Software licensing can feel like booking a flight, you think you've found a great price until the extras start piling up.
Between per-user fees, usage limits, maintenance costs, and hidden charges, the cheapest license isn't always the most affordable.
Understanding software license pricing is essential for controlling costs, especially as your SaaS portfolio management strategy grows.
In this guide, we'll explain the most common pricing models, the factors that influence software costs, and how to optimise your software spending without sacrificing the tools your business relies on.
What is a software license pricing model?
Your pricing model determines how much a customer will need to pay to acquire the software license and access your product's features.
When we talk about pricing models, we’re really talking about the framework that aligns your business objectives with the value your customers perceive.
At its core, a pricing model determines how you capture revenue in exchange for the product or service you provide.
It’s about how you structure your pricing to reflect the value your product delivers while still appealing to your customer base and supporting your long-term growth.
Popular pricing models include one-time purchase fees, subscription-based models, usage-based fees, tiered pricing, or value-based pricing.
Why is it important to be picky about your pricing model?
Deciding how to price and license your software is integral to your product strategy.
The chosen pricing model not only shapes your revenue streams but also affects how customers perceive and adopt your solution.
Different models can make your product more accessible to certain segments or more lucrative in the long run.
While enterprise IT teams evaluate license costs to manage budgets, your focus is ensuring that each seat or usage instance is legitimately licensed in accordance with the value you deliver.
How to choose your software pricing model?
The right software pricing model depends on your company's stage of growth. Early-stage startups often prioritize customer acquisition over immediate profit, making simple and affordable models like freemium, flat-rate, or low-cost subscriptions attractive.
These pricing strategies reduce the barrier to entry, encourage adoption, and help validate the product before focusing on maximizing revenue.
As a business matures, pricing typically becomes more sophisticated. Companies often introduce tiered, usage-based, or custom enterprise pricing to better match customer needs and capture more value.
Higher-tier plans, implementation fees, and minimum contract commitments can increase recurring revenue while giving larger customers the flexibility and features they require.
As your product gains market recognition, your pricing strategy should evolve to reflect the value it delivers.
8 Types of software pricing models
There isn't a single way to price software. Depending on the product, target market, and business goals, vendors use different pricing models to generate revenue and deliver value.
Some focus on one approach, while others combine multiple models to create a flexible pricing strategy. Below are the eight most common software pricing models you'll encounter.
Pricing Model | How It Works | Best For |
|---|---|---|
1. Perpetual license | Customers pay a one-time fee for permanent access to the software. | Enterprise software, on-premise solutions |
2. Subscription (Recurring revenue) | Customers pay monthly or annually for continued access. | SaaS products, cloud software |
3. Per-user (Seat-based) | Pricing is based on the number of users or licenses purchased. | Collaboration tools, business software |
4. Usage-based | Customers pay according to how much they use the product (storage, API calls, bandwidth, etc.). | Cloud services, AI tools, infrastructure platforms |
5. Feature-based (Tiered) | Different plans unlock different features at different price points. | Products serving multiple customer segments |
6. Value-based | Pricing reflects the value delivered to the customer rather than costs or usage. | Specialized B2B software with a strong ROI |
7. Freemium | A free version attracts users, while premium features require payment. | Product-led growth and customer acquisition |
8. Hybrid | Combines two or more pricing models, such as subscriptions with usage or add-ons. | Mature SaaS businesses with diverse customer needs |
1. The Perpetual model
In a perpetual license model, customers pay once to buy the software and can use it for as long as they want.
Unlike subscription pricing, there are no ongoing license fees. However, customers might need to pay extra for updates, maintenance, or technical support.
This type of license is most often used for traditional on-premise and enterprise software.
Disadvantages
Can be a significant upfront expense for customers, which may deter some from purchasing
May be less attractive for customers who only need the software for a short time
Revenue is less predictable since it is dependent on new purchases
Requires a robust license enforcement and protection to avoid intentional or unintentional misuse
Advantages
Generates upfront revenue for the vendor
Provides customers with a sense of ownership and control over the software
Can incentivize customers to use the software more since they have already made the investment
Simple to implement
2. The Recurring revenue model
A subscription-based pricing model is when customers pay a regular fee to use a product at set intervals, either monthly or yearly.
Within subscriptions, businesses offer different pricing tiers based on the number of users, features, storage access, or other value metrics. Most successful SaaS companies use some form of subscription pricing.
Disadvantages
May be more expensive in the long run for customers
Revenue is dependent on renewals (which are often influenced by customer experience and market conditions)
May be less attractive for customers who only need the software sporadically
Advantages
Provides a predictable revenue stream for the vendor
Encourages customer loyalty and long-term commitments
Allows you to provide updates and improvements to the software
3. Per-User (also called seat-based) pricing model
In a per-user or seat-based pricing model, businesses pay based on how many people need access to the software, as the name indicates.
Each user gets a license, also called a seat, and the total subscription cost goes up as more seats are added.
Some vendors offer volume discounts, so the cost per user goes down when organizations buy more licenses.
- Tier 1: 1-50 licenses - $100 per license
- Tier 2: 51-100 licenses - $80 per license
- Tier 3: 101+ licenses - $60 per license
Disadvantages
May not be cost-effective for small businesses selling to a limited number of users
Licenses can intentionally or unintentionally shared, creating revenue leaks for a vendor
May incentivize customers to limit the number of users to save on costs
Advantages
Allows for scalability as you charge more for more users
Provides a predictable revenue stream for the vendor
Encourages customer loyalty and long-term commitment
4. Usage-based pricing
In a usage-based pricing model, customers pay according to how much they use the software instead of a set fee.
