Pricing your SaaS is like pricing a plate of nyama choma at your local joint. Charge too little and you can't afford to stay open. Charge too much and customers go to the spot next door. The trick is finding that sweet spot where everyone wins.

Except SaaS pricing is way more complicated than nyama choma, because software costs scale weirdly. Your 100th customer doesn't cost you 100 times more to serve than your first. And customers KNOW this, which is why they'll argue about pricing like they're negotiating for a matatu fare.

Today, we're breaking down every major SaaS pricing model, when to use each one, and how not to accidentally destroy your business with the wrong choice.

The Main SaaS Pricing Models

1. Flat Rate Pricing

Everyone pays the same amount. Simple. Clean. Easy to understand.

Example: Basecamp charges 99 dollars a month. Doesn't matter if you're a team of 5 or 500. One price.

Pros:

  • Super simple for customers to understand
  • Easy to communicate and market
  • Predictable revenue for you

Cons:

  • Leaves money on the table (big companies would pay more)
  • Small startups might find it too expensive
  • Hard to capture different customer segments

When to use it: When your product has similar value to everyone, regardless of size or usage. Think productivity tools, simple SaaS apps, or products targeting a very specific niche.

2. Tiered Pricing (The Most Common One)

You know this one. Basic, Pro, Enterprise. Maybe throw in a "Startup" tier if you're feeling generous.

Each tier has different features or limits. The more you pay, the more you get.

Example: Slack has Free, Pro, Business+, and Enterprise Grid. Different features, different prices.

Pros:

  • Captures different customer segments
  • Customers can start small and upgrade as they grow
  • Clear upgrade path built into the model

Cons:

  • Can be confusing if you have too many tiers
  • Feature differentiation has to make sense (not arbitrary)
  • The "good" tier should actually be good

When to use it: When different customers have genuinely different needs. Freelancers need basic features. Enterprises need security, compliance, and integrations. Tiered pricing handles both.

Pro tip: Most people pick the middle tier. Make sure your middle tier is profitable.

3. Per-User Pricing

You pay per person using the software. More team members = higher bill.

Example: Most project management tools. 10 dollars per user per month. Got 10 users? That's 100 dollars.

Pros:

  • Scales naturally with company growth
  • Easy to understand
  • Incentivizes teams to adopt widely (you make more money)

Cons:

  • Creates friction for adding new users ("Do we REALLY need to add Janet?")
  • Can get expensive fast for larger teams
  • Encourages password sharing (one account, multiple people)

When to use it: When every user gets clear, independent value from using your product. Think collaboration tools, communication platforms, CRM systems.

Warning: This model can backfire if people start sharing accounts to save money.

4. Usage-Based Pricing

You pay for what you use. Like electricity. Or M-Pesa transaction fees (which, let's be honest, add up fast).

Example: AWS. You pay for compute time, storage used, requests made. Twilio charges per SMS or API call.

Pros:

  • Fair (you only pay for what you consume)
  • Low barrier to entry (try it cheap, scale as you grow)
  • Revenue scales directly with customer usage

Cons:

  • Unpredictable bills (customers HATE surprises)
  • Hard to forecast revenue
  • Requires complex metering and billing systems

When to use it: When usage varies wildly between customers. Infrastructure tools, APIs, communication platforms, data processing services.

Pro tip: Give customers visibility into their usage IN REAL-TIME. Nobody likes a surprise 10,000 dollar bill at the end of the month.

5. Freemium

Free tier with limitations. Pay to unlock more features, higher limits, or remove restrictions.

Example: Notion. Free for personal use. Pay for teams or advanced features.

Pros:

  • Low friction to try (it's free!)
  • Large user base quickly
  • Free users can become paid customers later

Cons:

  • Most free users never convert to paid (2-5% conversion is normal)
  • Free users still cost you money (hosting, support, infrastructure)
  • Can cannibalize your own paid tiers if free is too good

When to use it: When your product benefits from network effects (more users = more value), or when you have a strong conversion funnel from free to paid.

Critical rule: The free tier should be good enough to be useful, but limited enough that power users NEED to upgrade.

