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What is Feature-Based Pricing?
Feature-based pricing is a tiered pricing strategy where the specific features included in one version of the product or service determine its price. This approach allows companies to offer different levels of features at varying prices, giving different customer segments choice and flexibility in their purchases.
The feature-based pricing model works by breaking down a product or service into individual features and assigning a value to each feature set. Customers can then choose the offer that suits their needs without overpaying for advanced features they don’t need.
Generally, products offer 3-5 levels of features:
- Freemium — Only the basic features your product couldn’t function without, usually meant to convert some users into paying customers.
- Basic — Your first paid tier, meant to cover your most essential features.
- Middle — Usually called “Pro,” “Team,” or “Business,” this tier offers a more comprehensive set of features for teams or advanced users.
- Advanced — Everything in your previous tiers, plus specific features for larger companies (e.g., security protocols, more storage, higher user limits).
- Enterprise — A quote-based plan for users with specific needs (e.g., custom implementation, dedicated support).
Tiered pricing models allow you to serve a larger customer base, cushion the impact of price-sensitive customers, and tailor your value to different types of customers. Feature-based pricing takes this to the next level by enabling you to monetize specific functions and characteristics within your product or service.
- Feature-based SaaS pricing
- Feature-based subscription pricing
- Feature tier pricing
SaaS Pricing Challenges Solved by Feature-Based Pricing
Pricing tiers are standard in the SaaS business model. Software products are scalable (up and down) and hosted on the cloud. So, just like it’s possible to incorporate additional security measures or implement custom architecture for enterprise customers, locking or limiting certain features for customers who only need their core function is completely doable.
In general, though, SaaS pricing is complicated. Here’s a look at how feature-based pricing simplifies it:
Provides a solution for price-sensitive customers
Throughout the SaaS sales process, price sensitivity is one of the biggest roadblocks for your sales team to overcome. The reality is most of your total addressable market either can’t afford or doesn’t need the full extent of your product.
When your product tiers are based on features, you lower the barrier to entry for customers with more simple needs. Assuming they’re also growing their businesses, they’ll eventually upgrade their subscription and add new users. In other words, offering value to smaller customers also sets you up to earn additional expansion revenue in the future.
Helps you position your product more precisely
Whether you realize it or not, your product has already positioned itself. Your proximity to the bullseye determines whether it’ll resonate with your target market.
By aligning your pricing options with different use cases and service levels, you’re giving yourself multiple chances to meet your prospects where they are. As an added bonus, you can also use your pricing page to reinforce how much value each feature offers.
Supplements customized solutions and services
Enterprise SaaS pricing is a tough egg to crack. Selling complex products to customers with entirely different needs and expectations can be overwhelming for your sales and development teams.
By breaking down the proportional value of each feature, you’re setting yourself up nicely for enterprise negotiations. Of course, there will be variable costs like development and maintenance. But it’s a lot easier to generate quotes for your most valuable customers when you can speak to every piece of functionality you provide.
Benefits of Feature-Based Pricing
Aside from solving some of the most significant pain points of SaaS pricing, feature-based pricing carries a few other benefits.
Better customer acquisition and retention
Pricing tiers give you multiple chances to snipe customers who can’t afford or don’t need everything your product offers at first glance. If they’re hooked on the core functionality but aren’t ready for anything more yet, they’ll feel comfortable sticking with your freemium product and growing into it. Eventually, some will adopt your product.
Besides freemium-to-paid conversions, your sales team will also have an easier time moving deals through the pipeline when they can pair a customer’s use case with a specific set of features. It makes it easier to overcome pricing-related objections and helps them communicate your product’s value proposition more effectively.
More control over how you monetize different customers
Your product may have 20 features, but some are more important to certain customer segments than others. Feature-based pricing allows you to set prices based on the value of each feature to particular groups.
Let’s say you’re selling a project management software. Small businesses don’t care about API access and custom development options. They just want a simple way to collaborate and visualize their tasks.
Bigger companies, however, will have to integrate your software with dozens of other tools and create automations that suit their unique processes. Keep these features in your higher tiers, and you can still offer competitive pricing to small businesses while maximizing revenue from larger customers.
A more scalable pricing model
As your product and customer base grow, so does the complexity of managing tiered plans. Feature-based pricing models are more flexible and easier to manage as they allow you to adjust prices for specific features or add new tiers as needed. This way, you can keep up with market trends, changes in demand, and evolving customer needs without having to overhaul your pricing structure entirely.
Continuous feedback for product development
As customers show preference for certain capabilities over others, you’ll learn more about what’s actually important about your product. Over time, you can refine each pricing tier to include the extra features that fit each type of customer best.
Behind the scenes, this same data tells you exactly which features to roll out next. Simply by accessing this customer data, you’re saving your company millions on R&D and development.
How to Manage the Complexity of Feature-Based Pricing
When you offer a range of features, it’s sometimes difficult to know where to start. Sometimes, it feels like software companies choose the features that fit into each product tier “at random.”
The truth is, they don’t.
Take the following steps to put the right features in each tier:
1. Analyze customer usage and feedback.
The easiest first step you could take to measure the value of a feature to its current user base is to look at its engagement levels.
SaaS apps collect clickstream and event stream data that shows you which features customers use the most and what actions they take within them. Use that data to pinpoint which features take up too much server space for their value or aren’t useful to your subscribers.
Next (or in tandem), you should ask your customers how they use the product. Survey them on specific features and workflows they use in their everyday work.
2. Keep the most important UI elements.
You can go right ahead and take the core functionalities off the table. Anything that, if removing it, would make your app functionally worse belongs in all tiers.
