, you charge based on how many of those users are actually active.
Slack is the best known example of this model. It does not matter how many people at a company are signed up, only how many are logged in and using the platform.
Pros of per active user pricing
- Customers only pay for what they actually use, which removes a common objection at the point of sign up.
Cons of per active user pricing
- That same benefit works against you. Some of your best margin as a SaaS business comes from unused seats customers forget to cancel.
- Defining an ‘active user’ can get complicated and contested, and revenue becomes harder to forecast as active user counts shift month to month.
- Small teams will not see much benefit from this model, since most or all of their seats are likely to be active anyway.
This model tends to work best in one specific scenario: when you are struggling to convince larger organisations to commit to a standard per-user model, and a lower risk, pay-for-use option helps get them on board.
Freemium pricing
Freemium pricing offers your first tier for free. Customers get access to a basic set of features so they can see the value in your product, while more advanced functionality sits behind paid tiers.
Paid tiers can be based on capacity (upgrade once you exceed a free storage allowance), usage (a set number of free minutes or actions before charges apply) or use case (individuals use it for free, while businesses pay).
Pros of freemium pricing
- Supercharges adoption, giving you a foot in the door with customers who might otherwise never try your product.
- Builds a customer database and word of mouth from day one, even before it generates revenue.
Cons of freemium pricing
- Can drain resources if your free tier does not convert to paid customers at a reasonable rate, leaving your paying customers to cover the cost of everyone else.
- Can contribute to churn, since customers tend to value what they pay for less than what they get for free.
Freemium works well for SaaS businesses that need to build awareness, provided it sits alongside a tiered model based on features, users or usage. Get customers in the door, then give them a genuine reason to pay.
In summary
There is no universal right answer here. The best combination of pricing strategy and pricing model depends on how established your SaaS is, how your costs behave as you scale and how your customers want to buy.
What matters is that your pricing is a deliberate decision, not an afterthought. Revisit it regularly, test your assumptions and make sure your price reflects the value you are actually delivering, rather than just what it costs you to deliver it.
Frequently Asked Questions
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