Pricing Plan

What is a Pricing Plan?

A pricing plan (sometimes called a price list) is a structured outline of the costs associated with a business’s product or service. It reflects your pricing strategy based on several key factors, including production costs, market demand, and competitors’ pricing of similar offerings.

The goal of a pricing plan is to provide transparency for customers while ensuring the business covers its costs and remains competitive in the market. Each pricing plan can vary, offering different tiers, bundles, or features depending on the target audience and business objectives.

Synonyms

• Price list
• Pricing structure

Understanding Pricing Plans

There are several different ways to tackle pricing. The ones you’ll see most often include:

• Tiered pricing — Customers pay different prices based on the features, functionality, or quality of the product or service they choose, with higher tiers offering increasingly more value at a higher cost.
• Usage-based pricing — Customers only pay for the specific amount of product or service they use. This is common in industries like telecommunications and utilities.
• Flat-rate pricing — One set price is charged for the product or service, regardless of usage or features.
• Per-user pricing — There’s a flat fee for each additional user, common with SaaS pricing models.
• Freemium pricing — A model where a basic version of the product or service is available for free, while fully functional or premium versions require payment.
• Block pricing — A volume-based pricing model where customers pay a per-unit price for each unit up to a certain quantity. Once they reach the next “block,” the price per unit gets lower (e.g., $10 for a 5-pack vs. $15 for a 10-pack).
• Subscription pricing — Recurring flat-rate and/or usage-based rates for continued access to a subscription service.

Depending on the nature of your business and the products you sell, you’ll probably have multiple pricing plans you offer to different types of customers. For example, SaaS companies use subscription pricing models, but there are tiered, user-based, and sometimes usage-based elements to this as well.

Key components of a pricing plan

In a broader sense, every pricing plan has three main components: the base price, add-ons, and discounts.

• The base price is exactly what you think it is. It’s the starting cost of the product or service, before any additional fees or discounts are applied.
• Add-ons are either optional extras or must-have features that come at an additional cost on top of the base price. For example, a software company might offer add-on modules or integration options for their core product.
• Discounts are reductions in price that reduce the base cost of the product or service. These might be volume discounts, promotional offers, or customer-specific discounts laid out in a special pricing agreement.

To maximize revenue, your pricing plan needs to strategically incorporate all three.

• The base price can’t be too high (turns away customers) or too low (makes your product look (“cheap”).
• Add-ons can drive sales and so can bundle deals, but your product should function well enough on its own.
• Discounts can help attract new customers, but they’ll devalue your product if you offer them too much or make them too steep.

Pricing plan vs. pricing strategy

“Pricing strategy” is a term you’ll hear used interchangeably quite often. They’re pretty much the same, but there’s one crucial distinction.

Your pricing plan is the tangible output that lists the prices for products or services offered by a company. Your pricing strategy is the thought process or methodology you use to determine the prices you’ll include in the pricing plan.

The pricing plan is published on a company’s website, presented by sales representatives, and included in customer-facing materials. Its main goal is to communicate to customers exactly what they’ll pay.

As an example: SaaS businesses may have multiple pricing plans, such as “Basic,” “Pro,” and “Enterprise,” each clearly showing the associated costs and features for each plan.

Developing your pricing strategy means analyzing production costs, market demand, competitor pricing, customer willingness to pay, and broader market conditions.

You might adopt different strategies — cost-plus pricing, value-based pricing, penetration pricing, or competitive pricing, depending on your goals (e.g., maximizing profit, gaining market share, or undercutting competitors).

How pricing plans influence customers’ decision-making

Price perception has a profound impact on how your target customers view your business. You have the perceived price (what they feel like they’re paying). Then, you have the actual amount of money leaving their wallet, which is more or less arbitrary by comparison.

There are tons of factors at play, here:

• Production cost vs. what you sell it for
• What competitors charge
• How much their friends/colleagues pay for similar items
• The status associated with your product
• How “rare” or “exclusive” it is

What they’re expecting to pay also plays a role. But, in a B2B setting, you can shift them away from this through consultative selling and mastering sales negotiation.

And of course, your target customers’ income levels play a huge role. You won’t sell something expensive to customers with no money, no matter what the quality is. And you won’t convince a rich customer your product is the best if it’s priced like a budget option.

Creating an Effective Pricing Plan

Now, to actually develop your pricing plan, there are a lot of variables to consider (which we’ve covered above). So, how can you create a pricing plan that maximizes your sales, appeals to customers, and doesn’t undervalue your product?

1. Map out all the different factors that affect pricing.

Even though the actual price of something is just a dollar amount, that number determines whether you’re profitable, attractive to customers, and reasonable for the market. Ideally, you’ll hit all three (though you can potentially sacrifice profitability in the short term).