Pricing usually depends on measurable factors like API calls, storage, bandwidth, transactions, or computing time. Costs go up as usage increases.
Many providers offer pricing tiers or volume discounts, so customers can use more resources and only pay for what they actually use.
Disadvantages
Can be difficult to predict revenue since it is dependent on usage
May not be cost-effective for high-usage customers
Implementation requires a system that can operationalize complex billing and usage tracking
Advantages
Customers only pay for what they use, making it a cost-effective option for sporadic or low-usage customers
Can provide a scalable revenue model for you as usage grows
Is cost effective while providing opportunities for growth and flexibility
5. Feature-based pricing model (Tiered pricing)
In a feature-based pricing model, sometimes called tiered pricing, customers pay more or less depending on which features come with each plan.
The price goes up as customers get access to more advanced features.
This setup helps software companies reach a range of customers, from individuals and small businesses to large enterprises, without needing to create separate products.
Disadvantages
May make it difficult for users to compare pricing between software products
Users may not fully understand what features they need and may end up overpaying for unnecessary features
Can be complex to operationalize a customer's right to access specific features
Advantages
Gives users the flexibility to choose a plan with the features they need
Encourages users to upgrade to higher-tier plans to access more features
Can provide users with a sense of cost control as they don't have to pay for features that are not important to them
6. Value-based pricing model
In a value-based pricing model, customers pay for the value your software provides instead of the cost to develop or maintain it.
Rather than using production costs or market averages to set prices, businesses look at how their solution affects customers financially or operationally and set prices based on that impact.
This approach is most effective for software that leads to clear business results, like higher revenue, better productivity, or major cost savings.
Disadvantages
Requires significant research to figure out the value of the impact of your product
Can be difficult to communicate the value proposition to potential customers
May not be a feasible option for software with broad appeal or limited differentiation from competitor
Advantages
Allows you to sell your product at a higher price because you understand the value you provide
Can provide a competitive advantage by differentiating the software from competitors
Revenue is less dependent on volume, making it more predictable
7. Freemium pricing model
The word combines "free" and "premium." In SaaS, the freemium pricing model lets users access a basic or limited version of a product for free, while charging for extra features, more capacity, or premium support.
Freemium also helps attract new customers and serves as a marketing tool.
This approach lets users try the main features of the software without paying, with the hope that some will later choose to upgrade.
Disadvantages
Can be difficult to convert free users to paying customers
Revenue may be limited to a small percentage of paying customers
May require a significant investment in marketing and customer acquisition efforts to attract a large user base
Advantages
Offers a low-risk way for customers to try the software, potentially leading to upsell opportunities
Attracts a large user base and can increase brand recognition
Allows you to collect data on customer usage and preferences
8. Hybrid pricing model
A hybrid pricing model uses a mix of pricing strategies to better match different customer needs and help businesses reach their revenue goals.
For example, a software company could charge a monthly subscription, bill by the number of users, and offer extra features or add-ons for an additional fee.
This approach gives businesses more flexibility to earn revenue and lets customers pay only for the features or resources they want.
As SaaS products get more advanced, hybrid pricing is becoming more common, especially in enterprise software.
Disadvantages
Can be complex to implement and manage for the vendor
May make it difficult for customers to compare pricing between different pricing plans
Can create complexity in billing and pricing structures for both you and the customer
Advantages
Allows you to diversify revenue strategies
Provides a predictable revenue stream for the vendor
Offers flexibility for customers to choose the pricing plan that best fits their needs
What should you consider when evaluating SaaS pricing models
Selecting the right B2B SaaS pricing models can impact revenue growth, customer retention, and overall business success. Consider these three things when evaluating a pricing model for your product:
1. Target market and industry
The target market and industry for your software offering can heavily influence SaaS pricing models. Consider factors such as the size of the businesses you serve, potential market growth, and potential geo-expansion.
Take your research even further by identifying the specific customer segments within your industry that are particularly enthusiastic about your product.
Determine their unique pain points, needs, and then price and package to effectively address those challenges.
2. Functionality and value proposition
Identify where you add the most value, then charge customers accordingly.
Traditionally, SaaS companies charge a higher price for access to a product tier that includes additional software features.
Companies can also monetize usage, or resources consumed. For example, usage or storage-based models appeal to customers who are looking for a clear cost/value alignment.
3. Competitor pricing and market conditions
Analyze your industry's competitive landscape, market trends, and emerging technologies. You may need to adjust your pricing strategy in the face of economic downturns or customer needs and behavior shifts.
Ultimately, there is no one-size-fits-all approach to pricing.
You might juggle numerous software pricing models, especially as you move into enterprise sales, utilize channel partners, or evolve from a single product to a platform.
Take control of your software pricing with Najar
Picking the right software pricing model is just the beginning. As your software stack grows, it gets harder to manage pricing, renewals, license usage, and vendor deals.
If you don’t have a clear view, you might pay for licenses you don’t use, miss renewals, or have duplicate software in different teams.
Najar solves these problems. It gives finance, procurement, and IT teams a full view of their software, helps them use licenses better, manage renewals, and get better deals from vendors.
With Najar, you don’t just understand software pricing, you actually cut costs and get more value from every software purchase.
Want better control over your SaaS spending?
