As a membership business owner or director, you need to choose a pricing model that optimizes both your revenue and your customer satisfaction, and improves your ability to forecast, without taking too much time and effort to manage.
There are many models to choose from, including freemium, flat-rate, tiered, per-user, and usage-based, and each type has its own set of advantages and disadvantages.
In this article, we’ll teach you the basics of each pricing model and help you decide which one to adopt, while also pointing out examples from the real world that show how other businesses use them.
Freemium Pricing Model
The freemium pricing model offers members free but limited access to the product or service, with the option of paying to get full access.
A free plan is similar to a free trial in that users can access your offer for free, but different in that, unlike a free trial, a freemium account continues indefinitely until the buyer cancels or buys the upgraded edition.
According to Investopedia, the freemium model is best for “internet-based businesses with small customer acquisition costs, but high lifetime value”.
Companies like JotForm, LinkedIn, EverNote, Medium, Fortnite, and Grammarly use the freemium model.
For example, Grammarly offers basic grammar and spelling checks on documents for free.
But users need to upgrade to get more powerful features like full sentence rewrites:
One of the major advantages of offering a freemium pricing model to your customers is that it’s easy and low-risk for them to test out your business’s product, service, or content.
Not only does this enable you to attract more leads, and ultimately more customers, to your paid version, but it also ensures that the people who do decide to become paying customers are great matches for your business.
Having had ample opportunity to test drive your solution, they know what they’re getting themselves into, so they’re less likely to churn or complain post-purchase.
Another advantage of this model is that you can massively expand your subscriber base and therefore increase the reach and power of your brand messaging. It’s easier to sell to members than to non-members.
On the other hand, revenue problems can arise if too great a percentage of your customer base is happy with your free plan and feels no need to upgrade.
Counteract this by making your upgrades irresistible, and by effectively marketing their benefits to freemium users, like Grammarly does whenever you use their free tool:
In this case, Grammarly reminds users at the top of the toolbox that switching to premium will allow them to see 21 additional suggestions to further improve their writing.
In sum, a freemium pricing model is a great choice for membership businesses that want to grow their subscriber base quickly and are confident enough in the desirability of their premium offering to allow users to access a free but limited plan indefinitely.
The most common pricing model for membership businesses, the flat-rate pricing model, charges members a fixed price at recurring intervals, typically monthly, quarterly, or annually, for the product or service.
Sock of the Month uses the flat-rate model and offers four subscription length options:
Source: Sock Club
In general, companies that regularly provide value to their customers, payment term after payment term, can find serious success with this pricing model.
These include SaaS brands, subscription box companies, specialty forums, and content sites that pump out a bunch of helpful articles every payment cycle.
However, if your business has instances where it provides substantial value one month, then very little the next, this might not be the best option.
After a slow month, customers might start to wonder why they’re paying you so frequently.
Companies using this model often give customers a choice between monthly or annual payments, with the annual option being slightly discounted because it secures more money upfront for the company.
For example, Hubspot Marketing Hub Starter users who commit annually instead of monthly save 10%:
Some advantages of using this model include predictable revenue, consistent cash flow, and a simple customer payment experience.
Also, when you have a dedicated online payment platform, managing your payment collection becomes incredibly easy when you use a flat-rate model.
For example, Regpack’s recurring billing feature allows you to automatically collect membership fees from your members at the beginning of every billing cycle.
Members can also access a user portal where they can see and submit upcoming payments:
This automation ensures that you receive payments on time and that your customers can easily track and pay their outstanding balances.
The tool also allows you to run payment reports that provide insight into the effectiveness of your payment collection process and pricing model.
A final note on this model—it’s often a good idea to give customers a free trial period where they can test out your offer before committing to recurring payments.
This helps you win over those hesitant, risk-averse customers who just need to trust you a bit more before buying.
Tiered Pricing Model
The tiered pricing model offers different versions of the product or service at different price points, where the cheapest option offers basic features and the most expensive tier offers the most advanced ones.
Typically, companies using this model offer somewhere between 3-4 different tiers, but some, like Jotform for example, offer five:
Tiered pricing models are common amongst B2B businesses with customer bases that are varied in size and differ in which features and services they will pay for.
You’ll commonly find companies giving their pricing tiers names like Team or Enterprise so as to hint to buyers which package is right for them.
This prevents customers from deciding not to buy from you because they can’t justify paying for a bunch of features and services they aren’t going to use.
For example, if Jotform only offered one price with a 100-form limit, then a lead who only needs 10 forms is going to feel like they’re overpaying.
