Per User Pricing

What is Per-User Pricing?

Per-user pricing is a pricing strategy where the number of individual users on an account determines the total cost of a subscription package. It’s common in the SaaS industry, where customers pay a flat recurring fee for up to X users, and $Y for each additional user on the account.

There are four defining characteristics of per-user pricing:

  • Simplicity. The pricing structure is easy to understand, with a clear cost associated with each additional user.
  • Scalability. Customers can scale their usage up or down by adding or removing user licenses.
  • Predictability. Both customers and providers can predict costs and revenues more accurately, as they are directly tied to the number of users.
  • Customization. Providers can offer different tiers or packages with varying features and limits per user, allowing for customization based on the customers’ requirements and budget.

Since cloud-based software is inherently scalable and customers all have different-sized teams, per-user pricing is a solid way to reflect the value each customer gets from using it. If your platform requires each user to log in with a unique account, and there isn’t much disparity in individual usage levels, per-user pricing is a suitable model for your business.

Synonyms

  • Per-seat pricing
  • Per-seat license
  • User-based pricing
  • Seat-based pricing

How Per-User Pricing Works

Calculating prices under a per-user pricing model is rather straightforward.

Customer Cost = Number of Users X Cost Per User

Businesses quote the cost on a per-month basis, especially for subscription services. To incentivize customers to commit longer-term, many companies also give the option of making upfront payments for a whole year’s worth of access at a discounted rate.

Here’s a breakdown of how the price is typically calculated:

  1. Set the per-user cost. This is the cost for one individual to use the service for a set period (usually per month or per year). For example, a vendor might charge $10 per user per month.
  2. Determine the number of users. For instance, a small business might need 10 user licenses for its team.
  3. Calculate the price. Multiply the per-user cost by the number of users. Using the example above of $10 per user per month, if the business needs 10 user licenses, the total monthly cost would be $10 * 10 = $100.
  4. Apply the cost to the billing period. If it’s per month, the total here would be $100. If the customer opts for an annual plan in exchange for a 10% reduction, the cost would be calculated as $1,200 – (10% of $1,200) = $1,080.
  5. Include additional fees. For larger customers or tailored products, you might have setup fees, support fees, or charges for extra features not included in the standard pricing.
  6. Discounts and tiered pricing. Some providers offer volume discounts, where the per-user cost decreases as the number of users increases, or tiered pricing, where different features or levels of service are offered at different flat-rate and per-user price points.

How companies actually arrive at the optimal price point and structure is more complicated. Calculating the optimal price requires you to consider your competitors, price sensitivity, market dynamics, cost structure, and the perceived value of your product.

Advantages of Per-User Pricing

The per-user pricing model is straightforward and transparent, making it easier for both the provider and customer to understand and manage costs.

For customers, it allows for scalability. They can add or remove user licenses based on their current needs, which can fluctuate due to changes in team size or project requirements. That way, they’re never overpaying and underusing. Plus, it’s easy for them to adopt your product quickly.

For providers, it offers a predictable revenue stream and the ability to scale their services in line with their customers’ growth. While this means customers pay less for fewer users, it also means they’ll pay more as they grow their business and increase their headcount. If you can retain your customers, this means most of them will become more valuable (and profitable) over time.

Disadvantages of Per-User Pricing

Although the per-user model works well for many types of subscription businesses and service providers, it isn’t an across-the-board solution.

For large organizations, the per-user pricing model becomes incredibly costly. If hundreds or thousands of employees need access, this pricing model discourages collaboration and adoption and limits scalability.

Companies using a seat-based pricing structure may also struggle to reflect the true value they deliver to users. If usage varies wildly between employees or a unit of usage is easily quantifiable (e.g., an API call), a usage-based model will be closer to the underlying value proposition.

Real-World Examples of Per-User and Per-Seat Pricing

Netflix

Netflix charges $15.49/month for its ad-free Standard plan and $22.99/month for its Premium plan. Standard allows for 2 simultaneous users per account, while Premium allows for 4. Up to 1 (Standard) or 2 (Premium) additional user profiles can be added for an extra cost of $7.99 each.

How did Netflix arrive at these numbers? Simple:

  • People stream Netflix at home. So, as a baseline, the account will need to operate on multiple devices.
  • Two people (e.g., a couple) share a home quite often. So it makes sense to allow 2 seats for each standard account, plus the optional third for $7.99.
  • The typical family has 4 members, so it makes sense to cut off the Premium plan at 4 simultaneous viewers. To add a buffer for larger families, adding an additional fifth or sixth user is reasonable.
  • Without the limits of 1 and 2 additional seats per account, subscribers could theoretically add 10 or more profiles, making it too easy to share accounts between non-family members at considerably lower subscription prices. Netflix would lose tons of money on this deal.

Canva

Canva pricing starts at $12.99 for up to 5 members. For teams of 6+, the price per additional person starts at $6.49 for members 6-10, but uses a progressive scale down to $3.87 for members 15,001 and above. Members 6-10 will always cost $6.49, and members 15,001+ will always cost $3.87.

Although progressive discounting sounds complicated, it actually encourages expansion and offers greater support for Canva’s largest customers. Since many of Canva’s customers are multinational enterprises, standardizing per-user cost for 6-10, 11-25, 26-50, and so on until 15,001+ is a lot easier than configuring a custom contract every time.

Salesforce

Salesforce Sales Cloud uses a straightforward per-user model, where customers pay $25, $80, or $165 per user per month, depending on whether they choose the Starter Suite, Professional, or Enterprise plan.

The reason Sales Cloud can use this model is because its platform operates on the same core architecture, no matter the user instance. In this way, the value proposition is universal and context-agnostic (unlike a product that needs to be tailored for each customer).

