How to pick a pricing model for your product

You’ve spent months building the first version of your product. With early testing complete, it’s time to roll it out to the broader public. There’s just one issue: What will you charge for it? 

Pricing your product for the first time is an exercise that factors in your product’s capabilities, customers’ behaviors, and your company’s financial operations. This difficult task forces you to move from a back-of-the-envelope estimate of how quickly you can generate, say, $100M in annual recurring revenue (ARR) to confronting uncomfortable questions about your company’s value and your customers’ willingness to pay for your products or services. 

The good news is that you don’t have to get it perfect on day one. Your pricing model is a hypothesis — just like your initial features or your go-to-market strategy. 

In this article, we’ll break down common pricing models and offer a framework for thinking through your hypothesis — and evolving it over time.

Deciding on a pricing model for your product (or service, software, marketplace, app, AI agent, etc.) isn’t just about what you believe your customers are willing to pay. 

Pricing serves three specific functions beyond modeling future revenue:

• It filters your customers. Your price plays a major role in qualifying your leads. A high price point focuses your team on serious white-glove buyers, while a low price point opens the doors to the mass market but may require a self-serve support model.
• It signals value. Pricing should reflect the message you build around your product and the customers you plan to attract. For example, you wouldn’t want to sell enterprise security software and price it like a consumer app — this could turn your customers skeptical. 
• It aligns incentives. The right model ensures that as your customer gets more value, and you get paid more. This alignment is critical for net revenue retention (NRR) and long-term growth.

Most startup pricing strategies fall into a few core buckets. Understanding the mechanics of each will help you decide which one aligns with your product’s value proposition.

1. Flat rate subscription

A flat-rate subscription means customers have a single purchase option; it’s the same for everyone, regardless of how much or how little they use it (e.g., Amazon Prime). 

This model makes it easier to forecast revenue. It’s best suited to products with a single, clear value proposition, where usage doesn’t vary widely across customers. However, flat-rate pricing can squeeze margins with power users and price out smaller users who would have converted at a lower point.

2. Tiered pricing 

This is the standard for most SaaS pricing models. With tiered pricing, you offer feature bundles at different price points — such as starter, pro, and enterprise — to serve different market segments (e.g., Slack).

Tiered pricing is best for companies that serve multiple customer personas or where feature requirements vary by customer size. This model can add complexity to your product development, since you have to gate certain features and manage customer permissions.

3. Usage-based pricing 

With usage-based pricing, customers pay for exactly what they use, whether that’s storage, API calls, or active monthly users. It’s most common for B2B infrastructure products, developer tools, or platforms where value is directly tied to activity (e.g., payment processing with Stripe or cloud hosting).

This model has meaningful benefits to companies, such as:

• Lowering the barrier to entry for new customers starting out
• Scaling revenue in line with customer growth rates 
• Protecting unit economics by charging for incremental use

The downsides? Usage-based pricing can be unpredictable, making forecasting difficult and increasing operational costs as customers increase their usage. 

4. Freemium

Freemium is both a customer acquisition model and a key component of a pricing strategy. Under this model, companies offer a limited version of the product for free forever, in hopes that a percentage of users will upgrade to paid tiers.

Freemium products are most popular among companies with large total addressable markets (TAM) and a low marginal cost to serve each additional user. The model works best when the product has network effects (e.g., LinkedIn). However, it’s expensive to support free users, and if your conversion rate is low, you may not be able to support your business with the paying users you have.

5. Hybrid approaches

If you’re reading through these models and still stuck on which model you think is best for your company, it’s worth noting that many successful companies mix these models. For example, you might have a flat subscription fee (platform fee) plus a usage component (transaction fees). This helps stabilize revenue while still capturing upside from customer usage growth. 

As YC Partner, Kevin Hale, advises, the right pricing strategy widens the gap between price and value — a metric he calls the customer’s “incentive to buy.” But how do you determine how a customer measures value from your product?

Ask yourself these four questions to narrow down your options.

1. How does your target customer measure value?

If your product is a CRM, value is likely tied to the number of salespeople (seats). If it’s an email marketing tool, value is tied to the number of contacts (usage). Think of it this way:

• If the value is static (such as access to a database), consider flat or tiered pricing.
• If the value is variable and scalable (such as sending emails or processing payments), a usage-based model is a better reflection of how a customer measures value.

2. What is your cost structure?

If each new customer significantly increases server costs or onboarding time, you can’t afford to extend a freemium model. You’ll need a model that covers your unit economics from day one.

High variable costs typically require a usage-based pricing strategy, while low variable costs can accommodate a flat or tiered pricing model. 

3. Who is the buyer?

Are you selling to a developer at a small startup, who can swipe a credit card, or to a CFO, who needs an invoice? Knowing who your ideal customer profiles (ICP) are within companies that would benefit from your products or services, as well as these decision-makers’ needs, are key elements in understanding  how to set your prices. 

Small and medium-sized businesses (SMBs) or individual contributors often favor transparent, monthly pricing or self-serve usage models. But enterprise buyers, on the other hand, need predictable annual contracts that allow them to budget a specific amount.

4. Are you prioritizing customer acquisition or positive unit economics?

If your primary goal is to acquire new customers and increase market share, without worrying about monetization early on, freemium or aggressive low-end pricing makes sense. If you’re bootstrapping and need to strictly watch your customer acquisition cost (CAC) and payback window to generate cash flow immediately, value-based pricing with higher tiers is a safer option.

Your startup’s short-term liquidity needs and long-term financial health both depend on how your product is priced. Pricing impacts everything from modeling financials and ensuring sufficient short-term liquidity to deciding what to track and measure as your business grows.

Revenue forecasting

With flat-rate or tiered pricing, forecasting is linear. Your inputs are new customers and churn. However, with usage-based models, forecasting becomes more complex — you aren't just predicting whether a customer will stay, but also how much they’ll consume as they grow.

Cash flow dynamics

Pricing determines your liquidity cushion. Annual upfront contracts essentially provide you with interest-free loans from your customers, creating “negative working capital” that you can immediately reinvest into the company. However, monthly usage-based billing can create liquidity pressure depending on your payment terms and cash conversion cycle.

Metric tracking

The metrics you prioritize act as the “north star” for your operations, and they change based on your pricing model:

• For tiered models: Focus on monthly recurring revenue (MRR), churn, and customer acquisition cost (CAC).
• For usage-based models: Focus on net revenue retention (NRR) and usage expansion rates.

If you’re still stuck, use this decision matrix as a starting point.

The biggest mistake founders make is setting a price and never revisiting it.

When you launch your startup, you’re essentially guessing how to price your product with the information you have (which isn’t much, yet). As you gather data — on conversion rates, churn reasons, and customer feedback — you should refine your model. 

Ultimately, the “right” pricing model is the one that allows you to capture the value you create. Don’t overcomplicate it. Pick a pricing model that makes sense for your users today, and be prepared to change it in the future.