SaaS companies aren’t the only ones who use this model.
Service providers like consultants, writers, agencies, or coaches also find this pricing tier to be advantageous because it gives their potential customers the ability to customize their service package.
For example, a content marketing agency might offer the following three tiers:
|Bronze||2 blog posts per month, no revisions||$800 per month|
|Silver||3 blog posts per month, 1 revision round per article||$1,200 per month|
|Gold||4 blog posts per month, 1 revision round per article||$1,500 per month|
Another benefit of this model is that many customers who begin with your cheapest plan are likely to, over time, climb the ladder until they’re using your most expensive one.
The per-user pricing model allows membership businesses to charge membership fees based on the number of individuals who are using the product or service through a single company account.
If a per-user price for your product is $15 per month, your customers pay $15 for one user, $30 for two users, and so on.
This model is common amongst SaaS products and a great option if your target customers are teams of professionals.
For example, a CRM software company like Insighlty sells to teams of salespeople, and charges anywhere from $29 to $99 per user.
Therefore, while a large team of five salespeople using the professional plan will pay $245 per month, a single business owner on the same plan will only pay $49 per month.
Customers like this model for its flexibility. If they need more seats or licenses, they can easily change the agreement and start paying more.
The same goes for customers who want to reduce the number of people using the product. This makes them feel like they’re paying for what they need and nothing more.
Some membership businesses that rely on per-user pricing models limit the number of users who can use a specific plan, forcing companies to upgrade to add users past that limit.
Others, like Airtable, might use this technique to encourage people to upgrade from their free plan to a paid one.
As you can see below, they limit the free plan to five users and allow unlimited users for all the other plans:
Despite the model’s flexibility and revenue growth potential, the per-user model does have some serious drawbacks.
For starters, when companies set limits on the number of users for a plan, and a customer surpasses it and is forced to buy the next tier, they may experience a painful price shock.
For example, if a business’s Silver Plan only allowed 5 users at $15 per user, and a customer needed to add a sixth user, but the Gold Plan was $45 per user, they’d go from paying $75 per month to $270 per month.
A price hike this large can be enough to startle a happy customer into a state of distress and send them looking for other companies that will be a more cost-effective choice for their growing business.
However, you can counteract this by offering unlimited users on every plan and offering the ability to add users at a set rate lower than the price of the tier. But, in that case, you lose some revenue growth potential.
In sum, if your business isn’t in the SaaS space, or if it doesn’t sell to groups of users, it’s probably better to go with another pricing model.
The usage-based pricing model, also known as pay-as-you-go, charges members based on how much they used the product or service over the course of a defined timeframe.
It’s most popular amongst SaaS companies, but content creators can use it as well. For example, you could charge by articles read or pages viewed per month.
Companies use different metrics to determine the usage of their product, but the metrics are always related to the solution’s principal function — in other words, the main way customers use the product or service to receive value.
For instance, a cloud storage company might charge a set rate per gigabytes used, and a compliance monitoring software company may charge by reports run.
Other companies might use a time-based metric (e.g., $1 per minute on the platform).
Twilio offers its customers the ability to choose between usage-based pricing ($1 per hour) and flat rate pricing:
Customers appreciate this model because they pay for exactly what they need.
If a customer uses 10.65 gigabytes of storage, and the storage cost per gigabyte is $10, they would pay $106.50 at the end of the billing cycle.
They also love the flexibility. As their needs change from month to month, they can easily adapt and use more or less of your solution.
Since the cost is entirely in their hands, they’re also less likely to feel cheated or overcharged by your brand.
Despite its positive effects on the customer experience, the usage-based pricing model does negatively impact your ability to predict revenue.
Unlike the flat-rate model, where you know exactly how much each customer is going to pay month after month, here, you’re more in the dark.
Estimation based on usage data helps, but you’re still going to have instances where you’re off the mark in your revenue forecasting, and these mistakes can be dangerous for cash flow.
Also, customers pay after using the service, instead of before it, so you’re collecting payments later than you would with most other pricing models where customers pay upfront.
There are many ways membership businesses can charge their customers, the most popular being freemium, flat-rate, tiered, per-user-, and usage-based pricing models.
Remember that you can often mix pricing models and capture both of their benefits.
For example, tiered pricing with a free option is a hybrid between tiered pricing and freemium pricing.
For a tool that will help you collect payments, save time, and manage the many aspects of your membership business, check out Regpack’s membership management software.