How to develop a tiered subscription pricing model

The Bottom Line

To develop an effective tiered subscription model, you must categorise your software’s features and usage limits into distinct packages—typically three—that align with the requirements of different customer types. Start by identifying your 'value metric' (what the customer is actually paying for, such as the number of users or storage space) and then build your tiers around it to ensure that as your customers grow, your revenue grows with them.

Why Tiered Pricing Works

For a UK-based SaaS (Software as a Service) business, tiered pricing is the industry standard for a reason. It stops you from leaving money on the table. If you only have one price, it will be too expensive for some and too cheap for others. By offering a range, you can attract 'side-hustlers' with a basic plan while charging established companies a premium for advanced functionality.

Step 1: Identify Your Customer Segments

Before you set prices, you need to know who you are selling to. A typical SaaS model often targets three personas:

• The Entry-Level User: Individuals or early-stage startups with limited budgets who only need core features.
• The Growing Business: Small-to-medium enterprises (SMEs) that need more seats, better support, and more automation.
• The Enterprise: Large corporations requiring advanced security, dedicated account managers, and custom integrations.

Step 2: Choose Your Value Metric

A value metric is the unit of consumption that determines the price. Common examples include:

• Per User/Seat: Charging for every person who logs in.
• Usage-Based: Charging per email sent, per GB of data stored, or per transaction processed.
• Feature-Based: Locking 'power' features behind higher-priced tiers.

Step 3: Structure Your Tiers

While you can have as many tiers as you like, three is generally considered the 'Goldilocks' number—not too few, not too many.

Step 4: Pricing Psychology and Best Practices

How you present your prices is just as important as the numbers themselves. Consider these British market trends and psychological triggers:

• Monthly vs. Annual: Always offer an annual discount (e.g., "Get 2 months free if you pay yearly"). This improves your cash flow and helps with customer retention.
• The 'Decoy' Effect: Make your middle tier the most attractive by adding significant value for only a moderate price increase over the basic plan. Most customers will naturally gravitate toward the middle.
• VAT Transparency: In the UK, if you are selling B2B (business-to-business), it is common to show prices excluding VAT. If you are selling B2C (business-to-consumer), your displayed price must include VAT.

Tip: Don't be afraid to change your prices. Most successful SaaS companies adjust their pricing tiers at least once a year as they add new features and better understand their costs.