Pricing is one of the most powerful levers in any software business — and one of the least understood by people who are new to tech. If you are moving into a product, growth, or business role, understanding how SaaS companies charge for their products is not optional. Pricing signals value, shapes user behavior, and is a core product decision, not just a finance one.
The 5 main SaaS pricing models
Flat-rate pricing charges one fixed price for the product, regardless of usage or number of users. Basecamp famously charges a single monthly rate for unlimited users. It is simple to sell and easy to understand, but it leaves money on the table with large customers and gives no usage signal.
Per-seat pricing charges per user. Salesforce and most B2B SaaS tools use this model. It scales naturally with the size of the customer and is easy to forecast — but it can discourage adoption inside a company because every new seat costs money.
Usage-based pricing charges based on how much of the product the customer actually uses. Twilio charges per API call. AWS charges per compute hour. Stripe charges a percentage of each transaction. This model reduces buyer friction because there is no upfront commitment, and it scales with the value the customer gets.
Tiered pricing bundles features into plans — usually Starter, Pro, and Enterprise. HubSpot uses this. It lets you serve different segments at different price points and nudge users to upgrade by gating the features they want.
Freemium gives a free version of the product and charges for premium features. Slack, Notion, and Figma all use freemium. The free tier drives acquisition; the paid tier generates revenue.
Value-based vs cost-based pricing
Most companies set prices by adding a margin to their costs. This is the wrong approach for software. In SaaS, the marginal cost of serving one more customer is close to zero. The right question is not what it costs you to deliver the product — it is what the outcome is worth to the customer. A tool that saves a sales team ten hours a week can justify a much higher price than its hosting bill would suggest. Value-based pricing is harder to set but consistently outperforms cost-based pricing.
The freemium trap
Freemium works when the free tier is good enough to get users hooked but limited enough that they want more. If the free tier is too good, users never upgrade. If it is too limited, users churn before they see the value. The conversion rate from free to paid in most freemium businesses is between 2% and 5%. That math only works if your free tier is cheap to serve and your paid tier has a high enough average revenue per user.
What usage-based pricing is doing to SaaS
Usage-based pricing is growing because it aligns cost with value and reduces friction for buyers. Instead of committing to an annual contract upfront, customers pay as they go. This lowers the barrier to adoption — but it also means revenue is harder to predict. For PMs, usage-based models require a clear understanding of the value metric: the single unit that best represents the value the customer is getting. For Twilio it is messages sent. For Stripe it is payment volume. Picking the wrong value metric breaks the model.
What PMs need to know about pricing
You do not set the price alone. Pricing decisions usually involve product, finance, sales, and leadership. But as a PM you need to understand the model your company uses, identify what your value metric is, know what your customers think is a fair price, and recognize when the current model is creating friction in the user journey. Pricing is a product decision. The sooner you treat it that way, the more effective you will be.