Pricing is based on the amount of functionality sales reps need, as well as how much product support they require.

Slack

Slack uses a pricing structure similar to Salesforce’s — $8.75 or $15/user/month, depending on your plan. But Slack uses active user pricing, meaning you aren’t charged for inactive users.

Members active in Slack within 28 days are billed, while those who aren’t are automatically disengaged or deactivated. This pricing strategy is similar to adding and removing seats, but auto-configuration makes it more convenient and flexible for customers whose team sizes fluctuate frequently throughout the year.

When to Consider Per-User Pricing

As you can tell, the per-user model can vary in pricing structure depending on the company, its target audience, and how it wants to differentiate. This approach is not for every business, but it does work well under certain conditions.

Put per-user pricing at the top of the list when:

  • Your product or service costs more to provide as the number of users increases
  • Different customer tiers need varying levels of support, storage space, features, etc.
  • You want to discourage sharing or unauthorized use of your product
  • It’s difficult for customers to determine which features they’ll use ahead of time
  • Your target market is small- and medium-sized organizations
  • You want a pricing structure that is easy to understand and transparent for customers

When to Avoid Per-User Pricing

If you’re considering per-user pricing but don’t meet the conditions above, you may want to explore alternative pricing models.

Avoid per-user pricing when:

  • Your service’s value is tied to outcomes, not users
  • Usage intensity varies significantly among users
  • Your product facilitates collaboration across large teams
  • The market expects unlimited access
  • Your product is a utility tool used sporadically
  • Your service is highly competitive and price-sensitive

Alternatives to Per-User Pricing

There are several pricing models that can complement or entirely replace a per-user structure. Here are some examples:

Flat-Rate Pricing

Flat-rate pricing is a simple pricing strategy where customers pay a single fixed price for access to a product or service, regardless of the number of users or usage level. It’s best when user numbers don’t significantly impact service delivery costs or when all customers receive the same level of access and features.

Usage-Based Pricing

With usage-based pricing, costs are based on the actual usage of the product or service. This could be the amount of data used, the number of transactions processed, or the hours of service consumed.

It works well when customer usage varies wildly, and costs are more directly related to usage than to the number of users. For example, telecom companies, cloud storage providers, marketing automation vendors, and APIs use this pricing structure.

Tiered Pricing

Tiered pricing offers multiple pricing levels, each with a progressively higher cost and more advanced features or higher service levels. Customers choose the tier that best fits their needs.

Plenty of companies use a tiered model in conjunction with per-user pricing to cater to a wide range of customers. For example, Salesforce and Slack (mentioned above) offer lower-level, mid-tier, and enterprise packages.

Freemium Pricing

In a freemium model, you offer a basic version of the product or service you offer for free, while advanced features, functionality, or services are locked behind a paywall.

Project management and collaboration software vendors often use this strategy because (a) single-usage customers don’t need many features but can help promote the product to teams, and (b) they convert a portion of those users to paying customers.

Value-Based Pricing

In value-based pricing, companies set prices based on the perceived or realized value the product or service provides to the customer, rather than on the cost of service delivery or the number of users.

The value-based model works in B2B environments where the offering directly contributes to revenue growth or cost savings (e.g., an ad agency charging a percentage of the increased revenue generated by their campaign). It’s also common in B2C industries where perceived value and/or performance plays a huge role in demand (e.g., designer clothes, sports cars).

Technology Used to Implement a Per-User Pricing Model

Subscription Management

Subscription management software manages recurring billing cycles for user-based subscriptions automatically. It eliminates the need for human intervention for most of your subscribers’ account management needs.

Within the app, subscribers can…

  • Add and remove users/devices
  • Upgrade or downgrade their plans
  • Receive notifications for upcoming payments and renewals
  • View their account billing history

…while your software handles proration, invoice generation, and payment processing automatically.

CPQ

CPQ (configure, price, quote) software automates pricing and quote generation for all types of products and services, including seat-based ones. It can handle even the most complex pricing structures, like multi-year ramp deals with tiered, usage, and seat-based components.

When sales reps create quotes for customers, the software applies your pricing rules to calculate the total cost with a detailed breakdown. In the CPQ backend, admins can configure any product and pricing rules they want.

Dynamic Pricing Engines

With dynamic pricing, the system adjusts prices in real time based on predefined rules, current demand, and customer data. This allows businesses to optimize pricing for different user segments, time periods, and competitive environments.

Dynamic pricing engines are useful when you want to avoid the downsides of per-user pricing models. The system can continuously analyze data and tweak prices accordingly without manual intervention.

Billing

Billing software handles all the invoicing and payment processing for user-based subscriptions. It saves finance teams time and minimizes the risk of errors when handling the huge number of transactions involved in per-user pricing models.

Billing syncs with your subscription management software to send out invoices on time, collect recurring payments from subscribers, and generate financial reports about revenue and churn. You can also integrate it with ERP to manage fiscal reports, taxation, and accounting operations.

People Also Ask

What is active user pricing?

Active user pricing is a special type of per-user pricing where customers only pay for the number of users who actively engage with the product within a specific period. It differs from traditional per-user pricing, where companies charge based on the total number of users/subscribers in their system, regardless of activity level.

Why is per-user or per-seat pricing a popular SaaS pricing model?

Seat-based pricing is a popular SaaS pricing model for its simplicity. Software products are inherently complex. The per-user model makes it easy for vendors to communicate and customers to understand pricing.

What is the difference between user-based pricing and usage-based pricing models?

Unlike user-based pricing, usage-based pricing takes into account the level of activity or consumption by each user when determining the cost. This means a frequent user pays more in a usage-based model than an occasional user, despite having access to the same features.