subscription-based pricing model

What is a subscription-based pricing model?

A subscription-based pricing model is a payment structure that allows a customer or organization to purchase or subscribe to a vendor's IT services for a specific period of time for an agreed upon set price. Subscribers typically commit to the services on a monthly or annual basis.

Subscription-based pricing is commonly used for cloud computing. In a subscription-based model, cloud customers pay upfront, prior to receiving access to cloud services. Prices are often based on the subscription's length. A longer subscription often translates to a lower cost.

Cloud customers that use significant resources can benefit from a subscription-based model, however if a customer only uses a small amount of computing resources, a subscription-based pricing model may not be ideal. Some cloud providers offer a subscription-based model that can adjust to reflect actual usage. Subscription pricing terms are documented in the provider's service-level agreement (SLA).

Types of subscription-based pricing models

There are five subscription-based pricing models to choose from.

Flat-rate pricing. Also known as fixed pricing, this model offers a predictable billing process as customers pay for a single product with a fixed set of features for a flat rate. It is the most simple of all the models for both the business and customer, but it is not always the most cost effective.

Tiered pricing. Tiered pricing refers to multiple packages that have different price points. Typically, in the form of basic, standard and premium, this model offers combinations of added features and products for additional pricing. If an organization’s needs change, they can upgrade or choose a lower tier.

Per-user pricing. The pricing for this model is based on the number of users buying into the product, it scales with the business. The more users, the more it costs. A variant of this model is the per-unit model which refers to a base product that has the option to units. For each added unit customers can pay a higher price for an upgraded level of functionality.

Usage based. Also referred to as the pay-as-you-go model, usage-based pricing offers low upfront costs and flexibility. Customers are only charged for what they use.

Editor's note: This article was written by Nicholas Rando in 2015. TechTarget editors revised it in 2022 to improve the reader experience.