What is Pricing Model Selection?
Pricing model selection is the decision of how to charge customers, freemium, tiered subscription, usage-based, flat rate, or value-based. It is distinct from the price itself (the numbers and tiers) and sits upstream of every monetisation decision a company makes. The wrong pricing model caps revenue regardless of how well you execute on features, marketing, or sales. The right model compounds, aligning customer success with revenue growth, enabling natural expansion, and reducing friction at every stage of the funnel. OpenView SaaS Benchmarks research shows the fastest-growing SaaS companies are 2-3x more likely to have deliberately chosen and tested their pricing model compared to companies that default to "whatever the competition does".
The Formula
Pricing Model Fit = f(Business Model, Customer Type, Competitive Landscape, Value Delivery, Sales Motion, Growth Priority)
The best pricing model is the one that matches how your product delivers value, how your customers want to buy, and how you grow. There is no universally "best" model, only the best match for your current stage and strategy.
Worked Example
A SaaS founder had launched a project management tool on a flat $49/month plan serving small marketing agencies. Revenue was growing but stuck around $20k MRR for 8 months. Churn was 6% monthly. They believed the problem was acquisition and were about to spend $40k on paid ads. A pricing model diagnosis revealed the real issue.
- Diagnosis: business model SaaS, customer mid-market agencies, moderate competition, value scales per user, sales-assisted motion, monetisation as priority
- Current model: flat $49/month regardless of team size, 2-person agencies and 40-person agencies paid the same
- Recommendation: tiered subscription with per-seat value metric
- New tiers introduced: Starter $29 (up to 3 users), Professional $79 (up to 10 users), Business $199 (up to 30 users)
- Existing customers grandfathered for 6 months, then offered migration
- Result over 12 months: 30% of mid-market customers upgraded to Professional, 15% to Business
- ARPU rose from $49 to $112
- Revenue grew from $20k to $58k MRR with no change in customer count or acquisition spend
- Churn dropped to 3% as smaller customers self-selected into the Starter tier that fit their budget
📌 The entire revenue problem was pricing model, not acquisition. Switching from flat rate to tiered pricing nearly tripled MRR in 12 months without spending a pound on new marketing, because mid-market customers had always been willing to pay more, the flat model simply never asked them. OpenView data shows this pattern is common: 60% of SaaS companies are on the wrong pricing model for their stage, and switching models generates more incremental revenue than any other monetisation lever.
Why This Matters
Revenue ceiling
Your pricing model sets a hard ceiling on revenue per customer. Flat rate caps ARPU at the single price regardless of customer value. Tiered unlocks expansion to mid-market. Usage-based scales naturally with customer success. Value-based captures the highest margins. OpenView research shows companies on the wrong model leave 30-60% of potential revenue unclaimed, no amount of sales or marketing effort can make up the difference.
Customer segmentation
The right pricing model makes customers self-select into the tier that fits their needs. Tiered SaaS models let SMB, mid-market, and enterprise customers all buy without sales involvement. Freemium funnels high-volume, low-cost customers while reserving sales capacity for high-value accounts. The wrong model either forces customers into a bad fit or requires sales on every deal, both kill margin.
Expansion revenue
The best SaaS businesses have net revenue retention above 100%, existing customers pay more next year than they did last year. This only happens with pricing models designed for expansion: per-seat tiered, usage-based, or value-based. Flat rate has zero natural expansion. According to OpenView, companies with NRR above 120% trade at 2-3x the valuation multiples of flat-rate peers. Use the Pricing Strategy Grader to audit your current approach.
Common Mistakes
❌ Underpricing out of fear
The most common pricing mistake is charging too little because founders fear losing deals. Price Intelligently research across thousands of SaaS companies shows 80% are underpriced by 20-40% on the day they launch. The evidence is obvious, if fewer than 20% of prospects say "too expensive", you are underpriced. Raise prices on new customers and watch revenue scale with minimal churn impact.
❌ Copying competitors blindly
Founders often look at 3 competitors, take the average, and call it pricing strategy. This ignores your cost structure, target customer, and differentiation. Your competitors may be optimizing for market share, growth at all costs, or be badly priced themselves. Base pricing on your customer's willingness to pay and the value you deliver, not on what a competitor charges.
❌ Not testing willingness to pay
Most founders never run a Van Westendorp survey or willingness-to-pay interview before setting prices. They guess, then discount when prospects push back. A proper willingness-to-pay study with 30-50 target customers takes 2 weeks and reveals the optimal price point, the "too expensive" threshold, and the "too cheap to be credible" floor. The ROI on pricing research is typically 10-50x the cost.
Industry Benchmarks
| Category | Good | Average | Poor |
|---|---|---|---|
| SaaS companies | Tiered subscription with per-seat or usage-based value metric, NRR above 110%, gross margin 75%+ | Flat or tiered pricing, NRR 95-105%, gross margin 65-75% | Flat rate, NRR below 90%, heavy discounting |
| Professional services and consulting | Value-based pricing tied to client outcomes, 40%+ net margin, retainer mix 50%+ | Hourly or day-rate pricing with rate cards, 15-25% net margin, project-only mix | Hourly pricing with frequent discounts, margins under 10% |
| Ecommerce and DTC | Tiered product pricing with clear premium tier, repeat purchase rate 40%+, AOV growing year over year | Flat product pricing, single SKU, repeat rate 15-25% | Discount-driven pricing, no premium tier, repeat rate below 10% |
Source: OpenView 2024 SaaS Benchmarks Report
Benchmark data sourced from OpenView 2024 SaaS Benchmarks Report.