Here are a few examples:
- Every CRM user needs access to account creation and management features.
- Every email marketing subscription has to give access to the campaign builder and creative assistant.
Nothing that’s in every tier should be the “star” of any particular one. When you assess features based on their value and usage, it’s essential to make sure no customer feels cheated by your pricing.
3. Perform a value assessment.
For each feature, assess its cost, the value it provides to the customer, and its uniqueness. Features that are costly to develop, provide significant value to the customer, and are unique to your product should be considered high-value features.
4. Look at competitors.
Every product is slightly different, so you’ll need to know how yours stands out from the crowd. But there are some additional features and benefits you’ll need to include in all your pricing plans.
Let’s say you’re selling a project/task management SaaS. You might be tempted to limit the number of projects someone can start on your free plan.
But when you look at Trello, Asana, ClickUp, Notion, and just about every other tool out there, you’ll realize none of them put limits on that. So, you’re digging your own grave — nobody will sign up for your product if it has that limitation.
5. Put the remaining features where they belong.
Believe it or not, this is fairly simple. Most of the features you’ll limit in each successive product tier fall into one of the following categories:
- Branding — Remove your branding from everything (e.g., emails sent with your app) except for the free version.
- Usage-based components — Increase the limits for CRM contacts, additional seats, email sends, or whatever your specific product offers as customers move up tiers.
- Storage — Increase storage with each tier. Your highest tier should be either unlimited or close to it.
- Reporting and analytics — Reserve these for mid-tier and up. (If you’re a reporting-focused product, this step may not apply.)
- Forecasting and modeling — Usually, this is a premium/enterprise feature.
- Automation and AI — If automation is your product, offer it in each tier. Either way, increase the complexity and flexibility of rules and triggers with each successive level.
- Customization options — Offer customization options for layouts, designs, branding, and rules-based configuration (e.g., pricing rules in CPQ or access control in DAM) as customers move up tiers.
- API — API access belongs in the highest tier.
- Integrations — Always include integrations (e.g., data sources) in each tier, but reserve the more sophisticated ones for mid-tier and up.
- Service or support levels — Customer service response time can vary by plan. Freemium users usually don’t have much (if any) support, while high-level users get dedicated account managers.
Ways to Implement a Feature-Based Pricing Model
There are several different ways to sell feature-based product tiers to potential customers. Realistically, you’ll probably use more than one (if not all) of the below.
A free trial is the most common way to implement a feature-based pricing model. A limited-time free trial allows potential customers to test out your product and its features before having to commit to a subscription. This can be an effective method for converting leads into paying customers as they get to experience the full value of your product.
The freemium model is similar to a free trial, but users have the option to continue using the free tier for as long as they like. This allows them to become familiar with your product and its features before upgrading to a paid plan for more advanced functionality (if they ever do, that is).
With freemium, keep in mind that there’s value in every customer, even if they don’t generate revenue. Having a large user base is attractive to potential investors, serve as a source of referral marketing, and help you validate your product.
Feature-Based Tiered Pricing
Feature-based tiered pricing is when you have multiple subscription plans with different levels of features and functionality. This allows customers to choose the plan that best fits their needs and budget. It also enables you to target different market segments based on their willingness to pay for certain features.
Per-user pricing, also known as seat-based pricing, is a common usage-based pricing strategy for SaaS products. This model charges customers based on the number of users who have access to the product or specific features within it. This can be an effective way to scale your pricing as your customer base grows and adds more users.
Offering optional add-ons can be a way to upsell customers and increase their lifetime value. It’s also a way to add specific value to one of your customer segments without making your regular product tiers too complicated. Possible add-ons include additional features, integrations, or services not included in the base subscription plan.
Bundled pricing is popular, even with subscription models. Product bundling combines multiple products or services into one package and offers them at a discounted price. This can be an effective way to increase your product’s perceived value while incentivizing customers to use more features within your product suite (i.e., instead of your competitors’).
Technology Trends in Feature-Based Pricing
AI-Powered Pricing Software
AI-powered pricing software (called a pricing engine) helps companies analyze data, set prices, and optimize pricing strategies. It uses algorithms to determine the ideal price for a product or service based on various factors, including market demand, competition, customer behavior, and seasonality, in real-time.
Pricing engines also support dynamic pricing, where prices automatically adjust based on up-to-the-minute market conditions and customer behavior.
Usage-Based Billing Platforms
Usage-based billing is basically subscription management with digital usage metering capabilities. They directly integrate with your SaaS to track usage data across the app and automate billing for anything beyond a customer’s plan limits.
Configure, Price, Quote (CPQ)
CPQ software streamlines the sales process, automating quote management (and delivery), pricing, and proposal generation. It makes it easier for your sales team to generate quotes and proposals based on which features and pricing tiers customers have selected.
Machine-Learning for Personalization
When you use a customer data platform or analytics tool, you can take advantage of machine learning to offer personalized sales and customer experiences. As you collect behavioral data over time, the software gets smarter at predicting which features individual customers want and how much they’re willing to pay for them. This helps you score leads, upsell, and target customers with more personalized pricing packages.
People Also Ask
What is an example of feature-based pricing?
An example of feature-based pricing is when a software company offers different subscription tiers with varying levels of features and functionality. Customers can choose the tier that best fits their needs and budget, with each tier offering more advanced features than the previous one.
What are the three tiers of pricing?
The three tiers of pricing typically refer to low, mid, and high-priced options. Custoemrs can choose the level of features and quality they need at a price point that fits their budget. In feature-based pricing models, these tiers are often differentiated by the number or complexity of features included in each plan.