Consider the following:

• Development/production costs
• Marketing costs
• Income, willingness to pay, and price sensitivity for your target market
• Competitor prices
• Product differentiation
• Your immediate and long-term goals

For example, you might offer similar products to your competitors, but at a higher quality and with higher input costs. Using competitor prices as a reference, you’d set your prices above theirs to communicate to your target market, “This is a superior product, and you get what you pay for.”

Or, you might have a SaaS product you’ll spend millions to develop and maintain. But, you need to validate it and build a core user base, so you offer a low cost to enter the market. As your customer base grows and you secure more funding, you raise prices and see the long-term ROI.

2. Establish pricing tiers if you offer multiple service levels.

A lot of businesses offer several product tiers or purchasing options for their customers. Tiers help you cater to different interests and budgets while also allowing you to upsell on features not available in the lower-priced tier (e.g., “Basic” vs. “Pro”).

There could be a ton of factors driving revenue here:

• More expensive plans with higher profit margins
• More room for add-on sales
• Price anchoring to push most customers toward the middle tier (driving fast decision-making and conversions)
• Higher customer retention rates from successfully matching each price with its ICP
• Growing customer interest in new features at higher prices over time

The idea is that you’ll drive more sales across the board — whether that’s for the more expensive or less expensive tiers. As long as each tier is a magnet that attracts its respective customers, you’ll see overall revenue growth and higher retention.

3. Implement tools for pricing analysis.

In an OpenView Partners study with 2,200 different SaaS companies, they found that only 6% have done real, sophisticated pricing research to understand buyers’ needs and willingness to pay. A huge reason for this is they don’t have the right tools for the job.

You can’t get away with charging customers too much, even if they need your product. And you don’t want to sell yourself short, either.

Thankfully, there are a few tools that help you better understand your market and pricing potential without spending millions on research.

Your CPQ (configure, price, quote) software is one of them. Without investing in any new tools, you can find tons of transactional data within your CPQ to help you with pricing analysis.

These tools reveal:

• Average deal size and conversion rates
• The ROI from upselling (and how much room you have to grow)
• The average price of your product
• Most popular pricing tiers and packages

When you know how customers are responding to your current pricing plan, you can make calculated changes where you see an opportunity.

For more advanced functions (e.g., predictive modeling and finding the optimal price), you’ll need a pricing analytics tool and data tool with forecasting models.

4. Always be testing.

Pricing is never 100% done. it’s the hardest thing to nail, and you’ll only get there by constantly trying new things.

• Billing cycles (annual vs. monthly)
• Pricing tiers
• Add-on services and features
• The product price itself

Businesses often find that by simply raising their prices or introducing a new tier, they can see a significant boost in revenue and profitability. Don’t test more than one variable at once (and definitely don’t change different prices for customers buying the same product at the same time). But, do test often to maximize your pricing potential.

Examples of Successful Pricing Plans

To help you completely grasp the concept of pricing plans, let’s take a look at a few examples of businesses with effective pricing strategies:

Slack’s tiered pricing

Slack uses tiered pricing with several levels, ranging from a free tier to enterprise-level paid options. This allows the communication software vendor to target a wide variety of customer segments, from small teams using the free or $8.75 plan to large enterprises that need advanced features and support.

Their per-active-user pricing is where they differentiate. Slack only charges businesses for active users (those who have logged in and used the product within the last 30 days), which makes it flexible and cost-efficient, especially for companies with fluctuating team sizes.

This model aligns customer costs with actual usage. And it prevents disputes from customers who forget they had a subscription for a product or user seat they haven’t used in months.

Canva’s per-user pricing

Canva uses a per-user pricing model. Aside from their free plan with limited features, their paid “Pro” plan charges a flat rate that scales up with the number of users on the plan.

This makes it scalable for larger companies, which will need to add more users as they grow. It directly connects the amount of value a customer receives with the cost, while rewarding their larger customers with lower per-user rates.

Kärcher’s value-based pricing

Kärcher, a leader in the cleaning equipment industry, implemented a value-based pricing strategy for its spare parts. Instead of simply using a cost-plus model, they focused on the perceived value of their parts to customers.

By working with the tool MARKT-PILOT, they were able to gain real-time insights into market demand and adjust their prices accordingly. This allowed them to stay competitive by ensuring their parts were neither overpriced nor underpriced, based on what customers were willing to pay.

Allbirds’ premium pricing strategy

Compared to others in the footwear space, Allbirds is a premium brand that uses sustainable materials in their products. Their marketing and branding reflect this, and so does their pricing strategy.

Although ~$120 isn’t outrageous for a pair of shoes, it’s certainly on the high end for a non-“luxury” product. Their secret lies in the fact that they rarely offer discounts and promos. And they incorporate quality-oriented value propositions throughout their site and social media platforms.

By maintaining their premium price and reinforcing product value instead of pushing faster sales at a discounted rate, they’re communicating that they’re not just another shoe company. They emphasize their sustainability and comfort, and their shoes are worth the price for consumers seeking those values.

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