6. Hybrid Models (Mixing It Up)

Many successful SaaS products use combinations. Tiered pricing with per-user costs. Usage-based with a minimum monthly fee. Freemium with tiered paid plans.

Example: GitHub. Free for public repos and small teams. Paid tiers based on users and features. Enterprise with custom pricing.

When to use it: When your product is complex enough that one model doesn't capture all the value dynamics. Just don't make it so complicated that customers need a PhD to understand your pricing page.

The Psychology of Pricing (Or: Why People Are Weird About Money)

The Goldilocks Effect

Give people three options, and most will pick the middle one. It's not too cheap (feels risky), not too expensive (feels excessive). Just right.

Use this. Make your middle tier your target. Price it where you actually want people to land.

Anchoring

The first price people see sets their expectations. Show an expensive Enterprise plan first, and suddenly your 49 dollar/month plan looks like a steal.

The Decoy Effect

Add a slightly worse option at a similar price to make your target plan look better.

Example:

  • Basic: 10 dollars/month (limited)
  • Pro: 30 dollars/month (full features)
  • Pro Lite: 27 dollars/month (almost full features but missing key stuff)

Most people see Pro Lite and think "for 3 dollars more, I get everything?" and pick Pro. Pro Lite exists just to make Pro look good.

Charm Pricing (The .99 Trick)

Does 49.99 actually feel cheaper than 50? Research says yes, our brains are weird like that.

But in B2B SaaS? Less effective. Business buyers see through it. For consumer SaaS? Still works.

Common Pricing Mistakes (That Will Hurt)

1. Pricing Too Low

You think low prices attract customers. Sometimes they do. Often they just signal "our product isn't that good."

Plus, low prices mean you need LOTS of customers to survive. Higher prices = fewer customers needed = less stress.

2. Pricing Based on Costs

Your costs have nothing to do with your value. If your SaaS saves a company 100k a year in efficiency, charging 5k is underpricing by 95%.

Price based on value delivered, not server costs.

3. Not Testing Pricing

Your first pricing is a guess. Test it. Change it. See what happens. Pricing isn't set in stone.

(Just don't change it so often that customers get whiplash.)

4. Hiding Pricing

"Contact us for pricing" is fine for Enterprise. For everyone else, it's annoying. People want to see the price before talking to sales.

Transparency builds trust. Hiding pricing builds skepticism.

5. Too Many Tiers

Basic, Standard, Pro, Premium, Business, Enterprise, Mega-Ultimate-Platinum...

Stop. Three to four tiers max. More than that and people get decision paralysis.

How to Actually Set Your Prices

Step 1: Know Your Costs

Calculate how much it costs to serve one customer. Hosting, support, payment processing, etc. Your price needs to be higher than this. Obvious, but people mess it up.

Step 2: Research Competitors

What are similar products charging? You don't have to match them, but you should know the market rate.

Step 3: Understand Value

How much value do you deliver? Time saved? Money made? Problems solved? Price a fraction of that value.

Step 4: Start Higher Than You're Comfortable With

You can always go lower. Going higher later is painful and loses you customers.

Step 5: Test and Iterate

Launch. See who pays. See who complains. Adjust. Repeat.

The Bottom Line

There's no perfect pricing model. There's only the right model for YOUR product, YOUR customers, and YOUR business goals.

Flat rate is simple but limiting. Tiered captures different segments. Per-user scales naturally but can cause friction. Usage-based is fair but unpredictable. Freemium grows users but has low conversion.

Pick based on how your customers get value. Test. Adjust. Don't be afraid to experiment.

And remember: people who truly need your product will pay fair prices. If your only appeal is being cheap, you've got bigger problems than pricing.

Once you nail pricing, focus on reducing customer churn — because keeping customers is cheaper than acquiring new ones. Make sure your product is actually solving a real problem (see building SaaS products nobody asked for for what NOT to do). Consider mobile-first vs web-first approaches based on your users, optimize costs with cloud cost strategies, and don't forget dark mode — users notice these details.

Takeaway: SaaS pricing is part economics, part psychology, and part gut feeling. Choose a model that aligns with how customers get value from your product. Start with simple, transparent pricing. Test and iterate based on real data. And never be afraid to charge what your product is actually worth — underpricing hurts you more than overpricing does.